Wednesday, July 7, 2010

IRDA - Return of the prodigal son ? & its consequence on ULIPs

Drastic changes have taken place in the Insurance sector since the post criticizing the structure of ulip and IRDA in general was wirtten . Some key events in chronological order

  1. SEBI locked horns with IRDA stating that since ulips are similar to MutualFunds and hence it will take the control of ulips .
  2. SEBI banned all the insurance companies barring the PSUs in taking new premium which was later stayed by high court.
  3. Pranab Mukarjee asked both of the regulators to get the issue solved with High court .( I find this action not so appropriate. This is a policy decision and should be taken by finance ministry probably discussion with the cabinet.)
  4. Both SEBI and IRDA refrained to approach the high court for settlement and were waiting for directions from the government.
After this point actions stopped in public view but should have continued behind the screens probably under the supervision of Finance Ministry . Atlast IRDA decided to do firefighting(or might be forced to do so). It brought the following changes with effect from September 2010 on ulips.

  1. Minimum holding time was increased from 3 to 5 years.
  2. Charges were to be uniform over the term of the policy rather than being in the front loading
  3. Set a limit on the surrender charges .
  4. Minimum guaranteed return of 4.5 per cent for annuity and pension schemes.
Return of a Prodigal son ?
Nope i dont think so . By its recent steps , IRDA tries to communicate as if it were a serious watchdog. But this comes only after some serious actions from SEBI. I am pretty much confident that IRDA still doesnt have public interest in its priority list and its latest reaction is just to retain its control over Insurance Industry.It should bring much more drastic changes in the current structure of Insurance Industry to be more transparent & investor friendly. Better look at what SEBI has done to Indian stock market in the last decade.

Hail SEBI and its chairman. They have done a outstanding job in bringing some decency in the system , even though it was out of its purview as per rules .This sort of scenarios are very rare in Indian Administrative system , where one regulator takes predatory steps on another regulator exposing its wrong doings. But it has worked out well and will hopefully serve as precedent in future.

In a recent press release LIC has mentioned that it wont reduce the commissions to the Agents and it will take the loss under its own books,which will later adjusted. Such a measure will further reduce transparency in the operations(which is already a rare commodity in insurace industry ) .This will inturn reduce the returns on the investment portion of the ulips. LIC should take cue from goverment & regulator and should stop its old fashioned working style of being agent centric.

All these events raise the old question again , albeit under changed environment.
Has ULIP turned to be good investment option ?

New Advantages:
  • Reduced surrender charges . But why the hell should we consider this when you are planning to invested for long term.Moreover surrender charges are very low in mutual funds
  • Reduced charges in the initial years .

New Disadvantages:
  • Increase in lock in period has also skewed the equation towards mutual funds.
  • Minimum guaranteed returns (4.5%) requirements will force insurers to deploy a large chunk of investment corpus in dept funds which will reduce the possible high returns from investment portfolio.
Conclusion :
Still i am not convinced that it will give any added advantage over a MutualFund + term insurance combo pack. Don't mix investment with insurance.