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Transferable Health Insurance

Administrator — Sat, 12 Mar 2011 18:00:38 +0000

Insurance Regulatory and Development Authority (IRDA) has been working on norms to make a Health insurance policy transferable from one insurance company to another without the policyholder losing accrued benefits and coverage.

This is to help the policyholder who shifts residence from one region to another who finds that his insurance company is unable to service him in the new place, or employees who move from one employer to another losing Health insurance coverage in the process. Although they can take new Health insurance policies, they have no choice but to sacrifice accrued benefits like the Pre-Existing Diseases (PED) cover and other benefits of unbroken cover.

IRDA has announced these norms recently to be effective from July 1, 2011, and the details are as below.

“Portability will also ensure that the policyholder is not tied to one single insurer throughout his life for fear of losing the cover of PED,” a press release from IRDA on this matter says.

Making the Switchover Easy

Here are some vital points to be noted about portability as laid down by IRDA:

i) All Health insurance policies are portable.

ii) The policyholder should initiate action to approach another insurer, to take advantage of portability, well before the renewal date to avoid any break in the policy coverage due to delays in acceptance of the proposal by the other insurer.

iii) All insurers have to ensure that the entire database including the claim details of the policies, where the policyholder has opted for portability, shall be shared with their counterparts, if requested by the latter, within seven working days of such request by the counterpart.

iv) All applications for portability shall be acknowledged by the insurers within three working days.

Main Features

1. The credit from the period elapsed excluding PED shall be carried forward to the new insurer.

2. The accepting insurer shall provide cover, at least up to the sum assured in the previous policy.

3. The request for porting the policy shall be completed as per the timelines prescribed in the IRDA (Protection of Policyholders’ Interests) Regulations and Guidelines.

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Play for the Long-Term

Administrator — Sat, 12 Mar 2011 18:00:31 +0000

Selling insurance is all about

persistence, persistence, persistence. How many times have you heard your favourite trainer say this?

Now IRDA is also saying it! It has released performance norms for insurance agents effective July 1, 2011, applicable to agents of both Life and Non-Life insurance companies.

According to these, from financial year 2014-15 insurance agents should show a Persistency Rate (PR) of 75 per cent on their policies and premium collections, or their licences will not be renewed.

The deadline and the benchmark performance will be an important point in the career of Indian insurance agents and the agency profession in general.

The average PR of agents for the financial years 2011-12, 2012-13 and 2013-14 should be at least 50 per cent.

IRDA has alerted CEOs of Life

insurance companies against low persistency of policies, “which is a cause of concern for regulators, the industry, intermediaries and policyholders worldwide”. Early

lapses and surrenders are not

desirable for any of the stake

holders in the sector, it said.

The IRDA “recognises that agents can play a vital role in ensuring high persistency by

avoiding canvassing unsuitable products

bringing in transparency in providing correct and complete details of suitable products to prospective policyholders and

considering the needs of prospects”

No Relatives

IRDA has also banned relatives of employees of insurance companies from being engaged as agents by the same insurer. For this purpose, the definition of ’relative’ shall include spouse, sisters, brothers, parents, sons, daughters–in-law, daughters and sons-in-law.

Deferment of Commission

Every insurer shall frame suitable guidelines on deferment of commission payments to agents.

Commission payment on Single Premium policies shall not be deferred.

Commission on sale of Regular

Premium and Limited Premium

policies may be deferred only after approval of the Life Insurance Company’s Board, which should be

clearly spelt out and disclosed to the agents as well as displayed on the website.

Orphan Policies

For all orphan policies, insurers are advised to allow transfer of policies to another agent and pay 50 per cent of

the deferred commission the original agent was eligible for. The total commission paid for each policy shall remain within the statutory limits

and as per File & Use approvals.

Minimum norms for agents

All insurers are required to lay down Minimum Business Requirements for agents and monitor their perrmance in this regard as often as is required.

Insurers are required to incorporate these stipulations in the agency agreements with their agents and monitor compliance by agents through appropriate software.

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‘Unofficial’ nod to Rel Gen, RSA Merger

Administrator — Sat, 12 Mar 2011 18:00:19 +0000

The Insurance Regulatory and Development Authority (IRDA) has given an unofficial nod for the

merger of Reliance General

Insurance Company (Reliance Gen) and Royal Sundaram Alliance Insurance Company (RSA), media reports said, quoting sources. The official nod for the merger is expected soon.

RSA is a joint venture between Royal and SunAlliance of the UK and Sundaram Finance. The RSA group has been looking at expanding its operations in Asia.

Reliance Gen, on the other hand, has been substantially scaling down its business in its pursuit of underwriting profits.

A merger would allow Reliance Gen to regain its size and also a substantial share in the motor insurance business.

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Action and Response: Insurance Cos and the new ULIP

Administrator — Tue, 12 Oct 2010 05:50:31 +0000

K Nitya Kalyani

September 1, 2010 was the deadline for Life insurance companies to ensure that their Unit-Linked insurance policies (ULIPs) are compliant with the new norms announced by the regulator, Insurance Regulatory and Development Authority (IRDA).

The new policy structure includes limitation on margin, a five year lock in period, Life cover of at least seven to 10 times the value of the First Year Premium on the policy, a 4.5 per cent guaranteed return in the case of a Pension policy, lower discontinuance charges, among others.

Over 60 new ULIPs have been cleared by IRDA and slowly companies are launching them.

The new IRDA norms mainly curtail the expenses a company can incur for selling ULIPs. Companies are reacting to this by introducing new policy features and market practices to manage profitability under the new cost structure.

Higher minimum premium

The first thing companies have done is to avoid lower premium sizes. In other words, the sum assured of the new policies are higher and so are the premiums. This means lower costs for the company in administering the policy. Dealing with a smaller number of high-value policies is cheaper than a huge number of small-sized policies.

The minimum premium for ULIPs, which used to be as low as Rs 5,000 a year, has now become higher. IndiaFirst Life Insurance Company’s new policy, IndiaFirst Young India Plan, has a minimum annual premium of Rs 12,000 and LIC’s Pension Plus is Rs 15,000 a year. LIC’s Market Plus I had a minimum annual premium of Rs 5,000 and monthly premium of

Rs 1,000.

Aegon Religare Life Insurance Company used to have a minimum annual premium of Rs 12,000 for its ULIPs. Now, its Future Protect Plan, a ULIP, has a minimum annual premium of over double that amount, Rs 25,000, and the monthly premium is Rs 3,000 instead of the earlier

Rs 2,000.

Lower premium frequency

Collection is a huge expense for an insurance company. Even though it is the agent making a visit to the customer to collect the premium cheque, which is not a cost for the company, the company has administration costs for accepting payments, issuing receipts, accounting and so on. Lower frequency of premium instalments means lower expenses for the insurance company.

So, another trend is that the new policies either have only the annual premium paying mode or, the higher frequency modes, like quarterly and monthly, have even higher minimum premium and conditions like payment of premiums only through through Electronic Clearing Systems (ECS).

LIC’s Pension Plus does offer a monthly premium paying mode, but this option is only through ECS and the minimum monthly premium is Rs 1,500, which amounts to Rs 18,000 annual premium. The annual premium paying mode has a minimum of Rs 15,000.

Bajaj Allianz Life Insurance Company is not offering the monthly premium payment mode for its new ULIP, Max Advantage.

Some companies say that the lapsation in monthly premium policies was higher and so, this move would help in persistency.

Lower agency commission/ Lower First Year Commission

Insurance companies are also reducing the First Year Commission on ULIPs, since one of the main expenses of an insurance policy is the cost of selling it.

With the restriction in costs imposed by IRDA guidelines, the commission outgo is spread out over the 5-year lock-in period of the policy rather than the earlier system of higher First Year Commission and much lower renewal commission.

Spreading out commissions more evenly over the first five years of a policy also has another advantage for the insurance company. The agent is more motivated to ensure renewal because, now, the renewal commission is also a large component of his total income from that policy. Also, this would motivate him to sell the policy more carefully in order to ensure persistency rather than be tempted to hard-sell the policies, collect high First Year Commission (and possibly rebate that commission) and ignore the policy renewals.

LIC introduces surrender charges

Earlier companies used to charge high surrender charges, in some cases even 100 per cent of the premium paid.

The new ULIP norms have put a cap on surrender charges, called discontinuance charges, on ULIPs. The limit is calculated on Fund Value and also specified as an absolute value. The maximum discontinuance charges have been capped at 20 per cent for policies with annual premium up to Rs 25,000 and at 6 per cent for those with annual premium over

Rs 25,000.

In the new system, Life Insurance Corporation of India (LIC), which did not have surrender charges earlier, has introduced it from September 1 for all its ULIPs.

Charges for switching

As the margins are restricted, companies are restricting the value-added services they used to offer routinely earlier. Most companies and ULIPs allowed four switches (between fund options) free in a year or a certain number during the policy period. Now companies have announced charges for each such switch.

Impact

Insurance companies expect that sales of ULIPs would fall by 30 to 40 per cent because of the new norms. On the other hand, it is possible that prospective investors would find the new-look ULIP more attractive with its lower charges, and so customer demand would not fall.

Insurance agents would have to reorganise their business to sell more ULIPs as the lower First Year Commission and cumulative commission would be made up by larger volumes.

However, there is a view that agents who are doing small amounts of business may find it unattractive to stay in this profession and would quit.

It is the policyholder who will get the best benefit with these changes. However, while he gets better benefits, some of the services he took for granted earlier like free switching, have come to an end.

ULIPs are likely to rule high in the future too because, it was not just that agents were selling them but that customers were also keen in buying them. That interest is because of the good performance of the stock markets.

Till the common man perceives the market as giving him good returns, the combination of its attraction and sustained selling efforts will maintain ULIPs’ position as a popular product.

There could be a short period when premium collections through ULIPs could be lower than the past but, the new-look ULIP, which is better for the customer, would regain its sparkle because that itself is a major selling point – that it is loaded with new features that are better for the customer!

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‘Key Feature Document’ for policies

Administrator — Tue, 13 Jul 2010 17:45:48 +0000

In order to make insurance products

transparent and to ensure fair

treatment to policyholders, Insurance Regulatory and Development Authority (IRDA) has proposed that insurance companies should create a ‘Key Feature Document’ for each policy.

This is being proposed as an amendment to IRDA (Protection of Policyholders Interests) Regulations, 2002 An exposure draft for comments from the public and from stakeholders was release by IRDA on its web site in June 2010.

The document will be distinct from the other documentation for a policy and will have the same legal sanction is a comprehensive policy document.

In a tabular form, the document sets out information like aim of policy, type of policy, on whom the policy can be taken, eligibility conditions, proof of age, premium payment mode, grace period, policy term, sum assured, policy flexibility, policy surrender, benefits not payable, policy lapsation, policy forfeiture, policy revival, free-look period provision and amount refundable, loans, assignments and nominations, benefits, details of the agent, complaints mechanism, escalation of complaints and the benefit illustration.

Sample Key Feature Documents are available for viewing on IRDA’s web site www.irdaindia.org.

Background

As a background to this, IRDA has said that in line with the nation’s approach to economic reforms, IRDA has initiated reform measures around the principle of sustainable growth along with public accountability. Therefore protecting the interests of policyholders is the main mission of IRDA and the Authority’s efforts have been constantly directed towards this end.

In 2002, the Authority brought out the IRDA (Protection of Policyholders’ Interest) Regulations. The Regulations define the obligation of insurers and intermediaries and lay down time-frames for compliance that cover the entire life cycle of a product, starting from its sale to servicing, including at the point of claim.

It further says: The opening up of the insurance sector has given insurers the opportunity to bring about many innovative designs and concepts in product development. Spurred by competition triggered by this opportunity, the market has seen a plethora of new products. This has raised new concerns regarding availability of information to prospects and policyholders.

Ensuring fair treatment to policyholders

There should be utmost transparency at the time of sale and promotion so that the policyholder is made to feel confident that he or she is being given complete information regarding the product. Provision of clear and complete information about products is not only a fundamental expectation but also a necessity to ensure fair treatment to policyholders by insurance companies. It is a necessary disclosure obligation of insurance companies.

Contractual documents

Contractual documents developed by insurance companies should take care of the interests of policyholders by giving them the required information in a clear and simple manner. Legal documents are complex and not comprehensible to the insured persons. It is observed that insurance policy documents are long and run into several pages making it almost impossible for policyholders to read them.

While more than 30 per cent of the Indian population is illiterate, even the literate population will not understand complex legal language. In view of this, providing product information in a simple and easy to understand manner is very crucial.

Key Feature Documents

To ensure fair treatment to policyholders, it is necessary for insurers to bring out Key Feature Documents in simple language. This document will have the same legal sanction that a comprehensive policy document will have. Towards this end, it is proposed to incorporate a provision in IRDA Regulations for Protection of Policyholders Interests that would require insurance companies to issue Key Feature Documents for various insurance products to policyholders.

Format of Key Feature Document

The following is the description of what the Key Feature Document should be like according to IRDA:

It is necessary that the proposed Key Feature Documents are developed in a clear format with an appropriate title and sub-titles that makes it easy for policyholders to comprehend. The language used should be simple. Illustrations relating to cover/benefits offered should be part of the Key Feature Document. The ultimate test of a Key Feature Document is whether or not the target customer for a particular product understands its main features and is able to take a decision as to whether the product is suitable for him/her.

A good example of a Key Feature Document is one that clearly captures the aim of the product or in other words, what the product seeks to cover. It would clearly bring out the risks involved for the policyholder and the obligations or commitments required of him/her. A Key Feature document should not be too long as to lose the precision nor should it be too short thereby missing out on key facts. The document should avoid jargon, should be easy to read and most of all be attractive for the consumer to peruse. It should be titled prominently and should use easy to understand language. It should be in at least 14 size font (of Times New Roman, as an indication). Key Feature Document shall be available in local languages depending on the region where the policyholder resides.

It is necessary to have the Key Feature Document as a separate item and not part of other literature.

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Green Insurance!

Administrator — Sat, 12 Jun 2010 18:00:27 +0000

First Insurance World Broking Services Pvt Ltd, an insurance broker registered with Insurance Regulatory and Development Authority (IRDA) has launched an insurance buying portal www.insuranzone.com which enables the public to compare and buy policies of any General insurance company online.

Brand named Green Insurance and Any Time Motor (ATM) Insurance, Mr. Mathews Prabhakaran , Director and Principal officer of First Insurance World described this new venture as simple and user friendly.

Explaining that he wanted to make insurance buying simpler with less processes involved at the same time ensuring strict compliance with the regulatory requirements of the transaction, Mr Prabhakaran said that both the insurers and clients are equally important when it comes to an insurance broker who bridges the gap between them and that the web site is a demonstration of this concept.

Mr A R Sekar, Director and General Manager, The New India Assurance Co.Ltd launched the web site in the presence of other General insurance industry senior officials like Mr N Sriram, Head-Information Technology, Reliance General Insurance Co.Ltd and Dr C J Philip, Deputy General Manager, New India.

Commenting on Mr.Mathews’ hard work to convert his dream into reality Mr Sekar said that though the technical processes involved were difficult, he managed to pull it off well and that the concept of Green insurance in itself was a great idea.

Mr N Sriram said that the Internet had started changing from an entertainment medium to a medium with a focus on business. Lots of business applications are available on the Internet these days, a process which started off with Internet banking.

This venture promises to be very successful from the customer perspective since the process is simple and the product easily accessible through a paperless transaction, something that would naturally increase the number of prospective clients and increase the opportunity for insurers to increase their sales.

The web site offers various types of insurance like Motor Comprehensive cover, Third Party Liability cover, Fire, Theft and so on.

The customer can buy insurance for a new or used car and renew his vehicle policy even if it has lapsed or expired.

From the insurer’s point of view, in the case of a lapsed policy, the automatic pre-insurance inspection process is less taxing on the individual. Moreover, a 24×7 toll free number can be used by the customers for any help or queries.

A screen shot of www. insuranzone.com

Mr Mathews Prabhakaran, Director and Principal Officer, First Insurance World Broking Services Pvt Ltd

The web site offers various types of insurance like Motor Comprehensive cover, Third Party Liability cover, Fire, Theft and so on.

The customer can buy insurance for a new or used car and renew his vehicle policy even if it has lapsed or expired.

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United India Premium Grows 22%

Administrator — Thu, 13 May 2010 18:00:36 +0000

United India Premium Grows 22%

United India Insurance Company Limited, (UIIC) the Chennai headquartered public sector General insurance company has finished the

financial year 2009-10 with a gross

premium of Rs 5,239.05 crore, up 22.4 per cent from the Rs 4,277.77 crores collected in the year 2008-09.

Announcing the financial results of the company at a press conference at Chennai, Mr G Srinivasan, Chairman-cum-Managing Director of the company said that the growth of 22.4 per cent was the highest among all major General insurance

companies in India with its accretion o

Rs 961.28 crore being the highest in the industry. UIIC had the highest accretion the previous year also, he said.

The Profit after Tax of the company was Rs 707.09 crore compared to Rs 476.05 crore the previous year, a growth of 48.67 per cent and the board of directors of the company has proposed a dividend of 95 per cent.

The investment income of UIIC rose to

Rs 1,688.57 crore in 2009-10 from

Rs 1,048.56 crore the previous year

marking a growth of 55.35 per cent and with the market value of investment

growing by 37.31 per cent to touch

Rs 14,189 crore. The Networth grew to

Rs 4,149.75 crore from Rs 3,608.17 crore, a growth of 15 per cent.

UIIC, Mr Srinivasan said, had increased its market share continuously for the past 24 months ending 2009-10 with 14.59 per cent compared to 13.71 per cent at the end of the previous year.

Focus on agents

UIIC had stated that one of its important objectives was to increase the agency force which was its primary channel for

personal lines of insurance.

managers whose exclusive role is to

mentor and monitor agents in their work and in acquiring business.

The company widened its office network too during the year opening 92 micro

offices , a new regional office in Dehradun and 15 more branches and divisional

offices.

With these expansions, Mr Srinivasan said, the company hopes to drive its growth

further and achieve Rs 6,000 crore

turnover in the current financial year.

Corporate and Motor business

For developing its commercial lines

business, where corporate are the clients, UIIC opened four large exclusive

corporate cells in Pune, Kolkata, Hyderabad and Bengaluru. It also opened 20 specialised hubs for Motor claims both Third Party Liability and Own Damage.

It also opened eight offices/cells for Motor dealer business and seven exclusive bancassurance service centres.

In rural and social sector insurance, the company in 2009-10 continued to lead,

Mr Srinivasan said, with Rs 762.09 crore premium, a growth of 14.55 per cent over that of last year and covered 1.12 crore lives as against 50.60 lakh lives the

previous year.

This amounts to 121.21 per cent growth and it was through the company’s

continued focus on the common man

expanding the coverage of Universal Health Insurance, Tsunami Jan Bima Yojana and Rashtriya Swasthya Bima Yojana under the last of which UIIC

covered the entire below the poverty line (BPL) population of Kerala numbering more than one crore.

During the year the company issued 18.71 policies and handled 1.17 million claims.

New Products

UIIC had launched new policies during the year to the private car comprehensive policy and also an emergency road

assistance programme with ‘My TVS’ a multi brand car service chain. This programme was launched in the southern states and will be made available

countrywide soon.

Rating

Mr Srinivasan said that the company has

retained its iAAA rating from ICRA

continually for the past seven years

which indicates the highest claim

paying facility.

Mr. G. Srinivasan, Chairman-cum-Managing Director, United India Insurance Company Limited announces the financial results of the company at a press meet at Chennai. Also seen in the picture is Mr. V. Harshavardhan, Director & General Manager.

United India Insurance Company Limited, (UIIC) the Chennai headquartered public sector General insurance company has finished the

financial year 2009-10 with a gross

premium of Rs 5,239.05 crore, up 22.4 per cent from the Rs 4,277.77 crores collected in the year 2008-09.

companies in India with its accretion o

Rs 961.28 crore being the highest in the industry. UIIC had the highest accretion the previous year also, he said.

The investment income of UIIC rose to Rs 1,688.57 crore in 2009-10 from Rs 1,048.56 crore the previous year marking a growth of 55.35 per cent and with the market value of investment growing by 37.31 per cent to touch Rs 14,189 crore. The Networth grew to Rs 4,149.75 crore from Rs 3,608.17 crore, a growth of 15 per cent.

UIIC, Mr Srinivasan said, had increased its market share continuously for the past 24 months ending 2009-10 with 14.59 per cent compared to 13.71 per cent at the end of the previous year.

Focus on agents UIIC had stated that one of its important objectives was to increase the agency force which was its primary channel for personal lines of insurance.

Accordingly, Mr Srinivasan said, 10,000 agents were added in the last year taking the total number of agents to 30,000. This number would be increased to 1,00,000 in three years, he said. The development of the agency force has been aided by the appointment of about 1,000 unit managers whose exclusive role is to mentor and monitor agents in their work and in acquiring business. The company widened its office network too during the year opening 92 micro offices , a new regional office in Dehradun and 15 more branches and divisional offices.

With these expansions, Mr Srinivasan said, the company hopes to drive its growth further and achieve Rs 6,000 crore turnover in the current financial year.

Corporate and Motor business For developing its commercial lines business, where corporate are the clients, UIIC opened four large exclusive corporate cells in Pune, Kolkata, Hyderabad and Bengaluru. It also opened 20 specialised hubs for Motor claims both Third Party Liability and Own Damage.

It also opened eight offices/cells for Motor dealer business and seven exclusive bancassurance service centres.

In rural and social sector insurance, the company in 2009-10 continued to lead, Mr Srinivasan said, with Rs 762.09 crore premium, a growth of 14.55 per cent over that of last year and covered 1.12 crore lives as against 50.60 lakh lives the previous year.

This amounts to 121.21 per cent growth and it was through the company’s continued focus on the common man expanding the coverage of Universal Health Insurance, Tsunami Jan Bima Yojana and Rashtriya Swasthya Bima Yojana under the last of which UIIC

covered the entire below the poverty line (BPL) population of Kerala numbering more than one crore.

During the year the company issued 18.71 policies and handled 1.17 million claims.

New Products

UIIC had launched new policies during the year to the private car comprehensive policy and also an emergency road assistance programme with ‘My TVS’ a multi brand car service chain. This programme was launched in the southern states and will be made available countrywide soon.

Rating Mr Srinivasan said that the company has retained its iAAA rating from ICRA continually for the past seven years which indicates the highest claim paying facility.

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Mutual Fund vs ULIP Where are the Earnings?

Administrator — Mon, 12 Apr 2010 06:00:47 +0000

utual Fund vs ULIP Where are the Earnings?

Since August 2009 when Securities Exchange Board of India (SEBI) barred entry loads on mutual fund products, there has been concern among AMFI certified agents about their earnings through selling mutual funds.

Meanwhile in September 2009 came the discussion paper of the Swarup committee which argued that insurance policies are similar to mutual funds and so they too should not have any upfront commission (which is equivalent to the MF entry load,) it said. It recommended that, instead, there should be a fee negotiated with and collected from the client. The committee seems to have the impression that ULIPs are the only kind of insurance policy, but that is a different issue altogether.

There was widespread protest by insurance agents against the insurance commission abolition recommendation and the matter seems to be inactive at the moment.

At the same time, market sources felt that mutual fund agents’ activity would fall drastically as the average client would not be willing to pay a fee. Where clients were investing, the agents stopped paying them the incentive as before (usually one per cent out of the two per cent commission that they received from the fund house) since they were not receiving it any more.

Will this lead to a drop in fresh retail business for the mutual fund industry? Maybe. But, when the entry load was barred, the fund houses increased the trail fee which is an annual fee given to the agent and usually paid quarterly, as long as the investor he has brought in stays invested in the fund. That is, a fee for persistency of the business. This was raised to about two per cent or so per year, creating a new opportunity for the agent.

That opportunity is this: it has shifted the attention of the MF agent from just procuring the business and now gives him an incentive to advice his client to stay invested in the same fund. The advantage the fund houses can look forward to is that the practice of ‘churning’ investments, advised by many agents, will come to an end.

Churning is an unhealthy practice that unscrupulous agents encouraged for their own purposes. An agent who sold a mutual fund to a particular client and collected his fee in the form of an entry load would advise him to withdraw the money and put it in a different mutual fund in a few months time under the garb of better prospects.

If he did this a few times a year he would earn his fee each time such a reinvestment was made for the same investment!

Now, with no entry load the temptation, and with a trail fee, the temptation to advise clients to churn their investments has been removed. The focus moves from selling the investment to maintaining it with the same mutual fund, giving the fund house a stable corpus to manage and less administrative work in getting fresh investments only to pay out in a short while.

So the agent earns 2 per cent each year, about 20 per cent if the investment is untouched for 10 years! This is far less than the commission that he earns on an equivalent ULIP investment which is worked out to be less than half of what he would earn on an MF investment.

This is because the upfront commission for ULIP is higher but dwindles to one per cent from the third year onwards. Moreover it is dependent on the policyholder paying his premium each year.

While ULIP commission is calculated on the premium, the trail fee for a MF is calculated as a percentage of, not the investment, but the value of the investment on an ongoing basis!

So, if an investor put in Rs one lakh in a mutual fund and the value of this investment grows to Rs 1.5 lakh due to market movements, the trail would be on Rs 1.5 lakh! The agent is rewarded not on the quantum he procures for investment (which could be based on his selling skills and advice) but also on the performance of the investment, for which he cannot take any credit!

According to the Association of Mutual Funds in India’s September 2009 data, 50 per cent of retail investors hold their investments for a period of less than two years. A small per centage of them retain their investment over five years. It would be interesting to see if this trend moves towards longer term investments.

This seems entirely possible and so, it has been a good move on the part of fund houses to increase the trail fee, a move the benefits them and the advisor and also the investor who could, if he exercised due caution, reap the benefits of being invested for the long term.

K Nitya Kalyani

There was widespread protest by insurance agents against the insurance commission abolition recommendation and the matter seems to be inactive at the moment.

If he did this a few times a year he would earn his fee each time such a reinvestment was made for the same investment!

This is because the upfront commission for ULIP is higher but dwindles to one per cent from the third year onwards. Moreover it is dependent on the policyholder paying his premium each year.

While ULIP commission is calculated on the premium, the trail fee for a MF is calculated as a percentage of, not the investment, but the value of the investment on an ongoing basis!

K Nitya Kalyani

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SEBI vs IRDA The Turf War over ULIPs

Administrator — Mon, 12 Apr 2010 06:00:41 +0000

SEBI vs IRDA

The Turf War over ULIPs

In January, when Securities Exchange Board of India (SEBI) sent show cause notices to Life insurance companies demanding to know how they launched unit linked insurance policies without its approval, the insurance industry was totally taken aback.

SEBI’s stand was that ULIPs were collective investment schemes and hence under its jurisdiction. SEBI had also said in its show cause notice that ULIPs, just like mutual funds of late, should not have entry loads and the insurance companies should adopt investment and accounting norms related to mutual funds and not those prescribed by IRDA.

The insurance industry’s surprise was because, after all, insurance was regulated by Insurance Regulatory and Development Authority (IRDA) and each product that an insurance company launched came under the file and use guidelines of IRDA.

Moreover, IRDA had been in existence for ten years and ULIPs for over seven years. So what was new about all this now?

Life insurance companies responded to the capital markets regulator with these points, and also turned to IRDA for assistance.

IRDA too had, reports say, received a letter from SEBI about the matter.

Reports said that IRDA was displeased that SEBI chose to talk to the Life insurance companies without consulting it first, what one would have thought was basic professional courtesy.

So IRDA wrote to SEBI saying that it need not involve itself in this matter as another statutory regulator was overseeing it. It also took the matter of regulatory interference to the finance ministry which, apparently, told the two regulators to sort it out between themselves.

So the two regulators also had a meeting in mid-March in Hyderabad, attending by both the chairmen, Mr C B Bhave and

Mr J Hari Narayan, which ended in SEBI apparently conceding the point that ULIPs were indeed to be regulated by IRDA and not itself.

Mr Hari Narayan was quoted saying that ‘having multiple regulators for the same issue might not be healthy for the system and that all the regulators were working to ensure customer satisfaction, investor protection and financial stability.’

There was some media speculation that SEBI may have conceded its stand since insurance companies were anyway going to go public shortly and would then come under its ambit. But this is vague since not all companies would be going public shortly and, even if so, it would be the companies’ shareholders that SEBI would be acting to protect and not the customers (the policyholders).

Twins?

Though that turf war has ended in some truce, it is true that there is little difference between a ULIP and a mutual fund, and that is a known fact. More so when there are so called ULIPs that don’t even have a life cover!

So, the two products are not just dangerously close in nature, they practically become no different from each other as far as the investor is concerned. Technically, SEBI seems to have a point.

In fact as a purely internal matter to the industry, this has drawn discontent even from within. Industry members have been expressing the thought that ULIPs were undermining the seriousness and intention of conventional Life insurance policies where protection and not returns was the objective. In fact in the series marking ten years of reforms that Premium carried over the last few issues, reveals that this trend has worried quite a few members from various segments of the industry.

Technical point or not, SEBI, it emerges may not have a legal standing to demand that it is the ULIPs regulator because the SEBI Act excludes ULIPs from SEBI’s purview and Insurance Act includes ULIPs both in Life insurance and in annuity policies in IRDA’s purview.

Business better than usual

While this was happening in the last quarter of the financial year and the companies and IRDA were defending their positions, the marketplace saw a happy revival of ULIP sales, which had been hit badly last year because of the stock market crash and the dull financial markets sentiment. In fact, the trend of ULIPs outselling MFs continues and that could very well have been the origin of this adventure!

Moreover, IRDA had been in existence for ten years and ULIPs for over seven years. So what was new about all this now?

Life insurance companies responded to the capital markets regulator with these points, and also turned to IRDA for assistance.

IRDA too had, reports say, received a letter from SEBI about the matter.

Reports said that IRDA was displeased that SEBI chose to talk to the Life insurance companies without consulting it first, what one would have thought was basic professional courtesy.

So the two regulators also had a meeting in mid-March in Hyderabad, attending by both the chairmen, Mr C B Bhave and

Mr J Hari Narayan, which ended in SEBI apparently conceding the point that ULIPs were indeed to be regulated by IRDA and not itself.

Twins?

So, the two products are not just dangerously close in nature, they practically become no different from each other as far as the investor is concerned. Technically, SEBI seems to have a point.

Business better than usual

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When insurance companies merge

Administrator — Mon, 12 Apr 2010 06:00:14 +0000

When insurance companies merge

K Nitya Kalyani

In the last week of March there were two news developments relating to insurance companies’ ownership stakes. News reports, unconfirmed, said that both Reliance Life Insurance Company and Reliance General Insurance Company were talking to investors from abroad for selling them a stake.

The point of interest here is that Reliance General is supposed to be finalising an agreement with Royal & SunAlliance of the UK for selling a 26 per cent stake to the latter. If so, Royal will have to disinvest from the joint venture it is with now, the Chennai based General insurance company, Royal Sundaram Alliance Insurance Company, in order to take a stake in Reliance General.

The further talk was that Sundaram Finance Ltd., the Indian promoter of Royal Sundaram wants to exit the business altogether. That, speculation said, meant that the operations were being sold to Reliance General in effect.

None of these developments was confirmed by the three companies or groups concerned but market rumours were quite widespread and thick.

The Issue

However that may be, the first question that this raises is, what happens to the policyholders of the company that is being acquired or merged?

There has been only one acquisition/ merger in the Indian insurance industry after liberalisation and we have already seen that the insurance contracts of a company that is acquired are fully binding on the company that acquires it.

AMP Sanmar Life Insurance Company was acquired by Reliance Life Insurance Company and as per the regulations of Insurance Regulatory and Development Authority (IRDA) AMP Sanmar’s policyholders are the responsibility of the latter now.

The next question is what happens to agents in such a situation? The agents of the company have two questions staring them in the face in a situation like this.

One, what happens to their policyholders’ renewals and claims.

In a General insurance company the question of renewal of the policy itself comes up, not just renewal premium or continuity of the policy as in the case of Life insurance.

The agent’s income for the next year depends on renewal of the policy, and he has already worked and invested a lot for it. Claim servicing, in the case of General insurance personal lines is as crucial for the policyholder as the agent. Crucial for the policyholder since the documentation and procedures are more complicated than for a Life policy claim, and crucial for the agent because it is the best opportunity for him to provide his services and ensure the policyholder renews with him.

The other question – a larger one in the minds of the agent since it has a bearing on his career, what about his own livelihood? There is no guarantee that the company that has acquired his company will continue with his services. Even if it does, the agent has to undergo a lot of change and training to fit the new company’s culture and requirements.

There is very little past experience to go by in this industry till now. Moreover, other industry distribution models don’t provide any basis for making intelligent guesses on the impact on agents since they don’t have large sales force on a tied agency basis.

For example, the mutual fund industry has an open architecture distribution system – that is any AMFI certified agent can sell the funds of any fund house. The banking system has contracts with direct

sales agencies (DSAs) to sell credit cards and loans.

There is no repeat sales or renewal opportunities here and so, relationships-for-life are rarely cultivated – something that is the very core of an insurance agent’s profession and something that is inculcated into him at a very early stage in his career.

The agency profession will have to find out the answers to many such questions, the new challenges of consolidation!

None of these developments was confirmed by the three companies or groups concerned but market rumours were quite widespread and thick.

The Issue

However that may be, the first question that this raises is, what happens to the policyholders of the company that is being acquired or merged?

The next question is what happens to agents in such a situation? The agents of the company have two questions staring them in the face in a situation like this.

One, what happens to their policyholders’ renewals and claims.

In a General insurance company the question of renewal of the policy itself comes up, not just renewal premium or continuity of the policy as in the case of Life insurance.

sales agencies (DSAs) to sell credit cards and loans.

The agency profession will have to find out the answers to many such questions, the new challenges of consolidation!

K Nitya Kalyani

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