Insurance Regulatory and Development Authority (Irda) on Wednesday stepped in to discipline life insurers and put an overall cap on all charges levied in unit-linked policies (Ulips) with effect from October 1 for new policies. In the case of existing policies the regulator has given life insurers time till December 31 to modify charges.Irda has capped overall charges at 3 per cent of net yield in case of Ulips with tenure of 10 years or below and fund management charge shall not exceed 1.5 per cent. Net yield is the return that customer gets on maturity minus charges. In case of insurance policies of above 10 years, Irda has capped total charges at 2.25 per cent, of which the fund management charges shall not exceed 1.25 per cent.Financial Chronicle in a front-page report on June 10 highlighted the huge charges levied by insurance companies in Ulips. These charges are much higher than those of mutual funds, where entry load has been brought down to zero per cent.The entire effect of charges will be reflected in net yield, which means a cap has been put on the amount that can be taken from customers under various charges. The insurance companies will have to restructure their products in such a way that they follow the required norm. About 40-50 per cent of the products available in the market will have to be overhauled.However, the companies have the freedom to structure the policies as they want to. Industry players feel that following this order, the companies will have to bring down the commission paid to their agents.“ Ulip products will see a decline in commission paid to agents. Companies will also have to look at expense management,” managing director and chief executive officer of IDBI Fortis Life Insurance G V Nageswara Rao said.Through this order Irda has also tried to encourage long-term investments.At present, the first year charges levied in a Ulip is as high as 60 per cent. While average fund management charge is between 1.5-2 per cent. Out of the total charges in first year about 35-40 per cent goes towards paying agent’s commission.Apart from capping charges, the regulator also mandates insurers to issue the policyholder a certificate at maturity showing year-wise contributions, charges deducted, fund value and final payment made to the policyholder taking into account partial withdrawals, if any.
“Irda through this circular mandates an overall cap on all charges put together. Care has been taken to enable the insurers freedom to distribute charges across the policy term in order to impart flexibility and facilitate product innovation,” said R Kannan, member, actuary, Irda in the order.However, insurers say that there is not enough clarity on the order. “Cap on charges is a step towards policyholder’s protection. But, there are many technical details which are not clear at this point of time", Rao said.“The circular puts expense management in focus. However, it is likely to drive Ulips more as an investment product than protection, thereby restricting the development of the protection industry", Rajesh Relan, managing director of MetLife Insurance Company Rajesh Relan said.TR Ramachandran, CEO & MD, Aviva India said, “With a cap on overall charges, the customers stand to benefit in the form of higher returns on their investment. Moreover, lower charges on products with a term greater than 10 years will provide further impetus to long-term policies.”Nitin Chopra, CEO, Bharti AXA Life Insurance Company said, “The cap on ULIP charges is a significant move for the Indian life insurance industry and its policyholders. This notification is a clear indication of Irda's focus on customer benefit and ensuring that life insurance products are easy to understand and buy. However, it would help if the mortality charges were removed from the overall ambit of charges, as mortality charges are dependent on individual customer profiles and the amount of cover required. ULIPs provide flexibility in choosing the sum assured. Hence, including mortality charges in the overall charge cap may adversely impact, especially the aged customers.”Rajesh Sud, chief executive officer and managing director, Max New York Life said, “Life insurance penetration in the country is low and distributors of life insurance need to be adequately trained and suitably compensated for providing quality of advice and service to the policyholders for the development of the industry. The capital requirement in life insurance business, both due to its large gestation period and due to the reserving and solvency requirements is far larger than other financial products. Hence, life insurance business should not be equated with other financial products and this capping of charges may reduce margins of life insurance companies.”
“Irda through this circular mandates an overall cap on all charges put together. Care has been taken to enable the insurers freedom to distribute charges across the policy term in order to impart flexibility and facilitate product innovation,” said R Kannan, member, actuary, Irda in the order.However, insurers say that there is not enough clarity on the order. “Cap on charges is a step towards policyholder’s protection. But, there are many technical details which are not clear at this point of time", Rao said.“The circular puts expense management in focus. However, it is likely to drive Ulips more as an investment product than protection, thereby restricting the development of the protection industry", Rajesh Relan, managing director of MetLife Insurance Company Rajesh Relan said.TR Ramachandran, CEO & MD, Aviva India said, “With a cap on overall charges, the customers stand to benefit in the form of higher returns on their investment. Moreover, lower charges on products with a term greater than 10 years will provide further impetus to long-term policies.”Nitin Chopra, CEO, Bharti AXA Life Insurance Company said, “The cap on ULIP charges is a significant move for the Indian life insurance industry and its policyholders. This notification is a clear indication of Irda's focus on customer benefit and ensuring that life insurance products are easy to understand and buy. However, it would help if the mortality charges were removed from the overall ambit of charges, as mortality charges are dependent on individual customer profiles and the amount of cover required. ULIPs provide flexibility in choosing the sum assured. Hence, including mortality charges in the overall charge cap may adversely impact, especially the aged customers.”Rajesh Sud, chief executive officer and managing director, Max New York Life said, “Life insurance penetration in the country is low and distributors of life insurance need to be adequately trained and suitably compensated for providing quality of advice and service to the policyholders for the development of the industry. The capital requirement in life insurance business, both due to its large gestation period and due to the reserving and solvency requirements is far larger than other financial products. Hence, life insurance business should not be equated with other financial products and this capping of charges may reduce margins of life insurance companies.”
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