The new regulations may deal a body blow to unit-linked insurance plans (Ulips).
Insurers as well as insurance agents, who have so far been making big money selling Ulips, stand to lose after the new norms become effective.
Consequently, insurers are likely to jack up the minimum premium payable on Ulips, while insurance agents may start aggressively hawking traditional products where they will get a higher commission.
“Life insurers have higher expenses in the first year of the policy, which under the new regulations will have to be recovered over the lock-in period of five years. This will put a strain on new business,” said Deepak Sood, managing director and chief executive officer of Future Generali Life Insurance Company.
“The capping of expenses guidelines has been made very stringent and this will have far-reaching consequences,” said Kamesh Goyal, country manager and chief executive officer, Bajaj Allianz Life Insurance Company.
“Small regular premium (Ulips) policies will become unviable. A large proportion of people who were paying a premium of less than Rs 15,000 or so a year will suffer badly. I feel it should be changed and linked to the premium amount. Small-ticket policies of less than Rs 20,000 a year should have higher allowance to make them viable. The difference in gross and net return for this set of policies at the end of the fifth year should be 5.5 per cent (against 4 per cent prescribed in the new regulations),” he added.
“Acquisition of small-ticket policies will become costlier for insurers and hence it is very likely that insurance companies may increase the threshold premium level in Ulips,” agreed Gorakhnath Agarwal, chief actuary, Future Generali Life Insurance Company.
“The capping of charges will affect the (profit) margins of life insurance companies,” insurance sector researchers at Edelweiss Securities Limited said in a report. “The capping of surrender charges is a bigger blow compared with the difference in gross and net yield (return) because it would not only restrict the ability to generate revenue, but also raise the persistency risk borne by insurers,” the report said.
Until now, surrender of Ulips within the first three years would attract hefty deductions — often nothing is returned if the policy is surrendered in the first year. The new regulations have pegged surrender charges in the first year to a maximum of Rs 3,000 (in case of annual premium less than Rs 25,000) and Rs 6,000 (in case of annual premium above Rs 25,000).
“The new regulations on surrender charges will force insurers to trim the commission paid to agents,” said Agarwal.
He added that the increase in minimum sum assured in case of Ulips would reduce insurers’ income from fund management charges because they would have to allocate a higher percentage of premiums towards mortality charges.
“Commission levels and shareholders’ margins are among the lowest in India when compared with other Asian countries. There has to be a fair return for all stakeholders concerned,” said V. Srinivasan, chief financial officer, Bharti Axa Life Insurance Company.
Insurers also feel that lower surrender charges will lead to higher policy surrenders because policyholders will view Ulips as short-term investment instrument.
