No more loans against Ulips

The Insurance Regulatory and Development Authority (Irda) plans to ban loans by life insurance companies against unit-linked life insurance policies (Ulips). The insurance regulator is not approving any unit-linked plans with a clause of loans against policy.

“Irda has rejected our new unit-linked plan and has asked us to refile it after removing the loan facility clause,” said a senior official at a large private life insurance company on the condition of anonymity.

Confirming the development, Irda Chairman J Hari Narayan said, “Fundamentally, Ulips are risky products, given that they are linked with the stock market. In case the fund value drops dramatically due to negative price movement, the risk would come to the insurers. Hence, loans against such products are not advisable.”

Insurance officials said the move might further dent the sales of Ulips as the loan facility acted as an added feature. The facility first came into force after Irda raised the lock-in period for such plans by two years to five in September 2010.

LOANS AGAINST MARKET-LINKED PLANS RISKY

* Irda not approving any Ulips with loan facility

* Sept 2010 Loans against Ulips started

* 75% of the fund value could be the maximum loan amount

* Interest rate offered was benchmarked against the base rate of banks — currently around 10.75-11%

* Highest loan tenure could equal the policy tenure

* 90% of the fund value can be the maximum loan amount for traditional policies

“The loan facility was one of the selling points for these long-term insurance products. So, this would impact the sales of unit-linked plans,” said K Sahay, CEO, and Star Union Dai-ichi Life.

Earlier, when the lock-in period was three years, policyholders were allowed part-withdrawal after the period. With a lock-in period of five years, the loan facility was provided to meet customers' short-term fund requirements, said an official of a private life insurance company.

Another reason behind allowing loans was to prevent policyholders in need of short-term funds from surrendering the policy, added an actuary at a private life insurance company.

The loan amount against a unit-linked policy depends on the extent of the equity exposure in the portfolio. Generally, insurance companies provide up to 70-75 per cent of the fund value of a unit-linked policy as loan if more than 60 per cent of the fund is invested in debt instruments. However, the loan amount comes down to 50 per cent of the fund value where equity exposure accounts for more than 60 per cent of the total portfolio.

For traditional or endowment plans, companies extend loans up to 90 per cent of the fund value. The rate of interest varies from 9.5-12 per cent per annum, benchmarked against the base rates of public sector banks. The loan tenure can be as high as the policy term. "Traditional or endowment plans are safer products and we have no issues with a loan facility against these plans," the Irda chairman added.

Since September 2010, when stringent unit-linked guidelines came into force, insurance companies have focused more on traditional plans and the sale of Ulips, which till then constituted 80 per cent of the total volume, came down drastically. In the current financial year, the downward trend has continued, with a choppy equity market and high inflation adding to the problems. During April-November, premium collection by the life insurance industry was down almost 19 per cent to Rs 2,428.86 crore from Rs 76,989.88 crore reported in the year-ago period. Ulips accounted for only 20-25 per cent of the sales.

Kotak Life Insurance launched unit-linked Invest Maxima

Private insurer Kotak Life Insurance today launched Invest Maxima, an investment oriented Unit Linked Insurance Plan (ULIP).

The plan offers zero premium allocation charge feature that maximises the investible component and the choice of three different portfolio management strategies which affords customers tremendous flexibility in managing their portfolio, Kotak Mahindra Old Mutual Life Insurance said in a release issued here.

Customers are given the flexibility to choose from two options, one which offers a choice of five attractive fund options, or the other that enables them to invest in the equity market in a systematic manner over a period of time or a customized combination of the two.

In the last policy year, customers can choose to exit the policy in a secure and systematic manner, by selecting the Systematic Exit Strategy option, which gradually diverts all fund balances into a lower risk money market fund, to avoid volatility and safeguard returns on maturity.

Apart from regular premium payment option, the plan also offers limited and single premium payment options.

The minimum age is 0 years and the maximum age is 65 years.

The maturity of the plan is minimum 10 years and the maximum is 75 years.

There are three premium options, in regular the minimum amount is Rs 50,000, in limited Rs 75,000 and in single premium it is Rs 1, 00,000.

Kotak Mahindra Old Mutual Life Insurance is a 74:26 joint venture between Kotak Mahindra Bank, its affiliates and South Africa's Old Mutual, which is also listed on the London Stock Exchange.

The plan will provide tax benefits to customers.

There is a shift from Ulips to traditional products

SBI Life, the life insurance subsidiary of State Bank of India, has expanded its operations despite Insurance Regulatory and Development Authority's sweeping changes in the norms of unit-linked insurance plans from September last year.

MN Rao, managing director and chief executive officer of SBI Life speaks to FE about his strategies to cope up with regulatory challenges. Excerpts:

How SBI Life is faring in the days when the life insurance industry's numbers are falling?

Business so far has remained satisfactory at SBI Life though falling in line with industry. We have done R2,050 crore of business in the new business premium until August 31 in this financial year, as against R2,390 crore in the corresponding period of the last financial year, thus witnessing a fall by 14% during the period. Now the product mix has changed. We have shifted to low-ticket size product. Still, the total product portfolio remains unchanged from July last year to July this year. Till July during this financial year, our premium has gone up by 3% year-on-year. However, from August 2010 to August 2011, our performance is down by 14%. It has happened as August 2010 (the sales were very good during that particular month) was the last month for all of our old products and we had launched new products in September 2010 in line with the new regulations of regulator Irda. In total business premium, we are growing over last financial year on yield-to-date (YTD) basis in August 2011 when we achieved a sum of R3,983 crore, as compared to R3,706 crore in the corresponding period of the last financial year, thus recording a growth of 7.5%. Going forward, we do expect to show a growth on new business front and total business premium which are expected to go up by 10% and 15-16% respectively by the fiscal-end, as compared to our performance during the last financial year.

While the current volatile capital markets which may nots be conducive for Ulips, how are you trying to push traditional products?

As of now, our product mix-Ulip and traditional and corporate solutions plan (or group plans) is in the ratio 55:45. Total numbers of Ulips have fallen by 10% during August this financial year, when compared to the level of August 2010. Again, our traditional products have gone up by 125% during the period. Our group fund alone has increased by 15% during the same period.

Do you think the highest NAV products launched by insurance companies are misleading and Irda should take some action?

We do have highest NAV product, named as Smart Performer and it is doing well. The regulator is worried about administrative issue related to the product and how to make the disclosures to the customers about such products so that they get a fair deal. Life Insurance Council is working on it.

Has your investment portfolio fallen? Do you think that investment income will fall this year?

Nearly 55% corpus of our total assets under management (AUM) has been invested in equities. In majority of funds, our fund performance has been well so far. In most of the funds, we are in the top performer. In case the same market condition continues, we would invest R6,000-7,000 crore additionally in equities during the remaining part of this financial year. The balance amount would be invested in either G-sec or corporate bonds. There is a shift from Ulips to traditional products happening now. I think, it will stabilise after a year from now.

Do you have any capital infusion plans?

We had our last capital infusion to the tune of R500 crore in SBI Life in 2007-08. It was jointly done by the promoters like SBI and BNP. After that, there has been no requirement of capital infusion because of profitability. We first broke even in 2005-06. Except for a marginal loss, which was incurred by us in 2008-09 thanks to the market crash, we have continued to make profits constantly since then.

With SBI as the parent body, it was expected that SBI Life would emerge as a leader in the life insurance industry soon?

We started our operation some 10 years ago. We are the life insurer with the lowest operating ratio. Also, we are the largest player in the private sector in terms of total business premium as on July-end. The strength of SBI Life is primarily due to the support provided by the SBI. Most of the SBI branches are selling our products through bancassurance channel. On the selling of products of more than one insurers (which is permitted now) by the banks, a report has been submitted before Irda. We are in favour of selling two products each from life insurance and non-life insurance companies. We believe that sale of insurance product is a long term relationship with any bank. There should be close coordination between bank and insurance companies, not only for the sale of their products, but also for servicing of product and grievance redressal so that customers of the bank should have a choice.

Now you have 2 years to revive a lapsed Ulip

A lapsed policy is the last thing a responsible person would want in his/her balance sheet. Imagine the scenario. A policyholder forgets to pay the premium on the due date. He/she fails to pay the premium even after reminders from the company asking him/her to renew the policy within the grace period. The reasons for not paying the premium may be a temporary financial crunch or something serious and unanticipated.

But he/she would lose the insurance cover. In the process, the policyholder's worst nightmare could come true if something were to happen (euphemism for death) to him/her during the period. The whole purpose of buying a life cover - to support the family financially when one is not around - would be entirely defeated.

However, some Ulip (unit-linked insurance plan) holders would get more breathing space now thanks to the recent decision of the Insurance Regulatory and Development Authority (IRDA) to allow policyholders to revive their policies within two years from the premium due date.

The new guideline will be applicable only to Ulips issued after September 1, 2010, when the course-altering norms for Ulips were put in place by the regulator. However, Ulips that have crossed the lock-in threshold of five years will not get any benefit from these regulations.

Relaxed rules

The revised norms, which will become effective from November 1, are aimed at making it easier for policyholders to reinstate their policies that have lapsed. "Under the earlier guidelines, one could not revive their policy once it lapsed 60-75 days after the premium due date. The policy was treated as withdrawn and the balance amount moved to the discontinued policy fund. With the new guidelines, one has the option of reviving the policy for a period of two years (but within the lock-in period of five years)," says Gaurav Rajput, director, marketing, Aviva India.

Until now, if premiums were not paid within the grace/notice period, the accumulated funds were transferred to the discontinued policy fund and remained locked in till the end of the fifth year of the policy, after which it would become payable to the policyholder.

"After this circular, once monies are moved to the discontinued policy fund in the first five years, the policy can be reinstated for up to two years. In which case, the cover will be reinstated subject to underwriting, and the client will again get a choice of investment funds," explains Andrew Cartwright, chief actuary, Kotak Mahindra Old Mutual Life Insurance. For policies more than five years old, reinstatement is not possible, as the funds become payable immediately after discontinuance.

ICICI Prudential Life launched two new Ulips

ICICI Prudential Life Insurance has launched two unit-linked insurance plans (Ulips) – ICICI Pru Elite Life and Elite Wealth - aimed at the high net worth individuals. The features of both the plans are similar, save the premium. The minimum premium for Elite Life is Rs 2 lakh, while it goes up to Rs 5 lakh for ICICI Pru Elite Wealth. The premiums can be paid either in one go or over a period of five years.

Under the one-pay option, the life cover for those aged till seven years and over 60 years is limited to 1.25% of the premium. Those between eight and 60 years can opt for a minimum sum assured of 1.25 times the premium, with the upper limit being five times the premium amount.

If the premium is paid over five years, then policyholders aged between 8 and 45 can secure a sum assured that is either 10 times the annual premium or an amount equal to the policy term multiplied by half of the annual premium, whichever is higher. For those over 45, the sum assured will be seven times the annual premium or an amount equal to the policy term multiplied by one-fourth of the annual premium, whichever is higher.

If policyholders chooses a life cover of 1.25 times the premium, the deduction available under 80c of the I-T Act will be limited to only 20% of the total premium and not the entire premium amount. What's more, the returns generated by the product will be taxable, too.

FUND OPTIONS, MATURITY PROCEEDS
The products offer eight fund options, and also the option to invest systematically through the automatic transfer strategy. In case of the insured's death during the policy term, the amount payable will be the sum assured reduced by the partial withdrawal, if any, or the fund value, whichever is higher. Partial withdrawals are allowed after five years of the policy, subject to limits.

CHARGE STRUCTURE
Premium allocation charges amount to 3% of a single premium and 2% under the five-pay option. Policy administration charges are Rs 60 per month for one-pay and Rs 500 per month under the five-pay option. Any alterations in the policy, besides switching funds, will cost Rs 250 per transaction. "The initial charges are lower compared with other Ulips, but they still cannot beat mutual funds which don't have an entry load," says Pankaj Mathpal, CFP.

Upside: Long-term insurance cover with a limited premium payment term. Also, the policyholder can choose between eight funds options and switching between them is free.

Downside: Like all Ulips, financial planners feel the charges are higher vis-a-vis other comparable financial products like mutual funds.

New Ulip rules rob market of insurance

With flows for Ulips drying, life insurance companies invest just a fraction of what they did last year.

Indian bulls are missing their earlier close allies in the fight against the latest bear onslaught. Domestic life insurance companies, which had acted as a counterweight to fleeing foreign investors in the past, do not have enough dry powder now, as inflows into unit-linked insurance plans (Ulips) have fallen sharply.

Ulips, which used to account for 80 per cent of industry sales, have sunk since September 2010, when the Insurance Regulatory and Development Authority’s new rules made the selling of these hybrid plans less lucrative for both life companies and agents.

SHRINKING FLOWS Net investments by domestic institutions other than mutual funds
(Sep to Aug)	DII*	MF#	Difference
2006-07	18,683.03	6,884.50	11,798.53
2007-08	55,566.48	13,134.70	42,431.78
2008-09	47,806.61	8,373.00	39,433.61
2009-10	4,576.28	-26,067.50	30,643.78
2010-11	-128.93	-5,744.40	5,615.47
Figures in Rscrore # Source SEBI Data Compiled by BS Research Bureau * Source Exchanges

Lack of support from insurance companies adds to the woes of equities battered by foreign institutional investors (FIIs), say experts. Gaurav Dua, head of research, Sharekhan, said: “Insurance flows have slowed. This has impacted to the extent that there is no domestic support to absorb the selling by FIIs.”

FIIs have net-sold stock worth Rs 11,000 crore since the end of July. The BSE Sensex has lost a fifth of its value since January. According to the Business Standard Research Bureau, investments by life insurance companies in equities are down by 80 per cent since the Irda move. In the period between September 1, 2010 and August 31, 2011, net investment by the life companies was Rs 5,616 crore. That is a fall of 81 per cent from the Rs 30,642 crore deployed by these companies in the one-year period before the move.

Since there are no direct numbers in the public domain, this figure was derived by deducting the investments by mutual funds reported by the Securities and Exchange Board of India from the aggregate of domestic institutional investors reported on the exchanges. Domestic institutional investors refers to banks and financial institutions, but insurance companies constitute a major portion.

Insurance officials say equity inflows have fallen as the sales mix has shifted in favour of traditional policies. Unlike Ulips, where up to 95 per cent of the funds can be deployed in equity, traditional plans cap equity exposure at 25 per cent. After the new guidelines came into force, the traditional plans, which earn a relatively higher commission, have gained the attention of sellers. The mix between Ulips and traditional policies, which used to be 80:20, has, therefore, reversed. During April-July this year, life insurance companies collected Rs 26,794 crore by writing new policies and traditional plans accounted for nearly 80 per cent of these.

“Equity investments depend on various parameters like premium collection, sales of unit-linked plans, term plans and interest income, among other things. Across the industry, the premium collection has been down so far in the current financial year, largely due to the dip in sales in unit-linked plans. Looking at the present trend, it is highly unlikely that we would be able to match last year's investment figures during 2011-12,” said a senior official from Life Insurance Corporation (LIC).

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Not surprisingly, LIC, the largest institutional investor, has revised its equity investment plan for 2011-12. It expects to invest Rs 35,000-40,000 crore in the equity markets, as against an earlier target of Rs 60,000 crore. Equity investments by the insurance behemoth during 2010-11 shrunk 30 per cent to Rs 43,000 crore, compared to Rs 61,500 crore in the previous year. However,the official added, since prices are low, investors are able to shore up their stock portfolios by spending lower amounts of money.

“The measures taken by the regulator have changed the focus of insurers towards traditional plans. Though it is a temporary aberration, the slowdown in the sales of unit-linked plans has impacted the equity investments of all life insurance companies,” said Saravana Kumar, chief investment officer at Tata AIG Life.

“Also, in a high interest rate scenario, people tend to shift more to non-unit linked products. Hence, the equity investment tends to be lower,” an official added.

Tata AIG launches 2nd InvestAssure Apex Supreme ULIP series

Private insurer Tata AIG Life Insurance today announced the launch of the second series of its 'Tata AIG Life Insurance InvestAssure Apex Supreme' unit-linked insurance scheme.

"The introduction of the Series II of funds for Tata AIG Life Insurance InvestAssure Apex Supreme will once again give our customers the opportunity to invest in this unique product that is targeted at customers with medium to low risk appetite, who want to gain from the upside potential of the market whilst safeguarding their investments," Tata AIG Life Managing Director and CEO Suresh Mahalingam said in a release issue here.

Tata AIG Life Insurance InvestAssure Apex Supreme is a five-year limited pay plan with a policy term of 10 years and comes with the benefit of a guaranteed maturity unit price ( GMUP )) achieved under the product during the 100 reset dates.

It also provides a guaranteed maturity addition that is payable on maturity and death benefit for the financial protection. Click to know about Insurance

The policy is for individuals between the ages of 18-65 years and is eligible for tax benefits.