New ULIP norms – What it means?

Nearly three-quarters of the 1.6 million private life insurers have had trouble in business. Insurers are taking steps to cut costs in the wake of a dramatic reduction in charges of unit-linked insurance policies (or Ulips) by the insurance regulator, IRDA. The new norms, may push 1.2 million agents out of work, took effect from 1 September.
Ulips are: A hybrid product that combines insurance and equity investment.
They account for at least 80% of new business premiums for life insurers. The size of the agency channel, which sells policies of 23 life insurers, has grown from 900,000 to about three million since 2000. Until recently, agents were aggressively pushing sales of Ulips, earning commissions of up to 40%!
The state-run, Life Insurance Corp. of India (or LIC), alone manages at least 1.3 million agents. There are about 310 million policies in force, including traditional life insurance policies.
The insurance regulator has capped various charges including surrender charges. Till 31st August, companies were able to levy up to 100% as surrender charges from a customer if a policy was discontinued.
The regulator has also ordered insurers to offer a minimum guaranteed return of 4.5% on the fund value in linked pension plans. Earlier, there was no such norm and the value of the funds invested entirely depended on the yield of the instruments where the premium was allocated.
The new norms will benefit policyholders but will bring down average agent commissions in Ulips from 15-17% to 7-9%. The reduction in the first-year agent commissions will help curb rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more capital and cut costs to sustain Ulip sales.
LIC may not need to resort to cost-cutting measures due to its highly profitable business, but private sector insurers are planning drastic cost-cutting measures to sustain their businesses in the new regime.
What measures companies can take?
• Cutting the agency channel is one of several cost-cutting measures.
• The firms plan to cross-sell products through branches of associate companies instead of opening new branches,
• Cut commission of agents retained
• Redesign new products with variable premium.
• The companies are also focusing on alternative distribution channels such as subancassurance, where the expenses are lower. According to industry estimates, the cost of sales through bank branches or bancassurance can be as low as 20% of the value of the policies sold.
• To save costs, private players are also focusing on training facilities to improve agents’ productivity.
• Some bank-owned life insurers are planning to sell insurance policies through the branches of their mutual fund subsidiaries.
Statistical analysis:
According to a recent study, existing distribution channels are almost entirely focused on Ulips. Nearly 85% of new business premium comes from sales of Ulips but the cost of sales through agency channels is very high—between 50% and 100%.
The study said the cost should be brought down to 25-30%. It also revealed that nearly 60% of the agents work part-time.
India’s life insurance industry has grown some eightfold in the past ten years, collecting a total premium income of Rs2.61 trillion in 2009-10, or which nearly Rs1.1 trillion came from Ulips. At least 310 million life policies are in force now.
The regulator has so far cleared 51 of 68 new Ulips filed by insurers. There were 230 Ulips in the market till August.