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Change in ULIP norms too little too late

Investors should continue to be suspicious of ULIPs unless the new norms prove to be customer-friendly

Reading business newspapers and magazines, you would probably have come to know that September 1 is being widely written about as a watershed in the Indian insurance industry. The Insurance Regulatory and Development Authority’s (IRDA’s) new norms for unit-linked insurance plans (ULIPs) have come into force from this day, with lower commissions, lower surrender charges, longer lock-ins and a range of other measures that should bring some improvement in notoriously customer-hostile nature of this financial product.

However, when I see the spin that IRDA’s new rules are being given by the insurance industry, I would like to keep my fingers crossed. The public-relations pushback against the changes is intense. The dominant theme in what you will read and watch about these changes is that they will throw a large number of people out of work. That the changes will reduce the amount of money flowing from insurance companies into the stock markets and make it even more difficult for insurance companies to make profits.

All this may be true or it may all be false. However, it is completely irrelevant. The only thing that matters is whether under the new rules ULIPs will actually evolve into an investment vehicle worthy of being considered by a knowledgeable and aware investor. And that depends completely on whether the new ULIPs actually deliver what they are supposed to, and how creatively the insurance industry’s sales process actually works.

Leaving all hype aside, I would suggest that a potential ULIP customer should carefully consider what really has been the story so far. For at least six to seven years now, ULIPs have been practically the only product that Indian insurers have been interested in selling. During these years, this product degenerated into a complete scam. Agents were lying through their teeth to extract customers’ money and collect their giant commissions. Through all this, IRDA kept its eyes firmly shut, refusing to entertain the notion that there could be anything wrong with either the products or the sales process. Over these years, independent advisors and analyst as well as most writers in the media (by independent I mean those who don’t actually sell any financial products) started heavily criticising the product.

However, the insurance industry and IRDA stayed unfazed through all this. Eventually, it took an event unprecedented in the history of financial regulation— the Securities and Exchange Board of India’s (SEBI’s) attempt to takeover ULIP regulation — before it was recognised that the blatant loot had become a little too blatant to carry on any longer.

So, the real story is not one of a regulator fixing some problems and an industry making heroic sacrifices in order to benefit its customers.

Instead, it is one of a rapacious industry managing to carry on something it should never have been allowed to do in the first place. Had the bizarre SEBI-IRDA standoff not triggered off far too much attention to be tolerated, the earlier state of affairs would probably carried on indefinitely. In fact, nothing lays bare the corrupt DNA of the insurance industry than the frenzied sales efforts that were put into the old, high-cost, anti-customer ULIPs in the months before the rules changed.

The moral of the story is that till the time the facts — not promises and projections — prove otherwise, all investors who want to be careful with their money should continue to be suspicious of ULIPs. It is easy to get carried away by the hype but the fact is that this industry and its regulator have come up with as few improvements as possible, as late as it has been possible.