Irda worried over surge in unit-linked plans

Individuals fancy unit-linked invstment plans (ULIPs) feeling they only have an upside in exposure to equity market, but the insurance regulator is concerned.

The regulator, Insurance Regulatory and Development Authority (Irda), about two weeks ago commenced an internal study to understand the reasons behind life insurance companies giving preference to selling ULIPs over traditional insurance products.

Irda Chairman C S Rao said, "We are studying the impact of regulations on traditional policies. We want to examine whether there are features in traditional plans that inhibit their growth?"

ULIPs have been a major factor in life insurers enjoying over 100 per cent growth in new business premium over the last few years.

The government-owned Life Insurance Corporation (LIC) have witnessed over 180 per cent increase in its new business premium income in the current financial year, thanks to its agents going on an overdrive for selling ULIPs. About 71 per cent of LIC's new premium income of Rs 23,585 crore came from ULIP sales.

The share of ULIPs for the largest private sector life insurer, ICICI Prudential Life Insurance, as well as for Bajaj Allianz Life Insurance in their new business premium income is about 90 per cent.

One of the major drivers for life insurers to sell more ULIPs is the solvency margin. The insurance component in the amount invested in ULIP is about 20 per cent, which results in a much lower capital requirement.

The life insurers have to provide a much higher capital for traditional products, where the entire premium paid is accounted for insurance cover.

The regulator's idea behind the internal study is to work out a plan for popularising traditional insurance products.

"One of the reasons could be the solvency margin. We will study what needs to be done to bring about a balance (between ULIPs and traditional products)," Rao said.

Rao also pointed out life insurers might be focusing on selling ULIPs as the investment risk is borne by a policyholder as against the insurance company in the case of traditional policies. "In a few years, the move will stabilise. We don't want to take any step (now) that will act as a hindrance towards insurance penetration," Rao added.

Sanjay Jain, head marketing at Bajaj Allianz Life Insurance, said "Customers prefer ULIP because of their transparent nature wherein they can decide returns at every stage. Customers want to take the benefit from the strong growth in equity market, which they would not have benefited in a traditional product."