MFs chide new norms for insurance firms

The mutual fund industry is unhappy with the Insurance Regulatory and Development Authority's (Irda) new norms for Unit Linked Insurance Plans (ULIPs) which give insurance companies an "unfair advantage" of offering higher commissions.

"No broker is interested in pushing ahead the offering given by mutual funds. Life insurers pay a commission of 30 per cent from the first year premium while the commission is capped much lower for mutual funds," said AK Sridhar, chief investment officer, UTI Mutual Fund.

The Insurance Act allows life insurers to retain up to 40 per cent of the first year premium as commission, while the mutual funds have to cap their expenses for every New Fund Offering (NFO) to 6 per cent and annual expenses range between 1-2 per cent.

While UTI Mutual Fund and LIC Mutual fund offer ULIP schemes, other mutual funds do not have similar products. The differential in the commission is the main reason for lack of tie-ups between insurers and mutual funds for ULIPs even though mutual funds bring better investment expertise.

The insurance regulator does not see any change in the situation going forward except for market forces driving down commissions. "ULIPs are basically insurance products and any change in commission cap would require an amendment in the Insurance Act," an Irda official said.

DSP ML has innovated by launching an SSIP (Super Systematic Investment Plan), which combines life insurance, while taking advantage of equity market-linked returns.

"Between two equally good products, the one offering higher commission would be given preference. That is one reason why ULIPs are pushed more aggressively," Rajiv Bajaj, head of Bajaj Capital which offers investment management services and sells various investment and insurance products, said.

The expense ratio of UTI ULIP hovers around 2 per cent, compared with 15-30 per cent charged by similar products offered by other players.

"If a ULIP scheme collects Rs 100 from customer and pays Rs 30 as commission, the illustration showing the projected return shows the growth on the base of Rs 70. This can be misleading as the investment for the customer is Rs 100," Sridhar added.