They were once the top favourites of life insurance companies and their customers due to the potential for high returns from the stock market, along with a basic life cover. But the market fluctuations and the regulator’s move to put an indirect limit on fees have forced most insurance firms to shed their over-dependence on unit-linked insurance policies, or Ulips, which basically invest the premiums paid by customers into funds which buy stocks or bonds.
Insurers are now trying to focus on traditional products like term plans, money back, endowment and pension plans.
Market leader Life Insurance Corporation of India (LIC), for example, has reduced the share of Ulips in its total portfolio to 68 per cent in the first nine months of the financial year from almost 75 per cent in the period a year ago. Large private sector players such as Max New York Life and Bajaj Allianz Life have also adopted a similar strategy.
Max New York Life has reduced its share of Ulips from 75 per cent in April-December 2008 to 70 per cent in the same period, and Bajaj Allianz Life Insurance has gone a step further by paring the share of Ulips from 96 per cent of total sales in April-December 2008 to 81 per cent this year.
“Traditional products are the lifeline of any insurance firm. Insurance means we are trying to de-risk the customers. It is not as lucrative as Ulips but meets the real need of insurance,” said LIC Managing Director D K Mehrotra.
Apart from the equity market fluctuations, the regulator’s move to cap Ulip fees have also acted as a dampener. The new rule says that the expenses of a 10-year Ulip should not exceed three percentage points of the gross return (returns before expenses are deducted) of the underlying fund.
In other words, if the Ulip invests in a stock fund that gains a cumulative 10 per cent over the 10-year term of the policy, the client should get a return of at least 7 per cent, after the insurance company deducts the allocation, administration and fund management charges.
If the Ulip is for a term of more than 10 years, the difference between the "gross yield" and "net yield" should not be more than 2.25 percentage points.
“There is a shift towards traditional policies and we will see an impact with a lag effect. We would like our share of traditional to grow in the pie. The overall volume was negative last year. Sales will be driven by the consumers’ view on the market but we are seeing the need for protection rising,” said T R Ramachandran, CEO, Aviva Life Insurance.
Aviva saw a marginal shift towards Ulips from traditional in the first nine months of the financial year. Strong sales have helped the industry post around 30 per cent growth in new business income.
Insurers also witnessed a rise in demand for traditional products when the stock market collapsed and many came up with single premium products. Insurance companies launched various guaranteed products in the beginning of the year when the markets were volatile and demand for such products was high.
Last year, in order to beef up their valuations before listing, insurers were also trying to increase their exposure to traditional plans. The Insurance Regulatory and Development Authority (Irda) is working on the valuation guidelines which are expected to be released in February.
This doesn’t mean that Ulips are completely out of favour. Ulip sales have, in fact, seen a marginal uptick in the past two months due to the delays insurance companies are facing in listing on the stock exchanges.
“We did see a major transfer towards traditional when the market collapsed. But with insurance IPOs getting pushed further and further, there seems to be a trend reversal,” said Ernst & Young Partner Ashwin Parekh.
A few companies are still bullish on Ulips. For instance, Bharti Axa Life Insurance collects 95 per cent of its premium through Ulip sales. For ICICI Prudential Life, almost 90 per cent of the premium has come by way of Ulips.
“Today people are buying insurance in the form of savings or investment products. We are not going against the grain and leaving the choice to the consumers. We have not observed any prominent shift in our products mix per se,” said ICICI Prudential head of products Pranav Mishra.
The largest private sector insurer SBI Life also saw its portfolio shift in favour of Ulips with 64 per cent of the total income coming from equity-linked products in April-December 2009 compared to 58 per cent in the corresponding period last year.
"Our share of traditional has always been good as we sell more of group products. We would be looking at a healthy mix," said SBI Life chief financial officer Abhijit Gulyani.
