The ULIPs controversy that started with the stock market regulator SEBI banning 14 Insurance companies from issuing fresh ULIPs has drawn from fresh blood. Within 24 hours of this ban, Insurance Regulatory Development Authority or the IRDA has responses to the SEBI notice by stating that insurers can continue issuing policies as usual.
Why there is a fight?
SEBI manages all stock market related activities. They have power to manage mutual funds and other investment schemes that invest in stock markets.
ULIPs are similar to mutual funds (investment in stock market) and some part of insurance added to it. As ULIP are doing investment in share market, SEBI should have a control over it and thats why SEBI is saying that insurers should seek its approval for ULIP products.
IRDA is regulatory authority for insurance companies in India. As ULIP has more to do with Stock market investment and less with insurance part. Ideally SEBI should also have say in regulation of ULIPs. The same was requested to IRDA by SEBI, but they refused to give them control, So Sebi has asked them to stop selling Ulips, but IRDA has asked companies to continue selling the ULIPs.
SEBI has removed all entry loads on mutual fund investment, But insurance agents are making lot of money in first 3-5 years of ULIP charging high entry load on ULIP investment. Most of the ULIPs are mis-selled in India, saying that investment have to be done only for 3-5 years, which is incorrect as if policy holder does not continue this after that, he stands to loose.
This regulatory issue is turning into a battle of supremacy – an outcome wherein the consumer interest may be sidelined for the moment. IRDA seems particularly irritated as it may see this ban as an encroachment of its territory of rights – perhaps ignoring the public good.
It may be noted that Insurance Business in India has been lacking efficiency. The industry that was originally supposed to cover risks is selling investment instruments many a times dependent upon stock market – which bring in inherent risk – which is nearly opposite the whole philosophy of Insurance.
Barring the term plans which provides pure risk cover, rest of the insurance policies have steep overheads and charges. Many policies including ULIP deduct as much as 40% or more of the first year premium as charges.
India is a peculiar country which has a very poor ratio of premium to cover – which means that even though a lot of premium is being collected the cover provided is very less. The primary reason for that is that a huge portion of the premium is diverted to investments and corresponding charges and load. Only a small fraction of the premium goes into covering the actual risk.
These are major concerns that should ideally be addressed by IRDA, which has acted very little in consumer interest. Insurance still ranks to be the no. 1 product that is mis-sold making false claims and giving wrong product knowledge. In these circumstances, it is obvious for the market regulator SEBI to take a note. SEBI has made a great impact in the highly rigged mutual funds and stock markets, making it far more transparent over the years.
It is expected that with SEBI intervention, things would get better for the common man for whom Insurance is indispensable. It is high time that Insurance is being sold as Insurance and Investment is being sold as Investment and that too without leakage.
The government may be compelled to step in to resolve the issue as some insurers are planning to approach the court.
Update
SEBI has lifted the ban on selling of Unit Linked Insurance Polices (ULIPs) by 14 insurance companies. This move came in after SEBI guys met IRDA and finance ministry people. But Finance Minister Pranab Mukherjee has said that final decision will be by court.
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