The hullabaloo over unit linked insurance plans (Ulips) is unlikely to subside in a hurry, with the insurance regulator determined not to cede turf it reckons as its own to the stock market regulator, which has mounted an offensive to wrest regulatory control of what it says are mutual funds rather than insurance schemes.
“The argument that insurance is both predominant and inseparable in a unit linked insurance plan (Ulip) fails,” notes the 11-page order issued by Prashant Saran, whole-time member, Securities and Exchange Board of India (Sebi), against 14 private insurance companies.
DNA decided to examine the available data on Ulips to find out if the Sebi argument holds any merit.
Between April and December, 2009, for which data is currently available, insurance companies collected Rs 58,714 crore new premium selling around 2.22 crore Ulip policies, offering a total insurance cover of Rs 2,50,915 crore. The average premium collected per policy was Rs 26,438 and the average insurance cover per policy Rs 1.13 lakh, or around 4.3 times the average annual premium
So the question is what portion of the average premium of Rs 26,438 goes towards the mortality premium to be paid for the insurance cover?
“For a premium of around Rs 26,000 per annum, an average investor (aged 28-30) would be eligible for a pure insurance cover (term insurance) of over Rs 1 crore,” says Sandeep Shanbhag, director, Wonderland Consultants, a tax and financial planning firm.
Insurance data proves Sebi’s point. “Put another way, for a cover of Rs 1.13 lakh, the mortality premium (the portion of the premium that goes towards the insurance cover) required would be a mere Rs 300,” he says.
This means, barely 1.1% (Rs 300 as a percentage of Rs 26,438) of the average premium paid is going towards the insurance cover.
In other words, of the average premium of Rs 26,438, as much as around Rs 26,100 (Rs 26,438 - Rs 300) is being earmarked for investment.
The trend gets even more interesting when we consider only life single premium Ulips. The amount of money raised by this category for the period April-December, 2009 stood at Rs 2,612.81 crore. The number of policies sold was 5,07,138 and the total insurance cover offered was Rs 6,408.74 crore. That pegs the average premium per policy at Rs 51,521 and the average insurance cover per policy at Rs 1.26 lakh.
Here again, the mortality charge would work out to around to around Rs 300 per year for a 30-year-old since the average cover is almost the same as in the above instance. But the allocation towards the insurance cover is a paltry 0.6% of the huge premium paid.
This is precisely the point made by Saran in his order.
“It has been said that Ulips have a mandatory insurance cover which forms a vital and inseparable part of every Ulip. In this regard I note from one of the products offered by one of the entities that for a sum assured of Rs 15,00,000 an annual premium of Rs 1,50,000 is collected for 10 years. The premium allocated for insurance out of this is Rs. 7,500 in the first year and Rs 3,000 in subsequent years. Here, the insurance component is 2% of the premium paid.”
The DNA study found that in a number of policies, the portion of the premium that goes towards the insurance cover is even less than 1% of the premium paid in the first year of the policy, let alone the 2% as pointed out by Saran (see Table 2).
The table assumes a 30-year-old healthy male who agrees to pay a premium of Rs 50,000 per annum and takes on an insurance cover of Rs 2.5 lakh, or five times the amount of the premium, the minimum mandated insurance cover as per the current regulations. This is a reasonable assumption to make given that the data for the period April-December, 2009 clearly shows that the amount of average insurance cover is 4.3 times the average premium paid. As per the current laws, a single premium Ulip needs to have a minimum insurance cover of 1.1 times the amount of premium paid and a non-single premium Ulip needs to have a minimum insurance cover of five times the premium paid.
Given that a minuscule portion of the premium goes towards the insurance cover of Ulips, Sebi’s contention that “Ulips are in the nature of mutual funds which can only be offered/ launched after obtaining registration from Sebi” is a fair one.
“Ulips are nothing but investment products masquerading as insurance plans,” says Shanbhag.