Sebi lifts Ulip ban, leaves a catch

The devil lies in the detail.

The Securities and Exchange Board of India (Sebi) on Tuesday issued a clarification to its earlier order that was issued on Friday. The 14 private insurance companies which had been prohibited from raising new money or additional subscription on unit linked insurance plan (Ulips), have now been allowed to do so, for the time being.

But insurance companies may not sigh in relief yet, for the last but one line in the order goes thus: “However, with respect to any new Ulip schemes/ products launched after 09.04.10, the directions mentioned in the said order will be enforced as indicated therein.”

In other words, the stock market regulator wants any insurance company looking to launch a new Ulip to first get a clearance from it.

Sebi’s contention is that only a minuscule component of the Ulip premium goes towards insurance and a major part of it, in some cases, as high as 99% of the premium, is invested, which makes the structure of Ulips very similar to that of mutual funds. Since it regulates the mutual funds, it should logically have a say in Ulips, too, the capital market regulator feels.

The caveat is unlikely to impact the insurance companies immediately because they have just come off from a three-month tax-saving season, starting January, and are not likely to launch new products at least this month.

“LIC’s Wealth Plus is open for investing till May 9, 2010. Usually the company launches products only after this. Other insurance products too get launched usually later in May,” said Bharat Parekh, who runs a financial and insurance advisory.

Life Insurance Corporation of India was not among the list of companies Sebi had prohibited from raising Ulip premium in its order on Friday. “All the existing products that had been refiled to comply with the new guidelines have already been launched. April is usually a lean month in terms of new products,” a source in the Insurance Regulatory and Development Authority of India (Irda) said.

Starting August 1, 2009, Sebi made it mandatory for mutual funds not to charge any entry load on mutual fund schemes.

Under pressure because of this move, Irda had to prescribe a cap on charges insurance companies could make against the premium paid by the policyholder. Due to this, insurance companies had to refile their existing products with Irda to comply with the new norms.

“Most of the products have been refiled recently and fresh products may be only a few here and there,” the head of marketing of a private sector insurance company said on the condition of anonymity, given the sensitive nature of the issue.

It will be interesting to see what Sebi does if an insurance company does approach to register a new Ulip. “It may be noted that Sebi does not favour giving the go ahead for new mutual fund offers that do not have anything different to offer than any existing schemes of the asset management company. It would be interesting to see if the same ratio is maintained in the case of new Ulips,” said Sandeep Shanbhag, director, Wonderland Consultants, a tax and financial planning firm.  

But insurance companies say they will continue to launch new schemes despite the Sebi order, and without getting them approved by the market regulator.
“We have got a regulator (Irda) and we will abide by what they say. If they approve a scheme and say we can launch, then we will launch,” said the head of marketing of another insurance company, also speaking on the condition of anonymity.

“The product team is working round the year. It is a new financial year and all companies might be at different stages of launching. Some might have filed, some might be about to file for new products and some might have got approvals,” he said. 

Launching new schemes is important for insurance companies. This is because of a common misconception among investors. “Like mutual funds, insurance companies promote new schemes at the par value of Rs 10 as cheaper than existing Ulips with higher net asset values (NAVs),” Shanbhag said.
A new Ulip scheme offers units at the rate of Rs 10 per unit. So, if an investor puts in Rs 50,000 in it, he will get 5,000 units (Rs 50,000/Rs 10). However, if he invests in a Ulip with an NAV of Rs 50, he will get only 1,000 units (Rs 50,000/Rs 50).

Investors like to buy into new schemes as they can get more units. But this doesn’t really make a difference.

Let us say the performance of both the Ulips at the end of one year is the same and they give a return of 10%. The NAV of the new Ulip at the end of one year would be Rs 11 (Rs 10 + 10% of Rs 11). Hence the 5,000 units would be worth Rs 55,000 (5,000 x Rs 11). The NAV of the old Ulip at the end of one year would be Rs 55 (Rs 50 + 10% of Rs 50). Hence, the 1,000 units would also be worth Rs 55,000 (1,000 x Rs 55).

Thus, the number of units an investor has doesn’t quite matter. But the misconception remains and insurance companies continue to launch new Ulip schemes to gather new money.