Regulating Ulips

Sebi’s order banning 14 insurance companies from selling unit-linked insurance plans (Ulips) can be seen as an escalation of the turf war between insurance regular Irda and the stock market regulator. Ulips are the hottest-selling products of insurance companies, but they are less about offering insurance and more like mutual funds. The latter clearly falls under the ambit of Sebi, but Ulips have always been regulated by Irda. So how is one to interpret Sebi’s sudden decision to jump in and take on a fellow regulator on the issue? The answer surely will be in Delhi, for it is inconceivable that Sebi would have moved in the matter without a wink and a nod from someone high up in the finance ministry.

Three issues lie at the heart of the matter. One, insurance companies sell Ulips because they can couch it as an investment product, which customers are more willing to buy. Two, insurance products are sold by agents who swallow a huge amount of the first two years’ premiums as commissions. The customer would thus have been better off buying a mutual fund where entry loads are now zero. Three, the bundling of insurance with investment makes the product opaque, being neither fish nor fowl. The net result is that the customer is cheated, but doesn’t often know it.

This is the reason why the Swarup committee on insurance awareness and protection called for the complete elimination of commissions in selling insurance by 2011. It wanted commissions on first year premiums to be cut to 15% (from the current 40%) immediately, and further to 15% and 7% by April, 2011. Thanks to huge resistance from insurance companies and agents, none of this has happened. One can question the logic of eliminating all commissions when Indians are still grossly underinsured, but there is no doubt that excessive commissions in the first two years of a policy ensure mis-selling on a large scale. No agent finds it worth his while to sell pure insurance products. The gravy is in Ulips.

Sebi’s move should, therefore, be seen as an opportunity to relook at the whole issue and sort it out once and for all. The customer needs to know what he is buying, and mixing it all up in a hybrid product that is regulated by two different bodies is not helpful.