Unit Linked Insurance Products (ULIPs) - Insurance or Investment?

Abstract

The Indian life insurance sector saw a series of regulatory changes in September 2010, with IRDA finally deciding to clamp down on the mis-selling of ULIPs as investment products designed for regulatory arbitrage, and not as insurance products. The major steps taken by the regulator included increasing the mortality risk cover to 10 times the annual premium, thereby, increasing the insurance content and reducing the investment content, significantly reducing the commissions, increasing the lock-in period from 3 to 5 years and imposing a ceiling on ULIP charges. Ironically, these changes can be attributed more to the much reported duel between capital market regulator SEBI and IRDA than any consumer activism. These new ULIP guidelines have resulted in new business premiums reducing by 21% in the last six months of financial year 2010-11 (October 2010 – March 2011) for life insurers as compared to the previous financial year 2009-10, and have also adversely affected their operating profit margins due to reduction in ULIP fund management charges. The purpose of this paper is to closely examine the mortality and investment content of new ULIPs introduced by top 10 life insurance companies in India under the new regulatory regime and also review their performance and sustainability in the near future. The main objective is to research whether the current ULIP can be termed as a insurance product, or still it is very much an investment product despite the regulatory changes, whether agents are willing to sell them at such lower commissions and more importantly, whether customers’ interest and faith can be re-instated after so many years of mis-selling of ULIPs.