Irda to plug loopholes in Ulip fee rules

The Insurance Regulatory and Development Authority (Irda) is trying to crack down on violations of norms regarding overall charges on unit-linked insurance products (Ulips).

The regulator has set up an internal committee to identify possible loopholes in the norms, which it had issued in July 2009.

The regulator has found instances of companies flouting the norms. For instance, some have launched products with higher upfront charge to pay more commission. These plans return a portion of the charge in the form of loyalty additions to make the internal rate of return look attractive to customers.

But the regulator was of the opinion that in case of partial withdrawal or surrender before the end of the policy term, a policy-holder might incur a loss, sources said. Loyalty or guaranteed additions are subject to payment of all due regular premiums.

Since Ulips are positioned as investment products, most customers opt for withdrawals or surrender. Ulips come with a lock-in of three years, but in the changed structure, there is no surrender charge after the fifth year of the policy. Insurers companies have increased surrender charges by up to 100 per cent of the first-year premium.

Insurers pay up to 40 per cent commission on first-year premium and 2 per cent from second-year onwards. The average commission to agents is around 15 per cent.

While insurers have re-filed existing products and tweaked some basic features like the minimum ticket size and tenures, they have not reduced commissions to agents on new sales. They have reduced commissions on renewal premium but not on new sales.

According to the norms, for insurance contracts with tenures of up to 10 years, the difference between gross and net yields should not exceed 300 basis points. Similarly, for contracts with a term of more than 10 years, the maximum difference allowed is 225 basis points. Irda has also said that fund management charges should not exceed 135 basis points, irrespective of the tenure of the contract.

These norms were issued in July 2009 and came into effect from October 1, 2009, for new products and from January 1, 2010, for existing products.