Life insurers oppose mandatory investment of Ulip funds in G-secs

Irdai had proposed a minimum of 25% of Ulip funds be invested in government securities

Life insurers are up in arms against the Insurance Regulatory and Development Authority of India (Irdai)'s proposal that 25 per cent of unit-linked insurance plan (Ulip) funds be invested in government securities, or G-secs. The insurers are apprehensive it might impact the returns of policyholders. They gearing up to write to Irdai on this and also make a representation through the Life Insurance Council.

In its draft norms on investments, Irdai has said not less than 25 per cent of Ulip funds can be invested in Central government securities. It also added equity investments only in CNX 200 or BSE 200 can be considered as approved investments.

"Large insurers have been able to manage a higher allocation to equity from Ulip funds and offer good returns. There is no need for mandatory investment in G-secs," said the chief investment officer of a large private life insurer, who spoke on condition of anonymity.

BUMPY ROAD

• Irdai has said not less than 25 per cent of Ulip funds can be invested in Central government securities
   
• Equity investments only in CNX 200 or BSE 200 can be considered as approved investments
   
• Last year, Irdai had proposed that Ulips give at least 90 per cent of the premiums paid as fund value, but no official guidelines were brought out
   
• The regulator also planned to cap age-group for Ulip purchase could not buy products with high mortality charges

"Ulips are not sold to all customers. Only those who have the risk appetite and understand how the markets and have a long-term view are sold these plans. If 25 per cent investment of Ulip funds in G-secs is made compulsory, the end returns might be impacted and policyholders might become wary of the product," said the chief executive of a mid-size large private life insurer.

Last year, Irdai had proposed that Ulips be made more customer-friendly by giving at least 90 per cent of the premiums paid as fund value. However, no official guidelines were brought out. The regulator had also planned to cap age-group for Ulip purchase, so that older people do not end up buying these products with high mortality charges.

According to the chief executive cited above, from a historical perspective, policyholders who have held their Ulip plans for eight to 10 years have seen better returns than traditional products thanks to better performance of equity markets over a longer tenure.

In September 2010, Irdai had capped the charges and commissions on Ulips. As a fallout, the average commission in Ulips as a percentage to premiums collected fell to four per cent in FY12 from 10 per cent in FY10. This, however, made the product more transparent. The minimum lock-in was also increased to five years from three years earlier.

Industry sources said the proposal for 25 per cent investment in G-secs was to boost investment by insurers in areas such as infrastructure and related projects. While they invest in these sectors from their traditional funds, Ulip funds primarily invest bulk of their shares in equity due to the nature of the product structure.

Overall, Ulips form 30-40 per cent of the business mix of life insurers. For some insurers with strong bank partners, almost 80 per cent of their overall business comes from Ulips.