As equity markets rally, Ulip surrenders rise

There has been an increase in the surrender of equity-backed unit-linked insurance products (Ulips), owing to the surge in the stock market. Also, renewals of such products have dropped significantly in the past few months, insurers say, adding customers are rushing to surrender these policies and book immediate profits.

After the Insurance Regulatory and Development Authority (Irda) announced new guidelines for Ulips in September 2010, the minimum lock-in period for these products was increased from three years to five years.

Amitabh Chaudhry, managing director and chief executive, HDFC Life, said, “We have seen customers surrendering Ulip products in the recent past, owing to the good performance of the markets. This, to some extent, has impacted our renewals, owing to which renewal rates have seen a fall.” (GOING SLOW ON COVER)

On an average, Ulips comprise 35-45 per cent of a life insurance company’s product portfolio. Before September 2010, this segment accounted for about 80 per cent of portfolios.

According to the estimates of insurance companies, there was a rise of 20-25 per cent in Ulip surrenders in the quarter ended March, compared to the year-ago period.

In January, domestic institutional investors (DIIs) such as insurance companies net-sold Rs 1,455.47 crore. Between March and June, DIIs have been net sellers of equity every month. In March, Rs 41,710 crore worth of equity was sold, against Rs 28,570 crore of equity bought.

Sanil Kumar NV, head (sales), Geojit BNP Paribas Financial Services, said till April, there was a rise in Ulip surrenders among clients. He, however, added with a new government at the Centre, people might want to stay invested.

In the past year (June 2013-June 2014), the BSE Sensex has risen by 5,248 points. This, said insurance officials, was the primary factor why many had exited Ulip products. Another factor is the fact that the last phase of the Ulip products bought in 2009 is ready for surrender this year. “As many as 71,958 Ulip policies were in force at the end of March 2011 (after the Ulip reforms) and Rs 53,542.64 crore of premium was collected as first-year premium in FY11. All these products have completed the five year lock-in and are allowed to be surrendered, with the market rally luring customers to make money immediately,” said the chief investment official of a mid-sized life insurer.

According to a report by Espirito Santo Securities Research, through the past three years, renewal premia and net inflows for life insurance companies have been declining. This is due to a decline in new-business premia, persistency deterioration and redemption pressure on old Ulip policies.

While insurance agents had advised policyholders to stay invested, a section of those holding Ulips wished to surrender these, said insurers. The fact that agents do not have adequate compensation to sell these products has added to woes.

Irda has introduced a cap on various charges. Surrender charges cannot exceed Rs 6,000 in the first year, and after the fifth year, there are no such charges.

“Surrendering Ulips in just five years is not just bad for customers, it affects a company’s books, too. Though we have tried to persuade individuals to stay invested so that they get adequate returns on their investment, not many want to consider this, as they are through with the five-year lock-in,” said the chief distribution officer of a private life insurance company.

Contrary to perception, companies didn’t book surrender profits on such products, as exit charges were very low, the official added.

“Earlier, the market was not favourable and surrender charges were high. Also, the holding period of some investors had exceeded the originally envisaged tenure. Usually, profit booking happens with every bull run,” said Monish Shah, senior director, Deloitte India.