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Wednesday, August 05, 2009

IRDA to restructure half of existing ULIPs

The insurance regulator will have a special arrangement to clear within three days unit-linked insurance plans (ULIPs) which have to be reworked because of new norms, which put a cap on the fee investors have to pay.

The Insurance Regulatory and Development Authority (IRDA) has estimated that over half of the existing ULIP schemes will have to be restructured and it wants to ensure that there is no break in sales.

Just as equity and debt public offerings have to be cleared by capital market regulator Sebi, new insurance schemes have to get the green signal from the insurance regulator under a so-called 'file and use system'.

In May, IRDA relaxed 'file and use' rules to allow companies to start selling a plan if it does not object within 15 days of filing the scheme instead of 30 days earlier.

But in reality, the process takes longer if there is any product innovation, as there are generally issues where the regulator seeks clarifications. The system also applies if companies were to restructure existing plans.

Last week, IRDA said charges deducted from the premium paid by policyholders would be subject to a ceiling, which would be based on the difference between the gross yield (return to policyholder had there been no charges whatsoever) and the net yield (the return net of all charges). The regulator stipulated that the difference between gross and net yield should not be more than 300 basis points for policies up to 10 years and 225 basis points for those with longer terms.

For life insurance companies, the flip side of the special dispensation is that the regulator will not relax the December 31, 2009 deadline, after which non-compliant products cannot be sold. Some companies wanted the deadline to be pushed to the end of the financial year in March 2010, arguing that it would take time for new products to be developed and cleared by IRDA.

At a meeting on Wednesday with the regulator to discuss the new norms, the heads of life insurance companies said mortality charges — the cost of providing life insurance — should be kept out. Their reasoning was that while the cap on charges was uniform, mortality charges would be very high for an older person compared to, say, those in their 20s.

source: ET
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