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Monday, July 06, 2009

Insurance regulator to cap charges in ULIPs

Policyholders of unit-linked insurance plans (ULIPs) will soon see a higher amount of their premium being invested, with the Insurance Regulatory and Development Authority (IRDA) deciding to cap charges. The move comes close on the heels of Securities and Exchange Board of India abolishing the distribution commissions for mutual funds on June 18.

ULIPs are insurance-cum-investment plans where a high portion of the premium is deducted towards charges such as premium allocation charge (this includes the commission for insurance agent), mortality charge (for providing insurance cover), policy administration charge, switching charges and other miscellaneous charges. Only the remainder is invested. As a result, ULIP buyers lose a high portion of their premium as charges to insurance companies.

"Yes, we are looking at introducing caps on charges on ULIPs, said J. Hari Narayan, chairman, IRDA. "We are looking at how to do it. We will take a decision soon." Explaining the move, a senior IRDA official close to the development said, "We are looking at two things. First, how to introduce a cap on the fund management charge. Second, examine if we should also have a cap on mortality charges. And three, since some ULIPs offer capital guarantee, should we consider those kinds of ULIPs or not."

The fund management charge is calculated as a percentage of the assets under management while the charges under other heads remain the same throughout the contract of the policy. So would the move of capping ULIP charges lead to lowering commissions for insurance agents -which go as high as 40 per cent of the premium in the first year of the policy?

"Competition and efficiency of channels is driving down the commissions anyway," said Gaurang Shah, MD Kotak Life Insurance. "The percentage of commission as a percentage of the total premium has come down to 6.97 per cent in 2008-09 from 12 per cent in 2000."

source: HT

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