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Thursday, July 23, 2009

Ulips may fetch 150 bps more on new fee cap

Retail investors in unit-linked insurance plans (Ulips), arguably one of the hottest investment products, could see a 150-basis-point rise in returns.


The Insurance Regulatory and Development Authority (IRDA) have put a cap on charges that insurance companies, which sell Ulips, collect from investors. A slice of the charge is the commission paid to agents, which is set to drop.

IRDA’s decision is fallout of a vehement attack on Ulips by mutual funds, which compete with insurers. Since mutual funds have to stick to ceilings on charges laid down by Sebi, fund houses felt they were at a serious disadvantage compared to insurance companies.

Ulip charges have been capped at 300 basis points for insurance contracts up to 10 years and 225 basis points for contracts over 10 years. If a fund earns a yearly return of 15%, a policyholder has to get a minimum return of 12%. The ceilings will come into force from October this year.

“The move will usher in greater transparency, making it a more attractive choice for customers. It will also bring in discipline in expenditure management by insurers,” said R Kannan, member, IRDA.

For contracts up to 10 years, the difference between gross yield and net yield (after netting out all charges) to the customer should not exceed 300 basis points. Of this, the fund management charges should not exceed 150 basis points, said IRDA. For insurance contracts of over 10 years, the difference between gross and net yields should not exceed 225 basis points. Of this, fund management charges will not exceed 125 basis points.

Currently, Ulip charges on an average work out to around 375 basis points. As most products have an average tenure of 13-15 years, the return to the policyholder could go up by 150 basis points.

But reactions were mixed from insurers. V Vaidyanathan, MD & CEO, ICICI Prudential Life, reckoned the move would benefit the industry in the long run. “Lower charges on products with a longer term will provide further impetus to long-term policies,” said TR Ramachandran, CEO & MD, Aviva India.

But the CEO of a private life insurance company deemed the move to fix caps as an exercise in futility. “A cap will not make a material difference as customers do not pay their premiums after the third year,” the CEO said. “We will have to examine the impact on all customer segments since the mortality charges are not uniform and vary with age. We would not like one segment of the customer subsidizing the other,” said Rajesh Relan, MD, MetLife India Insurance Company.

Nitin Chopra, CEO, Bharti AXA Life Insurance Company, too said including mortality charges in the overall charge cap may adversely impact customers, especially those who are aged.

Source: ET

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