Irda may allow agents to sell products of more than one insurance company

The Insurance Regulatory and Development Authority (Irda) plans to allow agents to sell products of more than one insurance company, allowing private insurers to access the vast army of agents selling products of the market leader - the Life Insurance Corporation (LIC).

Agents can sell products of only one insurer under existing norms, but Irda Chairman J Hari Narayan said the current global trend was to do way with tied agents, who can retail products of only one company. "The idea is to allow agents to sell products of more than one company. This model has been tried in Hong Kong. In England, tied agents have vanished," he said.

The capping of charges on unit-linked insurance plans (Ulips) in September 2010 had reduced the income of agents, resulting in many exiting the sector and forcing the regulator to consider opening up alternative avenues of income.

More than 3 lakh agents have exited the insurance business after the regulator introduced stringent norms.

The new norms led to more than 100 products becoming ineligible. The number of agents came down from 3 million in 2009-10 to 2.65 million in 2010-11, according to data compiled by the Life Insurance Council. LIC has 13.5 lakh agents distributing its products.

"The move will increase earnings of agents. Though consumers buy Ulips of private insurers, when it comes to life products they only go for LIC. This would help us bolster our sales," said Renu Dhavan, an agent with ICICI Prudential.

Private insurers have largely followed the bancassurance model, in which banks distribute insurance products. However, access to LIC agents, particularly the bigger ones, will increase the reach of private insurance companies.

LIC had a market share of around 76% in terms of new business premium for the financial year up to August 2011 while the remaining was divided among 23 private insurance companies. The state-owned insurer has been increasing its market share mainly because of its strong base of traditional products, which were unaffected by the change in regulations, and its group retirement plans.

New Norms

The new regulations introduced a year ago increased the lock-in period and quantum of life insurance cover while capping charges that could be paid out as commission to agents.

Before September 2010, bulk of the premium paid in the first year was passed on by the insurer as commission to the agent responsible for bringing in the client. This created an incentive to sell new policies while existing ones were often surrendered after the initial years.

The intent of the new rules was to encourage consumers to buy more protection against accident or death. The Indian insurance market is dominated by Ulips -investment products with a nominal life cover that compete with mutual funds.

Irda had also made it mandatory for agents to retain 50% of their business in the second year.

This regulation, known as persistency norms, refers to the percentage of business retained without lapsing or being surrendered.

Many agents have found it difficult to meet these norms and operate in a scenario where the commission payable has come down.

The difficulties being experienced by agents were one reason for the insurance regulator to consider allowing them to diversify their portfolio.

Pure term plans save money

Invest the rest in mutual funds or debt instruments to create corpus.

One of the basic principles of sound financial planning is to buy insurance only if and when needed - the policy of choice being term insurance. However, most investors have difficulty in accepting the fact that upon survival (or when the term ends) there is nothing the policy yields by way of maturity proceeds. Those who buy term insurance are often told that they are making a totally wasteful investment! This misconception is quite enduring and widely prevalent. But term insurance scores over any other kind of insurance plan that one can buy.

Basically a plan that seeks to combine insurance and investment more often than not tends to be sub-optimal. It is always better to keep insurance and investments separate. All endowment, whole life and ulips are examples of combination insurance plans. On the other hand, a term insurance plan has no cash payout at the end of the term. This means if the policy holder were to pass away during the term of the policy, his family will get the sum assured. However, were he to survive he will not get a single rupee. In other words, term cover is pure life insurance and has no cash or surrender value. If this is indeed the case, why favour term insurance as against a traditional endowment or whole life policy which, at least pays, at the end of the day, no matter what, either the sum assured or the maturity value?

The reason is because basically insurance is a cost. It is a contract (policy) in which you purchase financial protection or reimbursement against a loss or an unanticipated expense. The price paid to purchase such protection is also called premium in insurance parlance. Such premium is payable, year in year out, till you desire protection from the loss. Now, take for instance car insurance. You pay the insurance premium, year in year out, to protect yourself against the financial damage an accident can cause. If you are a safe driver and manage not to damage your car during the year, the premium paid is lost – you don’t get anything out of it. And you are perfectly happy to have done so, so long as you and your car are safe. Or take medical insurance. Again, premium is paid to defray any costs of medical emergencies or hospitalization. However, if you remain fit and healthy the premium paid on buying the medical insurance is lost. But then again, you do not mind this, do you? Then why should life insurance be any different? But it is. It always has been.

The reason for this is mainly because life insurance premiums come bundled with the pure premium part combined with the part that gets invested on your behalf. The policy is sold more as an investment where the insurance just comes along. However, know that insurance never comes along, it always has to be paid for. In the case of life insurance, the premium is known as mortality premium. Such mortality premium is applicable for all polices, year after year, without any exception, till such time that the life is insured. Even in the case of single premium plans or policies where the premium is payable only for part of the policy term, nonetheless, the mortality premium keeps getting deducted every year from the fund value. So, you buy insurance directly or indirectly each year.

Let us take an example to understand this concept in depth Take the case of a 30 year old person who desires to buy an insurance cover of Rs. 10 lakh. Were he to buy an endowment plan, the annual premium that he would pay is around Rs. 39,000. However, a term plan would just cost Rs. 3,800 per annum for the same amount of risk cover of Rs. 10 lakh. This difference of Rs. 35,200 between Rs. 39,000 and the pure risk cover cost of Rs. 3,800 is the called the investment premium. Putting it differently, for a premium of Rs. 39,000 per annum, one can either purchase an endowment plan where the sum assured is Rs. 10 lakh or one can buy a term plan where the sum assured is around Rs. 1 crore. Your choice.

Of course and understandably so brokers earn a far greater commission if they sell you polices other than the term cover. These commissions, that can go as high as almost 40 per cent are recovered from the investment premium (Rs. 35,200 in the above example) that you pay. And it is an easy sell too since the logical sounding argument given against buying a term cover is why opt for the same when you don’t get anything back in the end?

A better strategy would be - buy term and invest the difference.

Insurers weigh options to save NAV products

Trying to persuade Irda to tread a middle path and drop the idea of scrapping the net asset value products entirely.

In a last-ditch effort to save the controversial “highest NAV guaranteed products”, the Life Insurance Council, which represents life insurance companies, is set to take up the matter with the Insurance Regulatory and Development Authority (Irda).

According to sources, the insurers are trying to persuade the regulator to tread a middle path and drop the idea of scrapping the NAV products entirely.

Irda, on the other hand, might consider their plea, however, it will attach some stringent riders.

INSURANCE FIRMS’ AGENDA

* Five-Six life insurance co CEOs meeting Irda by end of this week

* Insurers might have to go for higher provisioning

* They will have to provide greater disclosures

* Irda might allow only one fund annually under highest guaranteed NAV

Highest NAV (net asset value)-guaranteed products became largest-selling unit-linked insurance policies (Ulips) since the new guidelines on Ulips came in September 2010. Under such products, customers are guaranteed returns based on the highest NAV which the policy has achieved during the entire term of the insurance plan. Currently, it accounts for nearly 20 per cent of the Ulip sales in the industry. Leading insurance players typically raises money through three or four issuances throughout the year.

The controversy surfaced last month, when Irda informally sounded out its discomfort about the highest NAV-guarantied products on the grounds of perceived “systemic risk” associated with way the funds are managed, since such products give more emphasis on debt instruments and run the risk of heavy sell-off in equities in case of a stock market fall.

Following Irda’s discomfort, which also did not renew any such policy, leading private insurers like ICICI Prudential Life, HDFC Life, Bajaj Allianz Life and Birla Sun Life, who have at least one such product still in the market, have either withdrawn or set to withdraw the ongoing trance shortly. It is very unlikely that any new products will come out in the market as the regulator is not approving any new such products.

If sources are to be believed, the insurance regulator might allow only one such fund annually per insurance companies. This apart, insurers might have to go for higher provisioning for this category. Second, Irda might ask the insurers to attach an additional disclaimer or declaration with such products, explaining the nature, allocation and return from these products.

Last week, the insurance regulator has expressed some key concerns about the way funds are being managed by the insurance companies when the equity market is acting volatile. Later this week, key officials of five-six life insurance companies, representing the industry, are likely to meet the regulator and discuss the matter further.

“Not only about equities, Irda has also sought clarification on how the funds are being managed in debts, for instance, what could be the possible risk of a lock-in, when bond yields are high,” said a chief investment officer at another life insurance company.

Besides, the insurance regulator is not comfortable with the way these products are being pitched to the customers. Since these are debt-heavy products, fundamentally these products not expected to do as well as the simple equity-oriented schemes.

“We are willing to offer additional disclosures to the customers, mentioning that these products are primarily debt-oriented and returns would be average, that is more than debt but lower than normal equity schemes,” said an official at a Delhi-based insurance companies.

Insurance products with an innovative touch

In the last six years, the insurance sector has introduced innovative products. The wide range of products are designed as per the needs of the people. Here are some of the interesting insurance products offered by different insurers.

General insurance
Event cancellation insurance:
It is designed to cover loss caused in case an event gets cancelled, relocated or postponed for defined triggers. Events like musical concerts, dance programmes, weddings and cricket matches can be covered under this product. Premium charged differs as the risk associated with each event is different. Poor weather conditions, non appearance of the performers and relocating the events due to security reason are a few triggers which may lead to cancellation of events. This insurance also covers public liability policies, where it can cover for any liability on the host or event planner for causing bodily injury or property damage to the guests at the venue. For wedding insurance, the premiums range between Rs2,200 and Rs8,200, where the cover is anywhere between Rs20 lakh and Rs73 lakh.

Card sure package policy: This covers customers of banks, financial institutions and customers from any other banking and financial service Industry (BFSI) which provide a credit, debit, ATM (automated teller machine) or any other cards launched by them. A person will be covered if he is a customer, account holder, unit holder (in case of mutual funds) or has taken loan from that respective financial institution. The policy offers combinations of coverages and the insured can opt for the relevant sections depending on the coverage requirements and limit of liability required by the insured. The premium ranges from Rs3 to Rs1000, where as the sum assured offered is from Rs10,000 to Rs50 lakh.

Life insurance VIP (Variable insurance plan): VIPs are modified form of universal life plans. VIPs ensure guaranteed returns like traditional plans. It has a more transparent charge structure as one knows the amount deducted from his premium before the balance amount is invested. In Ulips (unit-linked insurance plans) too the transparency is ensured but the benefits are market linked and hence, it depends on the market movements. In VIPs, the rate of interest is declared at the end of the year and is used to calculate the year-end fund value.

“The product is good for people having a low risk appetite,” Suresh Sadagopan, Ladder7 Financial Services, said.

Life stage based products (LSBP): The emergence of LSBPs ensures the fulfillment of specific customer needs falling into various age groups. Child plans and retirement plans fall under this category. Child plan covers the risk and helps parents in keeping sufficient amount for their child’s future. Both, traditional and Ulip plans are available under this. Increasing longevity and rise in cost of living makes people worried about their retirement hence, making retirement products more popular.

“Child plans seem to have taken off as majority of parents are keen on insuring their children and ensuring their financial security,” says V Viswanand, director and head- product management, Max New York Life.

Highest NAV (net asset value) guarantee: The rising concern of the customers during the financial crisis has led to the design of such a product. It provides security against the market fluctuations. It is a typical Ulip (unit-linked insurance plan) which gives returns on the performance of the fund’s NAV. Under this plan, even though the NAV is low on the maturity date, policy holder will be entitled to receive the maturity amount on the basis of highest NAV. In this plan, the fund is proportionally divided into equity and debt market. When the highest NAV under the plan is reached, it is secured by shifting equity proportion to debt and by doing so the customer will get the highest NAV on maturity. But it cannot promise a high return. People who are risk averse can opt for this plan and it is costlier than a normal Ulip.

SBI Life Smart Elite ULIP graph most Experienced

SBI Life-Smart Elite is a unit-linked life insurance plan crafted exclusively for high net worth individuals. The plan is no different from other Ulips offered by SBI Life except that it has a high premium bracket starting from Rs 1,50,000. It offers two protection options. Under the Gold option, the diagram provides a choice of higher of sum assured or fund value on unfortunate events.

Under the Platinum choice, the nominee of the policyholder would receive both. The scheme offers six alternative investment options (funds) with varying equity and debt exposure for the policyholder.

COST STRUCTURE: The large ticket size has helped keep the cost of this scheme low. The insurance company charges 15% premium allocation charges for a 5-year period. This is much lower than the 20-25% charged by some other insurers.

Additional premium paid towards investment purposes only (top-ups) attract a 2% allocation charge. The policy administration charge is fixed at Rs 600 per annum for a single premium policyholder and Rs 720 pa for the rest. This helps in keeping the cost organization low since the administration charge is defined in absolute terms and is not linked to the annual premium. It needs to be noted that the scheme's mortality charges are same as that of the LIC mortality table, unlike other insurance companies, which have higher charges.

BENEFITS: SBI Life-Smart Elite is a flexible plan with various premium payment modes. The system allows the policyholder to increase or reduce the sum assured based on the needs. However, this flexibility is only allowed three times in the entire policy tenure. An increase in the sum assured is subject to underwriting and is not available at 50 years and above. The plan offers a settlement option, under which a policyholder can take away the fund value at maturity in five instalments.

PERFORMANCE: SBI Life-Smart Elite offers a basket of six investment options of which three funds are more than five years old. These include Balanced Fund, Bond Fund and Money Market Fund, while the rest three are recently launched and are just about a year old.

While most of the old funds have outperformed the benchmark with good margins, the new funds are yet to show their sheen.Equity Elite fund is nowhere close to the regular equity fund of SBI Life which is the best performing fund in the category with more than 23% annualised returns. P/E Managed and Index funds, which are equity-oriented funds, have also not put up an encouraging show.

PORTFOLIO REVIEW: SBI Life Insurance primarily has a large-cap defined equity portfolio with just about 4-5% mid-cap stock holding. Top holdings of the portfolio include Infosys, Reliance Industries , ICICI Bank and L&T. Similar to most other funds, SBI Life has a higher exposure to the financial services and oil and gas sectors. The healthcare sector, a more defensive one, forms a small part of the portfolio due to a complex business model, according to the fund manager . The portfolios have very significant exposure in metal stocks, which are currently underperforming.

DEATH / MATURITY BENEFIT: On maturity, the policyholder gets the amount accumulated in the fund. In the case of demise, the nominee of the policyholder receives higher of the sum assured or the fund value or both, subject to a minimum of 105% of the basic total premium paid towards the policy over the period.

For instance, say a 35-year healthy male invests Rs 2,00,000 per annum in the equity fund for 10 years. Assuming that the sum assured is 20 times the annual premium, the total sum assured receivable, in case of any eventuality, would be Rs 40 lakh. By the end of 20 years, assuming the rate of return of 6% and 10%, the fund value shall be Rs 36,65,524 and Rs 67,76,640 respectively.

OUR VIEW: Smart Elite is one of the most competent products in terms of its cost structure. It provides flexibility to investors.

Among its six funds, Balanced and Bond funds have shown a remarkable performance. But high net worth individuals generally have a high risk appetite. Since the returns from the equity-oriented funds in Smart Elite are not as good, prospective investors will be better-off by investing in other products of SBI Life.

Life insurers' new premium collection drop 31% in Feb

New business premium (for individual regular policies) collections for life insurers fell 31(%) per cent in February, one of the steepest decrease in recent months.

The continued decline comes in the wake of more strict norms imposed by the Insurance Regulatory and Development Authority (IRDA) on guaranteeing a minimum return on pension policies besides scaling down the amount of commission payable to the agents.

The public sector giant LIC saw an even more sizeable decline with its new business premium collections registering a 44(%) per cent drop compared with the same time last year.

LIC collected Rs 2,273 crore compared with Rs 4,092 crore in February last. Private players put together saw a 12(%) per cent decline, though a few players suffered much steeper fall in collections. What should be a source of worry to the industry is that such a decline has come during its peak season for fresh business. As a rule, the industry collects close to 40(%) per cent of its total new business premium in the January to March quarter of a year — the tax-saving season for investors.

Fewer pension plans

The industry launched fewer pension plans this year as the insurance companies were guarded of the regulator's condition that the former spell out a minimum return to policyholders on such plans. New insurance regulations require players to guarantee a 4.5(%) per cent return for long durations under such plans. They accounted for 25-30(%) per cent of the business last year.

The introduction of new guidelines for ULIPs in September 2010, which required insurance companies to offer a minimum guarantee on pension plans, too has seen new business premium collections decrease for private players. For 12 of the 22 private insurers, new business premium collections for February were down with Bajaj Allianz Life insurance premium collection declining 53(%) per cent to Rs 190 crore.

For the first time since the insurance regulator put in place new guidelines for unit-linked insurance plans, LIC's premium collections have declined more than the private sector.

Among the private players SBI, Max New York Life and ING Vysya Life witnessed healthy growth in the band of 44(%) per cent, 39(%) per cent and 25(%) per cent respectively.

New traditional products

However, the positive development witnessed throughout the April 2010 - February 2011 period, is that insurers have started introducing traditional products where the risk of humanity alone is covered or additionally the policy promises a lump sum amount with a bonus amount thrown in.

With traditional products chipping in, year-to-date new business premium collection for regular policies witnessed a growth of 10(%) per cent to Rs 69,297 crore. LIC's growth of 16(%) per cent in new business premium has also helped.

Another factor that contributed to the better year-to-date figures is the higher ‘single premium' business collections.

In the normal times, private insurers are wary of selling the single premium products on account of lower profit margins. But with equity market turning unpredictable and minimum lock-in for the ULIPs being increased to 5 years, insurers have preferred to take the single premium route.

On a year to date basis, private players such as India First (BoB, Andhra Bank and Legal & General) witnessed healthy growth of 241 per cent to Rs 396 crore, followed by Shriram Life and HDFC Standard Life.

Pvt Insurers look for level playing field with LIC

Urge Irda for a 3-5 yrs horizon to take on revised norms on Ulips.

Private sector life insurance companies have hunted a level playing field with government-owned Life Insurance Corporation of India (LIC), and have urged the insurance regulator for a 3-5 years horizon to adopt the revised regulatory architecture.

“One of the most worrying trends, post the new regulations, is that LIC accounted for 71(%) per cent of the new business income in the life insurance sector, during the first 10 months of the financial year. It is in difference to the trend in the last 2-3 years, when private sector players increased their share to around 50(%) percent of the new business income,” said P Nandagopal, managing director and CEO, IndiaFirst Life, during the Business Standard Insurance Round Table in Mumbai yesterday.

The Insurance Regulatory and Development Authority (Irda) had implemented new guidelines on unit-linked insurance plans (Ulips) from September, which capped the agent’s commission and mandated a minimum guarantee on pension products. The move was aimed at ensuring greater protection to policyholders and higher level of product disclosure.

First-year premium collections by life insurance companies increased 25.8(%) per cent to Rs 94,820 crore in the April-January period of the current financial year, mainly led by a surge in premium collection of LIC. The largest insurer’s premium income for April-January rose 36.9(%) per cent to Rs 67,135 crore, whereas private insurers posted a marginal 5.8(%) per cent increase to Rs 27,864 crore. During the same period last year, total first-year premium collected by the industry stood at Rs 75,347 crore.

“The new premium income of private insurance sector declined 40(%) per cent after September, which is not a good sign, whatever the growth may have been during the first 10 years. The new regulations have ensured that the industry is forced to sell more traditional products. And, since LIC has been selling traditional products, it has gained at the cost of private players,” said Amitabh Chaudhry, managing director and CEO, HDFC Standard Life.

“The main purpose of every regulation is customer protection. To this, there is no dispute and everybody is in the same pitch. When the main objective is the same, should we not have a level playing field between the private sector and the public sector, between the traditional plans and Ulips, between different distribution channels of the bank?” asked Nandagopal.

Keeping in mind the projected changes in the insurance industry, private players have sought a map for the next 3-5 years, so that companies can respond to changes quickly. “We would like to see a detailed map for the next 3-5 years, so that we can take the general industry forward. It would help us plan our business,” said Bhargav Dasgupta, CEO & managing director, ICICI Lombard General Insurance Company.

“As far as the upcoming challenges are concerned, the implementation of International Financial Reporting Services accounting norms will affect the industry, and also the Direct Taxes Code in its present form will be decremental to the industry’s growth,” said Gaurav Garg, managing director and CEO, Tata AIG General Insurance Company.

Industry would benefit if we have a map from the regulator as to what is expected in the next 4-5 years. We would be in a position to change our operating model and respond accordingly, Chaudhry added.

Life insurance IPO a distant vision

Domestic life insurance firms are in no hurry to hit the market with their initial public offerings (IPOs) even if the manager announces the guidelines now, according to a research report by HSBC.
According to the report, the hitches — such as limits on foreign direct venture, a 10-year track record and the absence of IPO guidelines — that have prevented floats by domestic life insurers will be removed this year.
However, it believes “only a brave Indian insurer” will come out with an IPO now, given the impact of the new regulations on unit-linked insurance plans (Ulips) and the pending direct tax code (DTC) bill.
New policy sales by private firms have fallen 20.78 per cent to 88,45,283 till the end of January this economic from 1,11,65,771 a year ago.
The refuse in the sale of individual regular premium policies was sharper at 22.7 per cent — from 1,05,67,140 to 81,68,782. “New business margins are also under pressure given the burden of fee and surrender penalty caps in Ulips,” the report said.
Following the new guidelines, the share of unit-linked business to total policy sales came down to 48 per cent from 52 per cent before September 2010.
Though the premium income (of private players) from new policy sales during April-January rose 5.84 per cent year-on-year, it came on the back of a steep increase in the premium rates of Ulips.
“Some insurers have started offering more guarantees on unit-linked products (such as NAV guarantee, capital protection) as they are not subject to Irda cap on charges and are hence high-margin business,” the report said.
“Insurers have also tried to tap conventional products that are also not subject to caps on charges and fees. However, it will be difficult for private insurers to compete on profitability because the Life Insurance Corporation of India is able to fund higher policyholder participation rate with free reserves accumulated over past generations.”
The DTC, if implemented unchanged in March 2012, could result in a collapse in sales and significantly lower earning for the life insurance sector.
The current DTC proposal will strip Ulips of all tax advantages and also does not provide relief to existing Ulips.
The latest published draft proposals for DTC provide for only Rs 50,000 tax deduction for life insurance premium, medical insurance premium and tuition fees taken together compared with Rs 1 lakh available for deduction now. Besides, the insurers’ corporate tax liability will also increase to 30 per cent from 14 per cent.
R. Krishnamurthy, former managing director of SBI Life Insurance Company and the present MD (distribution channel) of Towers Watson, had said, “Many domestic promoters of life insurers will be in a dilemma because these changes will put capital strain and promoters having non-financial sector as core business will find it difficult to pump in money in their insurance venture.”

Take benefit of investment avenues with variable life insurance plan

A variable life insurance plan (VLIP) combines investment and insurance, just like a unit-linked insurance plan (ULIP). Variable life insurance schemes offer flexibility in the ratio of mortality and savings components.

These plans also offer more clearness, simplicity, quick liquidity, guaranteed minimum returns, transparent charges and ample risk cover. This type of life insurance allows you to contribute in several investment options simultaneously targeting your premiums to separate accounts.

Generally, the optional investment funds include stocks, bonds, money market funds, equity funds, or a mixture of them all. Variable Life Insurance allows you to switch from one sub-account to another.

You can also apply the interest earned on these investments toward the premium, reducing the amount you pay. In a going away from the ULIPs, the returns are declared by insurance companies annually and are not linked to the stock market.

One part of the premium is allocated to buy life insurance. The balance is invested in bonds or equities. The premium amount cannot be changed in the course of the policy, but the death benefit and savings element can be reviewed and altered as the policyholder's circumstances change.

You can increase your insurance protection and decrease the investment component, or vice versa. Another feature of this plan is that it does not get automatically cancelled if the policyholder fails to pay the premiums as long as the premiums paid till date meet policy requirements. Under the plans, the premiums paid by the holder, after deduction of charges, will be credited to the account maintained separately for each policyholder.

If all due premiums are paid, the amount held in the policyholder's account will earn an annual interest which will be guaranteed for the entire policy term. In addition to this guaranteed return, if all due premiums are paid; the individual policyholder's account may earn an additional return depending upon the experience under the plan.

There is an option to pay additional (top-up) premiums without any increase in risk cover to the extent of total basic premiums paid under the policy. The premiums can be paid regularly at yearly, half-yearly, quarterly or monthly (through ECS mode only) intervals over the term of the policy. The sum assured ranges from 10 to 30 times the annualized premium, depending on age of entry.

There are two types of variable life insurance plans - participating and non-participating. Participating plans offer a guaranteed return, while nonparticipating plans offer an annual bonus at the end of each financial year in addition to guaranteed returns.

The minimum sum assured is Rs 50,000 or 10 times the annualized premium, whichever is higher for entry at the age below 45 years. After that age, the maximum is Rs 50,000 or 7 times the annualized premium.

Top-up premium is allowed throughout the term. In case the insured decides to increase his contribution through a onetime top-up, a maximum of up to 3 percent charges may be deducted from the top-up. The product also provides for loans up to 60(%) percent of the balance at a specific rate of interest.

Insurance firms squeeze outsourcing to cut costs

Hemmed in by regulatory changes and a potential squeeze in profitability, insurance companies are now increasingly looking to outsource many of their non-core functions to cut costs and remain competitive. ICICI Prudential, Max New York Life and HDFC Standard Life are among those who have initiated discussions to outsource some of their activities as focus shifts to cost control and consolidation.
Claims administration, analytics, customer care, policy administration, sales and distribution and even product development, are some of the areas that insurance companies are looking to outsource to specialist firms.
This is a departure from the past when insurance companies’ corporate strategies largely revolved around growth in policy sales and premium collection.
Max New York Life has engaged consulting firm McKinsey to carry out a comprehensive cost-benefit analysis across verticals.
“We are looking at ways to reduce costs and one of the options could be to outsource certain areas but we need to see what exactly the impact would be,” a senior official at a Mumbai-based private insurance company, who did not wish to be identified, told Hindustan Times.
Insurance companies are desperately seeking options to cut costs after sector watchdog Insurance Regulatory Development Authority (IRDA) enforced a new set of norms from this month for the controversial Unit Linked Insurance Products (ULIPs).
ULIPs — a hybrid product where a part of the money is invested in equities and the balance is set aside as premium and charges and fees — accounts for more than half of the life insurance firms’ total business.
The new norms have capped surrender charges of policies, slashed agent commissions and seek to make charges more transparent to prevent mis-selling. This will reduce profitability of companies but also help consumers by making their investments more transparent.
Business process outsourcing companies expect a major jump in their insurance related services in India in the coming months.
“We are in healthy discussions with many of the insurance companies in India for providing specialist services across all sub-verticals,” said Keshav R Murugesh, Group CEO of WNS, a leading global business process outsourcing company.

Two new ULIPs Plan launches by SBI Life Insurance

Private insurer SBI Life launched two Unit-Linked Life Insurance Policies (ULIPs), which observe with the new IRDA guidelines that will become successful.

"SBI Life has launched Smart Performer and Unit Plus Super... In compliance with the new IRDA guidelines, these recently launched ULIPs are equipped with enhanced features such as benefits of higher protection, multiple investment options and a wide range of riders," SBI Life said in a release.

SBI Life Insurance is a joint venture between State Bank of India and BNP Paribas Assurance. SBI has a 74(%) per cent stake in the insurance company, while BNP Paribas Assurance holds the remaining 26(%) per cent.

The Insurance Regulatory and Development Authority's (IRDA) new guidelines protecting ULIP-holders from mis-selling by dealers and onerous commissions are possible to make the equity-linked instruments more investor-friendly.

"Customers will find that the new range is highly beneficial, as it further reinforces the plan of security and long-term wealth creation," SBI Life Insurance MD & CEO M N Rao said.

Irda may cap charges on basic policies

After setting stiff norms for unit-linked insurance plans (Ulips), the Insurance Regulatory and Development Authority (Irda) is planning to cap charges on traditional products within three months.
“We will review the situation after September. If insurers try to cover the cost of squeeze in margins (due to new Ulip norms) by levying a higher charge on conventional products, we will cap it,” said a senior Irda official.
Last year, after the market regulator banned entry load on mutual funds, Irda capped overall charges on Ulips from January this year.
The difference between the net and the gross yield was capped at three per cent for products with a tenor of less than 10 years and at 2.25 per cent for those with a tenor of more than 10 years. In the new Ulip guidelines, the regulator capped this difference even during the policy term.
“At present, we are busy clearing Ulips. We will start working on the guidelines within three months of seeing the impact of the cap on Ulips,” the official added.
The regulations allow insurers to pay up to 40 per cent commission on life insurance products, including traditional plans. Insurers with more than 10 years of operation can pay only up to 35 per cent commission on selling both Ulips and conventional products.
Insurance companies are, however, against any price control and micro management by the regulator in conventional policies. “Fundamentally, we are against price control. But the industry also needs to become more responsible while designing products. On participatory products, the regulation is such that 90 per cent profit goes to policyholders and only 10 per cent to shareholders. Given the high protection and other features, there products need not be subject to price control,” said Rajesh Sud managing director and CEO, Max New York Life.
“There is nothing to cap in traditional products. These are a different class of products. There is a well defined premium and investment pattern stipulated by the regulator. They do not have any characteristic of Ulips,” said G V Nageswara Rao managing director and CEO, IDBI Fortis Life Insurance.

Only for the risk-disinclined

Despite Irda’s good moves, insurance policies should be bought for cover, and not for investment.
Those planning to buy unit-linked insurance plans (Ulips) might as well wait for some time. This is because products launched from September 1 will be quite different from the existing ones
This is a crucial phase where the regulator, the Insurance Regulatory and Development Authority (Irda), and insurers are exchanging notes to fine-tune the products. Since June 28, when the first round of guidelines came, more changes have been introduced. Last week, Irda issued another set of clarifications that would change things further.

GUIDELINES
• 4.5 per cent guaranteed return for Ulip pension plan on gross premium till March 2011
• After March 2011, returns will be 50 basis points above the average of reverse repo rate at each quarter-end in the 3-6
per cent range
• Difference between minimum and maximum distribution charges to not be more than 1.5 times
• From 5th year onwards, minimum difference to be given on completed year
• Life cover on top-up premium to be based at the age of payment and not at the entry age
Pension plans
Pension plans will certainly look better. But, only for the risk-averse who have more than Rs 70,000 to invest annually. With a guaranteed return of 4.5 per cent on Ulip pension plans on gross premiums, returns will be higher than the existing savings deposit rate of 3.5 per cent.
But this 4.5 per cent will only be paid till March 11, 2011. After that, the returns will be linked to the reverse repo rate. Policyholders will get 0.5 per cent more than the average reverse repo rate at the end of each quarter. The regulator has asked insurers to give in the range of three-six per cent on pension plans after March 2011.
Since policyholders cannot withdraw money in the interim, liquidity could be an issue. For liquidity seekers, it makes sense to look at fixed deposits. State Bank of India is offering 7.25 per cent on five to eight years and 7.5 per cent on eight to 10 years deposits.
Also, most people already have exposure to the higher paying employee provident fund (8.5 per cent annually) and the public provident fund (8 per cent annually). But returns from these two can get capped as one can invest only up to Rs 70,000 annually. For ones who wish to invest more than this, this option could be good.
Costs
The newly-inserted clause...“the maximum and the minimum charges shall not vary by more than 1.5 times” should come as a relief.
For instance, if one considers a policy that was charging a premium allocation charge (PAC) of 50-60 per cent in the first three years, earlier, the cost in the first year could have been 30 per cent in the first year, 20 in the second and 10 in the third.
Now, because of the formula, the charge will be over five years. So, one could see numbers like these: If an insurer is charging, say, eight per cent in the fifth year, he cannot charge more than 12 per cent in the first year. Accordingly, PAC will be between a 44 and 56 per cent, spread over five years.
Besides the formula and spread over five years, the difference between the net and gross premium has to be maintained – four per cent in the fifth year (for a 10-year policy), 3.75 per cent in the sixth year, and so on.
“The regulator has also clarified that the minimum returns prescribed starting from the 5th policy year will be given on completed years,” said an actuary of a life insurance company.
Where the policyholder could possibly lose out is top-up premiums. In new guidelines, Irda said top-up premiums would be used to purchase an additional cover and not invested entirely. But latest clarifications specify that policyholders will not be allowed to pay top-up premiums in the first five years. After that, top-up premiums will be used to purchase cover, but according to the existing age.
As a result, the mortality rate will come into play. If a person purchases a policy at the age of 30 and starts top-ups at 35, he will have to pay higher mortality fees.
“The new notifications remove all ambiguity. Manufacturers cannot interpret the guidelines in their own ways. Of course, if the policyholder has a very long-term perspective, he should look at insurance.
Otherwise, if you have a horizon less than five years, mutual funds, bank deposits and the likes suit you,” said P Nandagopal, managing director & CEO, IndiFirst Life.

Return-of-premium alternative may be positive for some

Despite financial planners untiringly extolling the virtues of pure risk covers — term insurance plans offered by life insurance companies — a vast majority of future policyholders remain unconvinced about having to split out a premium without being assured of any financial benefit in return, should they outlive the policy tenure.

This perception has contributed to the status of unit-linked insurance plans (ULIP) and endowment plans, which offer an investment module, but come at a significantly higher cost. Few policyholders realise that in the bargain, they may have settle for an insufficient life cover.

For those seeking the middle ground between the two options, some life insurers offer return-of-premium plans, with HDFC Standard Life’s Premium Guarantee plan being the latest among them. Others with similar product offerings include ICICI Prudential Life, Bajaj Allianz Life and Birla Sun Life.

Under HDFC SL’s Premium Guarantee plan, winning maturity, the policyholder is entitled to receive an amount equivalent to all the premiums — excluding any extra premium charged due to underwriting, revival or alteration charges, if any — paid through the policy’s tenure. In the event of the insured’s death during the policy term, the sum assured will be provided to his/her dependants.

As for the policy, a 30-year-old female opting for a term of 25 years will have to pay a premium of Rs 7,330 per annum for a sum assured of Rs 10 lakh. On maturity, the policyholder stands to collect a sum of around Rs 1, 83,250.

Compared to ULIPs, which provide life cover that is not equal with the premium outgo, the plan is surely cheaper, and seems like a compelling buy for an individual whose primary aim is to maintain her family’s interests in the event of her death, but all the same, wishes to get the premium back if she survives the term.

While it does address one of the key concerns of many policyholders, one needs to bear in mind that the comfort and peace of mind it offers comes with a cost attached. A comparison between the premiums charged by HDFC SL’s Term Assurance Plan (pure protection cover) and Premium Guarantee Plan (return-of-premium policy) shows that the former is more cost-effective.

Assuming the aforementioned parameters to be the same, the Term Assurance Plan will entail an annual premium of just Rs 2,541. The difference between the premium payable in the case of the two plans — that is, Rs 4,789 per annum — if invested for the same period in other instruments like equities or even debt, can get much higher maturity proceeds than the amount one can expect if one survives the tenure of the Premium Guarantee plan.

Tweak commission configuration: Irda

In what may lead to lesser front-loading of insurance policies, the Insurance Regulatory and Development Authority (Irda) plans to increase the commission over the tenure of the policy.
“We are going to ask insurers to propose ways to increase persistency levels. This will happen only after they tweak the commission structure,” said a senior Irda official.
Most insurance policy is extremely front-loaded. For instance, insurance agents earn over 40(%) per cent as commission in most unit-linked insurance plans (Ulips) in the first year. Even commissions for term plan and endowment plans are 20-35(%) per cent in the first year.
The commissions refuse considerably, particularly for term and endowment policies, after the first year. The agent, as a result, loses interest in pursuing the policyholder.
In case of mutual funds, the distributor earns a commission of 1.25(%) per cent in the first year (upfront fees plus trail commission). After that, there is an annualized trail commission of 50-75 basis points every year. This, the mutual fund industry said, keeps the point interested in the investor.
By proposing to extend the commission over the tenure of the plan, Irda thinks agents will continue to follow the policyholders.
Recently, Irda had extended the minimum term of an Ulip from 3 to 5 years. It had also made other proposals, including capping the first year surrender charge at 15(%) per cent for a policy over 10 years. This surrender charge would continue declining and go away in the 6th year.
However, experts said persistence levels were already on the rise.
“Persistency levels are already improving because of the events taken by Irda in the last two years. Tenure of products has left up as the lock-in has increased to five years,” said S B Mathur, secretary general, Life Insurance Council.
The insurance industry reported 80(%) per cent persistency in 2008-09, an increase of 7(%) per cent over the previous year.

Hurry to sell Ulips in front of July 1

Insurance companies are in a hurry to sell as a lot of unit-linked plans as possible before the new strategy force them to package a life or health cover with these popular instruments that account for nearly half of their business.

Insurance executives think selling these policies will be difficult once the new guidelines planned by insurance regulator IRDA are introduced from July 1. Once the new norms are in force, agents will have to convince the customer to buy a health or insurance cover along with pension plans.

“It was an easy product to sell since you don’t have to ask the customer too lots of questions,” said the sales head at a leading insurance firm.

Some of the insurance companies and banks have revised sales targets and initiated incentive schemes such as foreign trips, easy loans and discounts to make sales. Unit linked plans constitute 46% per cent of the total business of insurance companies.

Pension products have been the favourite unit-linked products, as insurance cover was not compulsory with the policy. These were sold as an investment product wherein customer was currently given the option to surrender his policy after a 5-year lock in.

“Given this flexibility, it was easy for a customer as old as 70-years to invest in such plans. Besides the commission from selling a pension plan was more than that of other products,” said a relationship manager with a leading private sector bank.

Traditionally, all unit-linked plans are front loaded and an agent can earn a commission up to 20% per cent by selling such policies.

“This (the new norms) will need more documentation and if the amount is high then an income proof will also be necessary, which will deter customers,” said a sales head at an insurance firm.

As per existing laws, the insurance cover should be 5 times more than the premium paid.

Further, the new law will also limit the customer from surrendering their pension plans, as they will not get the full amount on surrendering their policy. The customers will only get one-third of the invested corpus and the rest amount through annuity or monthly/yearly payments.

Ashish Kapur, CEO of Invest Shopee, feels the new laws will aid the investor from needless buying an insurance product. “There was a lot of mis-selling earlier,” he said.

Of the Rs 2, 00,000 crore-plus life insurance premium collected in the first 11 months of 2009-10, more than Rs 91,000 crore came from Ulips, according to the Life Insurance Council of India, an industry body representing 23 life insurers

For More information about unit linked plan.
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Insurance cos will require to protect capital

Indian insurance companies will need to save capital even with the growth potential since tools for conserving capital are not available to them, says prefessional servives firm Ernst & Young.

Speaking to ET, Ernst & Young partner Rohan Sachdev said different in the West, Indian insurance companies do not have any capital pull reduction tools such as securitisation or reinsurance of their collection. This would mean that companies have to every time provided more capital.

Mr Sachdeva said some mid-sized companies are using up nearly Rs 40 crore to Rs 60 crore a month as a few of their business models are not sustainable under the new regulatory rule and would need to be reworked. He pointed out that in capital efficiency; life insurers promoted by banks have done very well by increasing their operations with minimal staff. For new companies without their own sharing network, it was important that they have a variable distribution cost to keep expenses under check, he said.

In the last decade since the industry was opened up, promoters of life insurance companies have invested in surplus of Rs 27,000 crore into life insurance businesses. The force to get more efficient on capital will also come from new revelation norms that come into effect from July 2010.

Until now, insurance companies have been able to explain their high capital spending saying the funds require to meet the solvency norms. Insurers will be required to provide economic capital, which will provide a break-up of the capital that is required for different business and the extent of capital that they will lose under various scenarios.

According to Mr Sachdev, there are several stress points for the existing business plans of life insurance companies. “Most of the profit drivers for companies will not be there. Some companies have made important lapsation profits which cannot continue once surrender charges are capped.”

Earlier, the insurance regulator had capped all charges, including fund management charges that could be forced by insurance companies on their policyholder’s funds.

Mr Sachdev said he expects life insurance companies to continue to issue unit linked insurance plans but the share of Ulips would decline. He pointed out that the life insurance industry had centred their entire business around Ulips although the Indian markets were not older enough. At present, the life insurance penetration in India is close to 4%.

“The level of maturity can be gauged from the level of diffusion of other personal lines of insurance such as health and householder insurance, which is quite low in India,” he said.

Bajaj Allianz Life net up at Rs 427 crore

Bajaj Allianz Life Insurance nowadays reported a profit of Rs 427 crore in FY 10 as compared to Rs 41 crore in the previous year.

However, in the non-life division the company posted a lesser profit of Rs 121 crore during FY 10 as against Rs 150 crore in FY 09.

"As far as profits, cost control, product-mix, fund performance, bottomline and renewals are concerned; FY 10 was a good year. However, for new business it could have been improved, especially in the first-half of the year," Allianz Country Manager and Allianz CEO and Bajaj Allianz Life Insurance CEO, Kamesh Goyal, told PTI here.

He said The insurance company sold 22 lakh new policies in FY 10 in the life segment and is eyeing a 30(%) per cent increase in traditional policies from the 18-20(%) per cent of the previous fiscal "as the instability in the equity market is not liked by several investors,".

Goyal said. "After the sudden dip in the stock markets in 2008-09, some people prefer the constancy of the traditional market,"

The share of ULIPs is likely to be around 70(%) per cent this fiscal as compared to over 80(%) per cent in the previous year, he said, adding this modify, however, has nothing to do with the row between the regulators-Sebi and IRDA-over jurisdiction over them.

He said. There has been no capital infusion into its life insurance company in the last two-years and there would be no need for it this year as well.

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SBI Life to Begin child plan, pension & HNI Ulips

SBI Life Insurance has witnessed a 19(%) per cent growth in its new business premium in the nine-month period ending December 2009, compared with Rs 4,392 crore, while the total premium collection grow by 32 per cent during the same period a year ago.

The company will shortly launch a bunch of Ulips (unit-linked insurance policies) in the child, pension and high net worth individual (HNI) categories.

The new business annualized premium equivalent (APE), a standard calculate in the industry to measure performance, grew by 24.75(%) per cent to Rs 3,953 crore. The company’s assets under management grew by 111.5(%) per cent over the parallel period last year to Rs. 24,589 crore.

Announcing its quarterly results, the company said it posted a profit of Rs 82 crore in October-December period, while in the first nine months of 2009-10, net profit stand at Rs 199 crore.

M N Rao, managing director and chief executive officer, SBI Life Insurance, said, “We will focus on creating value for our customers through leveraging of our common distribution network, brand equity and customer-centric offerings. We will plan to provide Life Insurance solutions to customers across socio-economic and geographical segments, enabling them for a better tomorrow.”

The company has launched a suite of five ULIPs — SBI Life-Unit Plus III Pension, SBI Life-Unit Plus III, SBI Life-Horizon III, SBI Life-Maha Anand II and SBI Life Smart Ulip (Series II).

The company has also introduced two new funds — namely Top 300 Fund, which captures long-term capital appreciation opportunities by investing in stocks of top 300 companies by market capitalisation, and an index fund, which aims to provide returns aligned to the NSE S&P CNX Nifty index.