A series of investor-friendly rules framed by the Insurance Regulatory and Development Authority (IRDA), coupled with lacklustre equity markets over the past one year, is choking the life insurance industry. During April-May 2011, first premium income for private insurers fell 23 percent while that for Life Insurance Corporation, the biggest and only state-owned life insurer, went down by 8 percent.
Much of the crash can be blamed on the industry’s over-reliance on a single product, unit-linked insurance plans (ULIPs). ULIPs accounted for more than 90 percent of revenues, but tighter regulations caught the industry napping. Beginning September 2010, the IRDA cut commissions and made ULIPs — which offer life cover with a chance to profit from the stock market — more transparent and customer friendly. Private companies that rely on independent distributors have been hit hardest as the distributors do not want to settle for the lower commissions. Commissions on first-year premiums — sometimes close to 40 percent but generally about 20 percent — have fallen to about 12 percent.
To add to the woes, the equity market has been underperforming, disappointing investors who bought ULIPs more for returns than insurance. So far, many companies have been hinting at, if not plainly selling to customers, the manifold gains they stood to make by investing in ULIPs. Now they have to offer more life cover as well as keep investors locked in for longer periods, increasing the risk of a downside. Many investors are gravitating towards debt-oriented products and fixed deposits, as interest rates rise and confidence about corporate sector growth ebbs. But industry insiders
believe the slump will be short lived.
“Profitability has become the top agenda for most insurers now. We have to understand that most companies are now five or 10 years old and their concentration now is on rationalisation of their distribution and overall cost base. That is one of the main reasons of de-growth in the short-term. I am sure in the long-term, the growth will be back in the industry,” says Raijv Jamkhedkar, CEO, Aegon Religare.
Some call it a period of adjustment. They say that the new ULIPs are investor friendly and once the market sentiments become positive, the life insurance sector will bounce back. About 22 insurance companies are expected to launch nearly 100 products under the new ULIP regulation and the industry is trying to figure out training needs and distribution aspects for these.
ULIPs have always been costly equity mutual funds. Even if IRDA has made the products more customer friendly, the new version is not different from its earlier avatar. “The industry will probably go through one more crisis before they [the companies] figure out serious life insurance products and not investment products which offer some life cover as well,” says a fund manager who doesn’t want to be named.