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>Ulip strategy for all markets
Cover drive

When it comes to Ulips, it appears that there are no shades of grey: you either love them or hate them. To put it in black and white, the industry and potential purchasers love them, and most of the people who have them tend to hate them. Accusations of mis-selling and hard-selling are hurled at the industry. Most investors admit that they don’t understand how it works, but they keep buying Ulips more than any other insurance product. Hence, all kinds of records are being broken: there is an unprecedented growth in the number of Ulips sold and in the collection of premiums. All of this serves to boost the cause of privatisation. This is why we decided to make Ulips the subject of the first Money Today Round Table, held in Mumbai last month.

Since a number of investors (existing and prospective) purchase Ulips without knowing much about them, we felt it was the job of a magazine like ours to give them more information. But what are the industry stakeholders—insurance firms, distributors and advisers—doing about it? Surprisingly, many of them, who participated in the discussion, admitted that there was rampant mis-selling. But in the same breath they added that the system had become corrupted and they were only “the byproducts of the system”. They felt that the consumers didn’t wish “to be (seriously) involved” at the time that they bought a financial product.

When we prodded the experts, they admitted that agents push potential buyers to opt for Ulips instead of other insurance products that might suit the latter better. Even the product manufacturers were blamed for not being able to realise the “opaqueness” in the manner in which they operated. An additional complication arose since it is extremely difficult to compare different Ulip products. Many said that even the insurance regulator might be unable to solve the basic problems that the industry faces today.

As a part of the Round Table, we invited six industry representatives to brainstorm and discuss where the Ulips were headed, and the problems that confront the industry at present.

The panelists were: Pranav Mishra, senior vicepresident and head (products), ICICI Prudential Life Insurance, V. Srinivasan, CFO, Bharti AXA Life Insurance, Ajay Bagga, CEO, Lotus India Mutual Fund, Devendra Nevgi, CEO & CIO, Quantum AMC, Jagdish Bhat, principal officer, Ambit Insurance Broking & Advisory, and Ranjeet S. Mudholkar, CEO of the Financial Planning Standards Board of India. Acting as moderator was R. Krishnamurthy, managing director, Watson Wyatt Insurance Consulting, who kicked off the debate by raising four important aspects concerning Ulips—product structure, regulatory issues, distribution and, finally, customer service. He thought that the structure of the products was not transparent. There was no point in clubbing insurance features with those of investment. Archaic laws led to distribution-related issues, and the less said about customer service, the better. We present how these representatives responded to these issues. Excerpts from the debate:

Pranav Mishra, Senior Vice-President and Head (Products), ICICI Prudential Life Insurance
"It’s not just Ulips; even mutual fund investors don’t know what fund they own or why they bought it."

We have a very young population—500 million below 30 years. Of the 320 million working people, 87% have no retirement pension. That apart, of the 90 million senior citizens, a large chunk has no pension protection or virtually no retirement plan. Surveys show that Indians plan retirement with life insurance and bank deposits. Nowhere in the world does this happen.

Worse, people start thinking of retirement very late in life—in their 40s and 50s. The political class has done lasting damage to the nation’s investing pool by postponing pension reforms. This is why Ulips have served as a retirement-planning tool for Indians in the past few years. This has effectively transferred a lot of individual wealth to the distributors, and it builds their nest eggs instead of that of the customers.

Then comes the issue of agent commission. Till recently, there was no transparency or adequate disclosures. Changes have to be legislative. The product design should be simple and at least the default option should be easy and low-cost. Only then should a product be allowed in the public domain.

Ajay Bagga, CEO, Lotus India AMC
"Of 100 customers, 85 hold their returns, 10 compare it with the benchmark and only 5 compare it with peers."

Banks and mutual funds were the first to gain from liberalisation, with insurance companies setting up operations seven-eight years ago. Over the past 15 years, consumers have evolved and adapted to the financial products launched in this period. The shift from NSC and PPF-like products to mutual funds is good. But investors are still unaware of their risk appetites, and the benefits and limitations of financial products. All organisations, banks, fund houses, wealth managers, brokers, even insurers, try to educate consumers.

Our entire distribution service is a pure transaction model and it often happens that a consumer is sold a product that he later realises was not what he wanted. There have been instances of policyholders wanting to terminate Ulips after three years because they believed three years was its tenure. That’s why advice is important. Investors must understand their own profile to make the most of products that are meant to address a financial goal or need. We are a very strongly regulated market. The stringent solvency margins ensure that the consumer’s interest is foremost for us.

Devendra Nevgi, CEO & CIO, Quantum, AMC
"We specially advertised that a fund we launched wasn’t for those looking for short-term gains."

Distributors are largely reponsible for rampant mis-selling. They are not advisers and many are not qualified because our testing is not stringent. It's easy to lay the onus on investors’ lack of awareness, but every financial product must explain its costs and risks. Charges, costs and returns are very important because they indicate the tangible benefits of a product. Today, I do not know how much of my money insurers or mutual funds spend. For instance, on an investment of Rs 100, I get a statement that reflects a balance of Rs 98; it does not tell me where the rest of the money has gone.

Product standardisation is essential for Ulips. There has to be a way to compare performance, something that the mutual fund industry has successfully done. Ulips account for 90% of the new business; most probably it is riding a cycle. Such unsustainable growth needs to be checked for the good of the industry as well as that of the investors.

Ranjeet S Mudholkar, CEO, Financial Planning Standards Board of India
"Agents give service not as per rules but to further the interest of the companies they represent."

Almost everyone is duly diligent about the mobile he buys, compares features and finally goes to the shop that offers the best discount. But when it comes to buying a financial product, most just say: I signed the document at the marked points.

I think that as long as the rules are not compromised and and a product delivers what it promises, it is good. Investors must consider two important factors: asset allocation and costs incurred to get the best allocation. To this end, Ulips allow the best outcome from a single product.

The capital structure of insurance firms is such that they are tightly regulated. We have to maintain stringent solvency margins. As insurance is a long-term product, there are cost and investment calls that we can take, unlike in many mutual funds. The insurance regulator has standardised a sales guideline, which stipulates that the agent must illustrate the product benefit, the value of investment and take consent from the client at the time of the sale. There is a place for both funds and Ulips as long as customers understand what they are getting.

V Srinivasan, CFO, Bharti AXA Life Insurance
"The impact of upfront charges is lower compared with the annual charges of other products."

An insurance agent is tied to an insurer and so is bound to sell its products, which may not serve the purpose of the client. This is a huge stumbling block as it discourages agents from selling the best product.

Advice must be unbiased. If it is influenced by the company that is represented, it is not advice but sale. To a large extent, the certified financial planner (CFP) certification takes into account such lacunae. Irda exempts CFP certificants from taking the mandated 50-hour training from the tied insurer which focuses on educating the agent about their product suite and nothing else.

I appreciate Irda for being a proactive regulator. The new Ulip guidelines issued in December 2005 for change in product structure was the first step. In August 2007, it sought greater transparency with a fixed 6% and 10% on benefit illustration. And in January 2008, the regulator insisted on policy illustration to indicate all charges and the IRR of the product. But the regulator needs more teeth; until such time, agents will continue to function in the interest of their principal organisations.

Jagdish Bhat, Principal Officer, Ambit Insurance Broking & Advisory
"Some fund agents ask clients to churn holdings every 18 months and buy new, similar funds."

An intermediary’s role is to protect the consumers’ interests. The biggest challenge is to explain why they must understand their insurance needs before looking for a product. Often, I come across a consumer who wants a specific product from a specific company. The reason: a friend made good money from it. That this person is 40 and his friend is 25 and that they both have completely different financial needs and risk profiles is not considered.

The primary reason for life insurance is protection, for which term plans are best. But when a consumer figures that he gets nothing in return from the premiums, he loses interest in them. Ulips were conceived to combine protection with investment. They are transparent and regulated, so there’s uniformity in charges. As a product category, insurance was the first (and the only) to offer a free-look period, wherein one can return a policy within a month if he realises it is unsuitable. This checks mis-selling to a large extent.