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Looking to survive

Chandralekha Mukerji | Print Edition: December 2012

Earlier, unit-linked insurance plans (Ulips) were being surrendered before maturity. After the change in rules, Ulips are not finding takers. According to the Life Insurance Council, insurers sold over one crore regular-premium Ulips in 2009-10. The new rules came into force in September 2010. In 2011-12, only 14.7 lakh Ulips were sold, an overwhelming drop of 85%.

The reforms were aimed at improving the product. The fees and commissions, which were frontloaded (deducted at the beginning of the policy), were distributed over the policy tenure. To cope with deficiencies such as a small life cover, low persistency rate and premature surrenders, a minimum mortality cover (at least 10 times the yearly premium) was mandated. Also, the lock-in period was increased from three years to five years.

Defying the purpose of reforms, sale of Ulips fell sharply . Why did people stop buying Ulips? Earlier, agents who promoted Ulips got 40-45% of the first-year premium as commission. This has been capped at 7%, lower than the 25-30% commission on traditional plans. "If an agent has to sell a plan, he might as well sell one that earns him more commission, and rightly so," says Deepak Yohannan, founder and CEO of MyInsuranceClub.com, an insurance comparison website.

This is not the sole reason. The new rules also capped policy charges. So, insurers' margins also fell. "Business shifted as it made more sense to sell traditional plans," says Sanjay Tiwari, vice president (strategy and product), HDFC Life. There is also a fall in demand.

After the 2008-09 crisis and lower returns from the market thereafter, customers are unsure. "They prefer buying guaranteed-benefit products where the principal is secure," says Divya Gandhi, head (insurance) and principal officer, Emkay Global Financial Services.

HAS THE ULIP EVOLVED?
Ulips have been overhauled. However, low persistency ratio and premature surrender of policies are still a problem. So, premium renewals have gone down. Life Insurance Council data show that premium renewal for Ulips fell from Rs 55,492 crore in 2009-10 to Rs 52,276 in 2011-12-an increase in premature exits. Rajeev Kumar, chief actuary, Bharti AXA Life, blames this on the new rules as early exits have become less painful.

"Persistency ratio has become worse because of the low penalty on surrender. Customers are still using these for investment rather than long-term protection," says Kumar. The lock-in, after which no surrender fee is levied, is five years. New Ulips haven't completed this period yet. It will be interesting to see if those who have bought revamped Ulips stay on board after the lock-in period.

Another problem with the old Ulip was that they were often pitched as a short-term investment. The number of complaints has fallen, which Kumar says is because the industry has shrunk. "Regulations on product design cannot control mis-selling. Unless we have heavy penalties, these problems will persist," he says.

Mis-selling, however, doesn't mean the product is bad. It's just that it has been sold to a person who has no need for it. Regulations have succeeded in solving product-related problems such as high charges and front-loaded commissions. So, the new plans are more cost-effective and have the potential to generate better returns.

However, this won't be reflected in the short term, especially when the market is volatile as it has been for the last many quarters. All market-linked investments have been hit and Ulips are no exception. Also, the rules have brought standardisation of products. This makes comparison easier. Even so, insurers are innovating and trying to differentiate their products.

DIVERSITY IN UNIFORMITY
While it's true that the new Ulip market is not as happening as the old one, it is not dead. Insurers are launching plans with lower charges than the cap, flexible or limited premium terms, more fund options (to cater to different risk appetites), option to invest additional premiums as top-ups so that the sum insured increases, unlimited number of partial withdrawals and higher death benefit (up to 40 times the yearly premium).

There are also interesting rider options to improve the cover, such as child education benefit, coverage of an additional life and waiver of future premiums in case of death or critical illness.

Insurers are even targeting specific customer categories. For instance, HDFC Life's Smart Woman Plan is designed for working women. It offers waiver and funding of premiums for three successive years in case of pregnancy complications or birth of a child with congenital disorders, policyholder being diagnosed with cancer or death of spouse (in the high-end variant).

Companies are also shifting to the low-cost online distribution. Some Ulips, such as Aegon Religare's iMaximise, Bajaj Allianz Life's iGainIII and Aviva's Freedom Life Advantage are sold only online. Cutting costs means being able to pass on the savings to customers. Therefore, e-Ulips have lower allocation charges and commissions, sometimes none. Though they aren't as popular as online term plans, insurance companies are expecting fast growth.

"There is a positive response to this channel (online). Interestingly, while most customers buying online are between 25 and 35, the medium is also popular with customers in Tier-II and Tier-III cities," says Rituraj Bhattacharjee, head, market management, Bajaj Allianz Life.

It is not just the charges. Ticket sizes are also down. Since Ulips mix life cover with building a fund, they usually have higher premiums compared with pure-protection term plans, which offer only death benefit.

To get customers who won't pay that much, some insurers have reduced the premium. Bajaj Allianz Life's Money Secure Plan's minimum annual premium is Rs 7,000, while Life Assure Plan's monthly premium is Rs 1,000. There is also an option for downside protection.

To overcome investor scepticism, many insurance companies have gone a step further and started offering Ulips with some guarantee, such as highest NAV or guaranteed maturity benefits. For instance, Bajaj Allianz's Guarantee Maturity Plan promises to give at least double the invested amount, while ING Life's Market Shield guarantees the highest NAV with the help of active fund management.

Though the policyholder is charged for this benefit (about 1% of annual premium), people prefer these over regular plans. "We have seen Ulips with a guarantee do well in recent times," says Bhattacharjee.

Ulips are a tool to maximise returns in the long term and provide a basic life cover. However, that has not stopped insurers from experimenting to make these plans more attractive. "When markets improve, we might see Ulips back in favour," says Tiwari of HDFC Life.



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