Uneasy truce brings relief to Ulip buyers

Date- 12 Apr 2010 Source- Financial Chronicle, New Delhi http://www.mydigitalfc.com/plan/uneasy-truce-brings-relief-ulip-buyers-739 By- Shruti Verma, Dipak Mondal, Sarbajeet K Sen

Government wants regulators to move court

Investors in unit-linked insurance policies (Ulips) can breathe easy, at least for the time being, with the government brokering an uneasy truce between the Securities & Exchange Board of India (Sebi) and the Insurance Regulatory & Development Authority (Irda). The two regulators have in a bitter and public turf war over regulation of Ulips.

Following the government’s intervention, investors can go ahead and buy Ulip products of their choice and also renew the policies that have been in force.

The insurance industry heaved a sigh of relief after finance minister Pranab Mukherjee, announced that the two regulators would seek a “legally binding mandate from an appropriate court”. However, there were apprehensions among some quarters, including insurance brokers and those dealing with consumer issues in the industry, that the uncertainty would linger till a final court order sorting out the issue was obtained.

“Sebi and Irda have agreed to jointly seek a binding legal mandate on the Ulip issue from an appropriate court. Till then, status quo ante on Ulips is restored,” Mukherjee told reporters after ministry officials spent the better part of the day hearing out the views of the two regulators. The announcement, in effect, means that Irda will continue to regulate Ulips till a court order settles the jurisdiction issue.

On being later asked to clarify what “appropriate court” meant, finance secretary Ashok Chawla said, “I believe it will be a high court.”

On Friday Sebi had issued an order banning 14 insurance companies, including HDFC Standard Life Insurance, ICICI Prudential Life Insurance, SBI Life Insurance, Reliance Life Insurance, Max New York Life Insurance, from raising fresh money for Ulip schemes that invest a major chunk of funds in the stock market.

Sebi had contented that being in the nature of collective investment schemes, Ulips should ideally be issued only after obtaining prior approval from the capital market regulator.

However, a day after the Sebi order, Irda issued an order to all life insurance companies to ignore Sebi’s order and continue to sell and advertise Ulips as usual.

Neither side has budged from its stand. Sebi has not taken back its order. Irda has refused to agree to a dual regulatory system. The government’s decision came after a series of meetings on Monday between top finance Ministry officials with Irda chairman J Hari Narayan and Sebi chairman C B Bhave.

Speaking to reporters after his meeting with Chawla, Hari Narayan said, “We apprised the government of the situation and (explained) why it was necessary for Irda to step in and issue the order in the interest of policyholders and to assure there is no unseemly concern on negative expression in the market and market behaviour.”

Asked if Irda had the power to quash a Sebi order, Hari Narayan said, “I don’t have any power to quash Sebi’s order, but I certainly have the powers to direct insurance companies what to do or what not to do. ”He said that existing policyholders were completely safe, their claims and products were safe. There was no cause for anxiety at all.

Bhave refused to comment, saying, “I will speak when the appropriate time comes.”

Ulips are an insurance plan sold by life insurers. The money collected from subscribers is invested in the equity and debt markets. The schemes also have a built- in insurance component. Ulips have been one of the more favoured investment tools. The total inflows (new premium and renewal premium) from April 2009 till January this year were Rs 81,750 crore, 53 per cent of the total sales of life insurance policies. In 2007-08, ulips accounted for 76 per cent of life insurance sales.

S B Mathur, secretary- general of the Life Insurance Council, said the industry was relieved that status quo on selling Ulips had been restored. Insurance companies were unnecessarily being penalised in the clash of the two regulators. As this issue involved two regulators, it would set a precedent. He refused to say what a possible solution the tussle could be. “However, until a decision comes, business will continue as usual for life insurance companies,” he said.

A spokesperson of Bajaj Alliaz Life Insurance said, “For us the day Irda issued the notice asking us to carry on with our Ulip collections, the situation was back to normalcy.”

However, scepticism remained some quarters on whether the uneasy truce will stick. D Swarup, chairman of the committee on investor awareness and protection and former chairman of the Pension Fund Regulatory and Development Authority, said the public spat between the regulators would have an adverse impact on investors. “The confusion would certainly result in the confidence of investors being shaken,” he said.

He said the government should quickly take a view on the report of the committee he headed, which had called for a level playing field on the commission structure between mutual funds and insurance companies. “The report has not been officially accepted. The government must take a view on our recommendations and put the report in the public domain. We had said in the final report that an 18-month transition time should be given for the insurance sector to go over to a no-commisison structure. The start of a nil commission structure would be from the time the report is accepted,” Swarup told Financial Chronicle.

S K Sethi, vice- president of the Insurance Foundation of India, a non-profit organisation working for consumers, agreed that investor sentiment would take a beating. “It is good that the government has intervened and brokered peace for the time being. However, investors would want a quick legal settlement since the Sebi order and the resultant crisis will severely impact the confidence of several million Ulip investors. No investor wants uncertainty,” Sethi said.

He added that the controversy would have a greater impact on those who bought financial products but were not aware of how they functioned. He felt that banning Ulips might have an adverse impact on the stock markets where the money collected was invested.

“Life insurance companies have been investing heavily in the Indian stock market. The indices rose sharply in February and March since a lot of money flowed in from the life insurance sector. The money came from premium collected in the final months of the last financial year – a time when people invest in tax savings insurance schemes. Ulips have been one of the most successful products of insurance companies,” he said.

V Sitapathy, secretary and director of the Insurance Brokers Association of Indian and director of VIG India Insurance, said the uncertainty would continue till a court settlement. “And this will impact Ulip sales. In any case, sale of insurance products slows down during the major part of the first quarter of any financial year. We hope that the issue will be sorted out by then,” he added.

V K Anand, a distributor of both mutual fund and insurance products, said there was a need to bring about a level playing field. “If one is selling mutual funds there is no commission, but if one spices that same product with an insurance element, one can earn up to 40 per cent commission. This is not a level-playing field,” he said.