New Irda rule for Ulips to help launch new products
T.R. Ramachandran, CEO and MD, Aviva India, tells Chandralekha Mukerji
that there is enough scope for product innovation under the new Ulip
norms.
Avia India CEO and MD T R Ramachandran
T.R. Ramachandran, CEO and MD, Aviva India, tells Chandralekha Mukerji that there is enough scope for product innovation under the new Ulip norms .
Compared to older products, are Ulips better instruments for serving financial planning goals?
The old Ulips were most often used as short-term instruments. However, the actuaries had not designed the product to give returns in the short term. If the customer had held onto the product till maturity, then they got a substantial return. However, if they gave it up in the middle of the term, there was a surrender charge.
Therefore, when their short-term returns were being compared to that of a mutual fund, customers found mutual funds to be a better investment.
One important message that the Irda has given by increasing the lock-in period from 3 years to 5 years is that this is primarily an insurance product. And since life cover increases, the customer now gets the twin benefit of life protection and an investment, which is very good from the customer perspective.
Tip: How to choose the best Ulip to invest in
Under the new regime, Ulip structures have become more or less standardised. How does a company differentiate and project their USP?
One structural change is in terms of the kinds of funds that are made available. If we take Aviva's example, after September 2010, we introduced an infrastructure fund because infrastructure is a big story for India.
Another one was a PSU fund because we think there will be more unlocking of values in PSUs. Likewise, we have a growth fund, a balanced fund, an index fund, a secured fund, a protected fund, and so on. The proportion of equity to debt allocation is very different in all these funds. So, the customer, according to his risk appetite, can freely decide the equity-debt ratio.
Distinctions can be made in terms of the types of fund options available and how relevant they are from the customer perspective.
Moreover, there are many interesting age-oriented products. For instance, say, you enter the plan at the age of 35 years and we allocate 70% of your investment in equity and rest in debt. But the policy tenure is for 20 years and you wouldn't want to be heavy on equity in your later years. So, say when you turn 50, we will automatically park 70% of your funds in a debt fund to avoid any potential erosion of your money in case the equity markets go down.
Do you think the scope for innovation has been curtailed by the new Ulip guidelines?
Yes and no. Because of standardisation, the customer will now have a level playing field and will be able to compare and make more rational and informed decisions.
On the other hand, distinct differentiations can be made on how the insurer manages the funds and how creatively the new funds are designed and pegged to the customers' overall life-stage goals.
Have you seen a fall in the number of complaints of mis-selling under the new regime?
It's too early to comment on this. We will get to know whether a policy was mis-sold only when the customer wants to withdraw at the end of the lock-in period (one can't withdraw during the lock-in period). If the NAV (net asset value) of the Ulip has risen from Rs 100 to Rs 110, the customer expects to get it in full.
However, because of the surrender charges, he might even get less than what he had invested. This comes as a shock to him. So, since the lock-in for Ulips have been made 5 years, we'll now know at the end of the term what people think about it.
But given that the surrender charges have now been capped at Rs 6,000, one logically anticipates that the customer reverts coming on that factor will come down significantly.
The sales of Ulips as a proportion of total sales are going down? Why is that happening if it has become more consumer-friendly?
There has been a dip, but it is not alarming. If you see the March report of Irda, Ulips still constitute about 70-75% of the sales. It hasn't gone down to 30-40%.
What has happened is, because of the cap on the charges levied under the new Ulip regime are far lower than what they happened to be earlier, it restricts our ability to pay commissions to distributors. On the other hand, from the customer perspective Ulips have become lot more attractive.
So, while the distributors might not be that willing to push Ulips, it will be compensated by a customer pull, who should know that the new Ulips are a product to trust and buy.
The segment that has noticeably gone down post the new guidelines is the pension schemes. This is because it is very difficult for the insurers to guarantee a return of 4.5% on equity over the policy term as stipulated. And, equally, it's not reasonable to tell the customer that the insurer can't invest in equity and so you must invest everything in debt.
The whole argument of pension schemes is that if you keep the money over a 30-year period, starting to invest at the age of 30 or 35 years, you'll get the money back when you are 60 years, when you are about to retire. And, over a 20- to 30-year period, equity as an asset class will always outperform any other asset class.
So, the customer would obviously say, if all I get is an 8% or 9% return, why not put the money in a provident fund account, which gives similar returns and is safer. Why would he take market risks and buy a pension plan?
The industry has made various representations with the regulator on this. We hope that they will take a favourable view on the matter.
Compared to older products, are Ulips better instruments for serving financial planning goals?
The old Ulips were most often used as short-term instruments. However, the actuaries had not designed the product to give returns in the short term. If the customer had held onto the product till maturity, then they got a substantial return. However, if they gave it up in the middle of the term, there was a surrender charge.
Therefore, when their short-term returns were being compared to that of a mutual fund, customers found mutual funds to be a better investment.
One important message that the Irda has given by increasing the lock-in period from 3 years to 5 years is that this is primarily an insurance product. And since life cover increases, the customer now gets the twin benefit of life protection and an investment, which is very good from the customer perspective.
Tip: How to choose the best Ulip to invest in
Under the new regime, Ulip structures have become more or less standardised. How does a company differentiate and project their USP?
One structural change is in terms of the kinds of funds that are made available. If we take Aviva's example, after September 2010, we introduced an infrastructure fund because infrastructure is a big story for India.
Another one was a PSU fund because we think there will be more unlocking of values in PSUs. Likewise, we have a growth fund, a balanced fund, an index fund, a secured fund, a protected fund, and so on. The proportion of equity to debt allocation is very different in all these funds. So, the customer, according to his risk appetite, can freely decide the equity-debt ratio.
| "Innovations can be made on how creatively the new funds are pegged to customers' life-stage goals" |
Moreover, there are many interesting age-oriented products. For instance, say, you enter the plan at the age of 35 years and we allocate 70% of your investment in equity and rest in debt. But the policy tenure is for 20 years and you wouldn't want to be heavy on equity in your later years. So, say when you turn 50, we will automatically park 70% of your funds in a debt fund to avoid any potential erosion of your money in case the equity markets go down.
Do you think the scope for innovation has been curtailed by the new Ulip guidelines?
Yes and no. Because of standardisation, the customer will now have a level playing field and will be able to compare and make more rational and informed decisions.
On the other hand, distinct differentiations can be made on how the insurer manages the funds and how creatively the new funds are designed and pegged to the customers' overall life-stage goals.
Have you seen a fall in the number of complaints of mis-selling under the new regime?
It's too early to comment on this. We will get to know whether a policy was mis-sold only when the customer wants to withdraw at the end of the lock-in period (one can't withdraw during the lock-in period). If the NAV (net asset value) of the Ulip has risen from Rs 100 to Rs 110, the customer expects to get it in full.
However, because of the surrender charges, he might even get less than what he had invested. This comes as a shock to him. So, since the lock-in for Ulips have been made 5 years, we'll now know at the end of the term what people think about it.
But given that the surrender charges have now been capped at Rs 6,000, one logically anticipates that the customer reverts coming on that factor will come down significantly.
The sales of Ulips as a proportion of total sales are going down? Why is that happening if it has become more consumer-friendly?
There has been a dip, but it is not alarming. If you see the March report of Irda, Ulips still constitute about 70-75% of the sales. It hasn't gone down to 30-40%.
What has happened is, because of the cap on the charges levied under the new Ulip regime are far lower than what they happened to be earlier, it restricts our ability to pay commissions to distributors. On the other hand, from the customer perspective Ulips have become lot more attractive.
So, while the distributors might not be that willing to push Ulips, it will be compensated by a customer pull, who should know that the new Ulips are a product to trust and buy.
The segment that has noticeably gone down post the new guidelines is the pension schemes. This is because it is very difficult for the insurers to guarantee a return of 4.5% on equity over the policy term as stipulated. And, equally, it's not reasonable to tell the customer that the insurer can't invest in equity and so you must invest everything in debt.
The whole argument of pension schemes is that if you keep the money over a 30-year period, starting to invest at the age of 30 or 35 years, you'll get the money back when you are 60 years, when you are about to retire. And, over a 20- to 30-year period, equity as an asset class will always outperform any other asset class.
So, the customer would obviously say, if all I get is an 8% or 9% return, why not put the money in a provident fund account, which gives similar returns and is safer. Why would he take market risks and buy a pension plan?
The industry has made various representations with the regulator on this. We hope that they will take a favourable view on the matter.
