Investors Thrown to Insurers' Mercy

The government has issued an ordinance, handing ULIPs to IRDA finally and effectively ending ending hope of changing their anti-investor nature

Over the last couple of days, you may have heard and read in the media that the ULIP battle is over and the government has changed the relevant laws to ensure that IRDA continues to regulate ULIPs. Don't believe this for one moment-nothing is over. All that has happened is that the government has decided to throw investor to the wolves. Investors will now themselves have to take the full responsibility of discovering the truth about this most toxic of all asset types and keeping their money safe from it. Given the enormous financial clout and the marketing hype of the insurance industry (not to speak of their tame regulator), expect no more than some cosmetic changes which enable insurers to give a fig-leaf of a PR spin that if there were any problems with ULIPs, they have been fixed.

The core problems with ULIPs remain, and no one will now have any interest in fixing them. Problem number one is high expenses with heavily front-loaded commissions. You may heard insurance apologists (including IRDA) claim that ULIP expenses are now down to three per cent or some such number. Don't believe this for one moment. This figure is a sophisticated piece of subterfuge that is intended to hide the truth. This is the expense level that would be achieved by newer ULIP products if investors stay invested for the entire term of ten or more years. In practice, insurance agents earn so much in the beginning that the entire sales effort (and product design) is arranged to get the investor to quit after three or five years and shift the money to another ULIP.

Instead of going on repeating the theoretical expense number that will supposedly be achieved in the future, IRDA should come up with the real effective expense level that is actually being charged from investors today. This ought to be easy enough to do. The total amount of money that is being managed under ULIPs is known to IRDA, as are the myriad types of expenses that insurers are charging on this money. These two numbers would give the real expenses that are actually being charged from real investors. I doubt whether IRDA will ever reveal this number. To do so would immediately lay bare the truth about whose benefit insurance regulation in India being conducted.

There are some other basic numbers about the ULIP scam that you will never discover, no matter how closely you pore over IRDA's 214-page annual report. One crucial number is the lapse rate of ULIPs. Apparently, this is so because regulations are so arranged that ULIPs don't lapse, they just go into a 'premium-awaited' limbo. This immortality bestowed upon ULIPs by insurance rules is facilitated by the fact that insurance company can keep cancelling units to recover the basic charges, instead of being forced to recognise that the customer has abandoned its product.

Anyhow, none of this is going to change now. Realistically, there was probably never any chance that the government would allow meaningful reform of ULIPs. To do so would mean implicitly admitting that there was something seriously wrong in the way things have been done so far. Now, the regulatory die is cast, once and for all. Next time an insurance agent approaches you with a ULIP pitch, or when you see one of those emotion-stirring ads on TV, consider the fact that these people now have the full backing of the government and the regulations to cause as much harm to your personal finances as they'd like to. As an investor, it's your own battle now.

-- Dhirendra Kumar

-- Value Research