Alarmed at the increasing complaints against unit-linked insurance plans (ULIPs) — mutual funds with a ‘free’ insurance cover — the Insurance Regulatory and Development Authority (IRDA) will announce new guidelines next week aimed at bringing some order into a segment that has seen gross mis-selling in the last two years.The fresh stringent norms, IRDA chairman CS Rao said, would prevent life insurance companies selling investment plans under the garb of insurance. “I will announce the guidelines next week,” Rao told The Indian Express.The norms will address three major issues in the ULIP space — amount of insurance cover, portfolio disclosure and lock-in period — all of which will ensure that product delivers more cover and greater transparency. ‘Conditions Apply’ clauses, tucked away in fineprint, will be highlighted.ULIP, a blended insurance-cum-investment product that works like a mutual fund, giving the consumer options to invest in debt or equity, has been aggressively sold by insurance firms. ULIPs have helped them see spectacular growth: from 8.4 per cent in 2003-04, the share of ULIPs in the industry’s premiums has risen to 32.5 per cent in 2004-05.IRDA has been uncomfortable with the way life insurance polices are being sold as high-performing mutual funds. Rao now hopes to tilt the balance in favour of insurance through the new guidelines.Currently, companies sell high potential returns — an investment product —rather than life cover, the primary function of insurance. In case of death, an insured gets either the sum assured or the investment returns, whichever is higher. The risk that an individual runs is losing out on investment in case the markets fail to deliver and settling for the sum assured, which is likely to be insufficient, leaving him terribly underinsured.Rao’s concern stems from the fact that ‘‘the sum assured is terribly insufficient’’. ‘‘So, an individual takes a risk on his cover, giving in to the bait of higher returns. This goes against the spirit of insurance. The new guidelines will ensure some sort of correlation between the premiums paid and the sum assured. If the premiums are not reduced, the insurer will have to increase the sum assured either which way but the spirit of insurance will have to be retained.’’The other area which will be addressed is portfolio disclosure — a major grievance of mutual funds. Unlike mutual funds, ULIPs are not required to disclose their portfolios. Although the value of one’s money can be tracked through daily NAV (net asset value) disclosures, there is no way of knowing where it is invested. The new guidelines will insist on periodic portfolio disclosures.ULIPs have also been criticised due to the flexibility, rather the lack of it, an investor has to enter and exit. “The minimum lock-in period is 3 years which again is mostly not implemented. This also runs counter to the spirit of insurance, which is a long-term product. The norms will mandate a longer lock-in period so that an investor makes a conscious decision before buying a policy,” said Rao.
