IRDA moves to reform Ulip to stem mis-selling and meet needs of users

Theinsurance regulator is tightening the rules for Unit Linked Insurance Plans (Ulips) further as it indicated recently when it prevailed over an insurer to keep the component ofinvestment option of debt or equity throughout the lifetime of the product instead of a specified period and asked another company to guarantee capital on its Ulips. 
The Insurance Regulatory and Development Authority (IRDA) had earlier advised that life insurance products be designed with a saving element such that at a uniform assumed gross yield of 4% per annum, the expected maturity in linked insurance products, is at least 90% of the total premium paid excluding the service tax.
“The regulator wants fund value at maturity to be 90% of premiums paid, making it difficult to write Ulips for older age group where mortality charge is high. The total effect of total charges, including mortality on yield, could go well beyond 4% depending on age,” said Sanjeev Pujari, executive director (actuarial), SBI Life.”Through recent communications, it seems like the regulator is indirectly trying to discourage Ulips for people above 55 years.” 
IRDA is of the view that fund option is not independent of the product and it is not in favour of closed-ended products, said a senior executive of a large private sector insurance company. Another private insurer’s CEO said, on condition of anonymity, that the regulator is sending feelers to the market that there could be another round of reforms in Ulips.”IRDA has said we cannot withdraw fund options even if there is extreme situation when market corrects sharply,” he said. 
The premium collected by selling Ulips increased 33% to Rs 1,625 crore during April-June compared with the year-ago period, according to data collated by the industry. 
The benchmark BSE Sensex index advanced 26% in 2014 as investors are betting that the Narendra Modi-led government will remain stable and boost economic reforms. Private insurance companies are rushing to capitalise on the surge in investor interest in stocks. Many companies have filed online Ulips for approval with the regulator. 
The regulator has asked companies to examine thoroughly the advantages and disadvantages for both the customers and the insurer at the design stage for each of the features proposed under the product and ensure that the features meet the needs of the customers and do not contain any scope for mis-selling. 
Ulips have undergone an overhaul with the regulator stipulating minimum risk cover andcap on discontinuance charge. Other charges were capped in 2010. The maximum reduction in yield at maturity, that is the difference between the gross yield and the net yield, has been capped at 3% for policies whose tenure is less than or equal to 10 years whereas for plans whose tenure exceeds 10 years, the total charges cannot exceed 2.25%.
This means, the IRR, or internal rate of return, cannot be less than 7.75% in any case. Besides, the regulator has mandated an increase in lock-in period from three years to five years, ensuring that these policies have long-term orientation.