Directives by the Insurance Regulatory & Development Authority on unit linked insurance products has forced life insurers to modify their product structure and selling patterns.

On July 22, the Irda had capped charges on Ulip products. "For insurance contracts which have a tenure of less than or equal to 10 years, the difference between the gross and net yields shall not exceed 3%, of which fund management charges shall not exceed 1.5%. For products whose period is above 10 years, the difference between gross and net yield shall not exceed 2.25%, of which the fund management charges shall not exceed 1.25%", the insurance regulator had said.

These changes are effective from October 1, 2009 and all products have to comply with the cap by December 31, 2009.

The third and fourth quarters of a financial year typically see maximum policy sales for life insurance companies.

While insurers say that the changes would not have too much of an impact, industry observers and analysts feel companies would definitely feel a pressure on their margins.

Policy sales under the new norms, effective from January 1, 2010, would also coincide with the fourth quarter.

A lot of insurance sales are expected to happen in the second and third quarters under the existing norms.

GLN Sarma, chief actuary, Bharti Axa Life Insurance said, "According to the new circular, all charges levied will have to be realigned with the cap on the fund management charge. Also, if mortality charges are included as part of the cap then there may be restrictions in the maximum age at entry and maximum maturity ages for the insurance products. Additionally, companies will have to reduce the level of insurance cover in their products to comply with the cap of charges."

"Most products have charges within the limits set by the Irda. The only change will be in the alignment of the fund management charge as the limit is only 1.25% for products with a policy term of more than 10 years. However, some shorter-term contracts may require modifications to meet this criterion," Sarma said.

Rajesh Sud, CEO and managing director, Max New York Life, said distributors of life insurance need to be adequately trained and suitably compensated for providing advice and service to policyholders.

Analysts have given interesting insights. An analyst with India Infoline said, "In the near term, agents may have little choice but to push Ulips even with lower commissions, since they have even less incentive to sell mutual fund products after Sebi barred mutual funds from levying an entry load with effect from August 1, 2009."

An analyst with Nomura Equity Research said near-term growth rates may see sharp fluctuations. "We expect material changes to product structures, which would imply that a lot of training of the sales force would be required. Considering the short time lines, we believe this would be a challenging task, hence we expect sales to impact in Q4", the analyst said.

ULIP CHARGES FOR LARGER LIFE COVER MAY BE RAISED
Falaknaaz Syed, New Delhi Hindustan Times

The Insurance Regulatory & Development Authority (IRDA), balancing the interests of policyholders and insurance companies accused of taking a big cut of the premium pie as charges from customers, is planning to walk the wedge between the two by partially easing its norms concerning mortality charges.

Last month the regulator had mandated an overall ceiling on all charges put together for Unit Linked Insurance Plans(Ulips) in which life cover is mixed with returns from investments in instruments like mutual funds.

The new norms stated that for policies involving a tenure of up to 10 years, the difference between gross and net returns (after deduction of charges) shall not exceed 300 basis points (3 percentage points) of which fund management charges shall not exceed 150 basis points. For policies whose tenure is more than 10 years, the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points.

Typically, in case of a 10-year policy, if there is a return of 15 percent, policyholders should get at least 12 percent and the insurer not more than 3 percent.