The insurance regulator will have a special arrangement to clear within three days unit-linked insurance plans (Ulips), which have to be reworked because of new norms which put a cap on the fee investors, have to pay.

The Insurance Regulatory and Development Authority (Irda) has estimated that over half of existing Ulip schemes will have to be restructured and it wants to ensure that there is no break in sales.

Just as equity and debt public offerings have to be cleared by capital market regulator Sebi, new insurance schemes have to be getting the green signal from Irda under a so-called file and use system.'

In May, the insurance regulator relaxed ‘file and use' rules to allow companies to start selling a plan if it does not object within 15 days of filing the scheme instead of 30 days earlier.

But, in reality, the process takes longer if there is any product innovation as there are generally issues where the regulator seeks clarifications. The system also applies if companies were to restructure existing plans.

Last week, Irda said charges deducted from the premium paid by policyholders would be subject to a ceiling that would be based on the difference between the gross yield (return to policyholder had there been no charges whatsoever) and the net yield (the return net of all charges). Irda stipulated that the difference between gross and net yield should not be more than 300 basis points for policies up to 10 years and 225 basis points for those with longer terms.

For life insurance companies, the flip side of the special dispensation is that the regulator will not relax the December 31 2009 deadline after which non-compliant products cannot be sold. Some companies wanted the deadline to be pushed to the end of the financial year in March 2010, arguing that it would take time for new products to be developed and cleared by Irda.

At a meeting on Wednesday with the regulator to discuss the new norms, the heads life insurance companies said mortality charges—the cost of providing life insurance—should be kept out. Their reasoning was that while the cap on charges was uniform, mortality charges would be very high for an older person compared to, say, those in their 20s. In other words, younger policyholders would pay more and older policyholders less. The regulator said this factor was considered while preparing the regulation and the impact of mortality charges on overall charges was not very high. However, the regulator has said that it would look into suggestions made by the companies.

"Mortality charges and risk charges should be kept out of the overall ceiling" said GV Nageswara Rao, MD & CEO, IDBI Fortis Life Insurance. According to Rao, life insurance products that have in-built critical illness and disability cover will be hit as it would be difficult to provide all these benefits within the ceiling. IDBI Fortis has chosen to distinguish itself from others by offering wealth plans that provide insurance not only against death but also critical illness and disability. Rao also said the ceiling should be an overall one and there should be no sub-limits for fund management charges, as proposed by the regulator.

Most insurance companies are not willing to speak openly about the negative impact of the new Irda norm on their companies. But most CEOs privately admit that they fear growth will take a hit as distribution fees to agents will have to be reduced. Insurers say these guidelines will be more disruptive than Irda's last major overhaul a couple of years ago when it banned short-term Ulips.

Some of them point out that there could be circumstances not envisaged in the regulations. One possibility is that the policyholder may decide to terminate a policy early for whatever reason. There is also a fear that unscrupulous agents may advise their clients to allow their existing policies to lapse on the grounds that newer policies have lower charges and will generate better return.