Monday, June 21, 2010

ULIPs regularised, Insurance companies given absolution

As reported in the press, the President has finally issued an Ordinance dated 18th June 2010, coming into effect immediately from that date, for, what I would call, “regularising” ULIPs. I use that word because not only it is declared that ULIPs (as very widely defined) issued by an insurer are life insurance business but also that they were always so for all practical purposes in this context. 

To emphasise, the Ordinance covers ULIPs as we ordinarily understand them and more - the relevant extract of the definition reads - “any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment and a component of insurance issued by an insurer”. 

No minimum insurance component is required in this widely defined ULIPs. Thus, ULIPs would cover even the type of ULIPs referred to in SEBI’s order of 9th April 2010, which started all this, where the insurance component was just 2%. (see my earlier post on this decision and also several other posts around that date on this order)

There is thus an irony to this. ULIPs containing just 2% (or theoretically even less) insurance component can be issued only by insurers registered with IRDA. However, mutual fund or other entities that are not insurers cannot issue a ULIP having 98% or more investment component.

The Ordinance amends several laws – the Insurance Act, the Securities (Contracts) Regulation Act, 1956, the Securities and Exchange Board of India Act, 1992 and the Reserve Bank of India Act, 1934.

The aims are several.

Firstly, as referred earlier, it is to include ULIPs in life insurance business and thus not only validate issue of ULIPs by insurers but confirm (if there was any doubt), for all practical purposes, that ULIPs are an exclusive business of insurers and governed exclusively by IRDA.

Secondly, all earlier issues of ULIPs are effectively validated. It is specifically stated that this is so despite anything contained in any judgment or order of any court, tribunal or other authority (effectively covering SEBI’s order). It is also stated that the validity of issue of such ULIPs cannot be called in question before any court or authority on grounds such as non-registration under any law (effectively neutralising even existing references before Courts). 

For future jurisdictional disputes amongst specified regulators on whether specified instruments such as ULIPs, money market instruments, etc. are composite/hybrid instruments, a dispute resolution mechanism is laid down. The regulators to whom this would apply are the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority. Such disputes shall be referred to a Joint Committee consisting of 7 persons of which 3 represent the Central Government and 1 representing each of the 4 regulators.

Any member may make a reference of such a difference of opinion to the Joint Committee and the decision of the Joint Committee would be binding on the four regulators.

The saddest part of this is that there is no reference to the biggest complaint against ULIPs and insurers/agents and that is of mis-selling, encouraged by comparatively high initial commissions and also higher other upfront costs. 

There is also no attempt to empower IRDA with powers similar to SEBI to punish errant insurers and their agents. Even a cursory comparison of the SEBI Act and the Insurance/IRDA Acts shows that IRDA is wholly ill-equipped to protect investors of ULIPs, at least nowhere in comparison of the powers that SEBI has. The Insurance Act seems more focussed on protecting the interests of term and endowment policy holders and thus there is almost obsessive focus on matters such as where the funds paid by such policy holders are invested. 

For ULIPs holders, however, it appears that since they “knowingly” investing in “risk” assets, they do not need similar protection (i.e., the Buyer Beware principle applies). Thus, the Ordinance is a disappointment. Not only past sins are given absolution but the existing setup of poor effective protection and minimal powers to prevent future ones also continues.

- Jayant Thakur

1 comment:

Arvind Singh said...

Indian law and regulations aim to benefit the laypersons. The new IRDA regulations offer many benefits for ordinary policy holders. It will regularize the high upfront charges and surrender charges, keeping in mind the policy holder’s interest. Under the new scheme, the premium amount remains the same throughout the years, which was not the case earlier. I read some on http://www.lawisgreek.com/indian-law-new-irda-regulations-for-ulip-and-pension-plans/