- 1 -

The Study of Trends in Life Insurance Sector and

Growth of ULIPs in India

- Mrunal Chetan Joshi1

Abstract

Recently continuous increasing in the contribution of Service Sector in GDP of Indian

Economy, Life Insurance Sector is one of most important sector playing its role in the growth

of Indian Economy. As Globalisation and Liberalisation has open the doors for foreign

companies to enter in to this sector in India, of course through joint venture only, they have

identified the potential of the Indian market. Thus numbers of new private companies have

started their business in Life Insurance Sector and still numbers of companies are preparing to

enter into this sector. IRDA is playing its crucial role in managing all this efficiently in

interest of general public.

In this scenario, Life Insurance sector has also faced down-ward growth rate as global melt

down during year 2008-09. But now near about all problems have been settled in India and

India's insurance sector is zooming to show an unprecedented progressive growth of more

than 200% by the period of 2009-10. As Indian Stock market has also achieved stable growth

in last more than six months, investment avenues based on it are also performing well

afterwards. ULIPs have also shown its increased market-share, in the total insurance

business. ULIPs are also well managed by IRDA well, even in terms of ceiling of total

charges charged by Insurance companies. IRDA has established detailed guidelines with

explanation of the terms used in it. Finally we can say about ULIPs that its performance can

be identified by its NAV and its growth, which could be the important variable for the

investors for their investment decision.

Introduction

Due to out performance of Stock Market in last decade of time, Recently Stock Market has

become hot favorite market amongst the Investor of India. Number of Professional Investors

and Portfolio Managers has been emerged and they are playing their roles in different ways in

Indian Financial Market, like Portfolio Management (PM) Services, MFs, and ULIPs etc. and

stock market based other investment instrument has emerged.

At the same Life Insurance sector is also fast growing service sector, as people have became

more conscious and rational about their future planning during their life and for after their life

for their dependents and other family members. This increasing importance of Insurance

sector could be understood by identifying the active roles playing by the Private Life

Insurance Companies.

Insurance sector is facing Generic Competition from this all other investment avenues to get

money from financial market. Hence this sector has also come with innovative product like

Unit Linked Insurance Plans (ULIPs). ULIPs are very important instrument which provides

the link between two crucial investment avenues i.e. Non-debt Securities in Stock Market and

1 Lecturer, B.R.C.M. College of Business Administration, Surat, Gujarat, India

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Insurance Plans. Transparent and Well-organised stock market provides good channel

between Industries, which are in need of Finance and Investors, who want to maximize their

return with minim risk. It is very difficult for small investor to move fast in these dynamic

financial markets. At the same time it is very important for Investor to consider their

numerous needs related various aspect for their investments viz. Safety, security, tax-

planning, Liquidity etc.

Unit Linked Insurance Plans (ULIPs)

ULIPs are a category of goal-based financial solutions that combine the safety of insurance

protection with wealth creation opportunities. In ULIPs, a part of the investment goes

towards providing you life cover. The residual portion of the ULIP is invested in a fund

which in turn invests in stocks or bonds; the value of investments alters with the performance

of the underlying fund opted by you.

Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of

risk protection and flexibility in investment. The investment is denoted as units and is

represented by the value that it has attained called as Net Asset Value (NAV). The policy

value at any time varies according to the value of the underlying assets at the time.

In a ULIP, the invested amount of the premiums after deducting for all the charges and

premium for risk cover under all policies in a particular fund as chosen by the policy holders

are pooled together to form a Unit fund. A Unit is the component of the Fund in a Unit

Linked Insurance Policy.

The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP

investors have the option of investing across various schemes, i.e., diversified equity funds,

balanced funds, debt funds etc. It is important to remember that in a ULIP, the investment

risk is generally borne by the investor.

In a ULIP, investors have the choice of investing in a lump sum (single premium) or making

premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also have

the flexibility to alter the premium amounts during the policy's tenure. For example, if an

individual has surplus funds, he can enhance the contribution in ULIP. Conversely an

individual faced with a liquidity crunch has the option of paying a lower amount (the

difference being adjusted in the accumulated value of his ULIP). ULIP investors can shift

their investments across various plans/asset classes (diversified equity funds, balanced funds,

debt funds) either at a nominal or no cost.

Literature Review

Silender Sing and Satpal (2009) In study of Customer Satisfaction in ULIPs at and Delhi,

they have observed amount of the maturity of policy is most favorite factor, whereas period

of surrender of the policy is least preferred variable. This consideration is important for Life

Insurance Companies to plan polices and its features in future.

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Karuna K. (2009) ULIPs like other products cannot claim to be a perfect financial solution.

But, for an investor who invests judiciously and is ready to wait patiently, ULIPs is one good

investment vehicle available in the Indian financial market.

Pa. Keerthi,, R. Vijayalakshmi (2009) All the respondents/ Policy holders have certain level

of expectations from the services that are to e delivered by an insurance company. Their

expectation level varies irrespective of the demographic profile but they look forward to

excellent delivery of services.

Mr. Khanna, Member (Actuary) IRDA (2009), ULIPs are of generally long duration (12-

20 years) the ups and downs in the market are natural. When the market is down it not good

time to redeem the money from units, some investor see this as a good period to invest.

Sunil Dhawan (2009) Investors in the high-risk category should give priority to equity-

linked products such as ELSS or Ulips over fixed income products.

Objectives of the Study

To study of Trend in Life Insurance sector in India.

To study the various trends and growth of ULIPs.

To Compare certain Child and Retirement ULIPs.

To identify differences between Mutual Fund and ULIPs as an investment avenues.

Research Methodology

This research is Descriptive type of research, in which it studies about the current position of

Life Insurance sector and various trends in ULIPs. The study strives to describe the growth of

ULIPs, Differentiate from MF and comparative study between certain important ULIPs. This

research is completely based on Secondary data. Data source for the study is different

research paper published in various journals, guidelines published by IRDA, articles

published in newspapers and magazines and on internet. Finding and analysis is based on the

review of secondary data. Percentage is used to study the growth rate. Comparative tables

were prepared for differentiate between ULIPs. For comparison between different ULIPs

market share up to the year 2008 where consider for the selection of the top five companies.

Lastly comparison is made between MF and ULIPs on the basis of certain important aspects.

Finding and Analysis

Trends in Life Insurance Sector in India

The penetration of life insurance was less than 1% till 1990-91. During the 90s, it was between 1% and 2% and from 2001, it was over 2%. In 2003-04, it was 2.4% and the year

2006 it had increased to 4.1%. After opening up of the insurance sector to the private players,

the GDP from life insurance and its penetration has increased, which revealed that the

insurable population is more and there would be more opportunities for all players in

Insurance Sector [4]

. Increase in market share by 120% from the opening up of the sector in

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2000 when it was only $21.71 bn to $ 47.89 bn in 2007 [9]

. Insurance penetration in the year

2008 when the sector was opened up to the private sector was 2.32 (life 1.77 and non-life

0.55), and it has increased to 4.60 in 2008 (life 4.00 and non-life 0.6). The increase in levels

of insurance penetration has to be assessed against the average growth of over 8.2 per cent in

the GDP in the last five years [10]

.

The Indian life insurance market generated total revenues of $41.36 billion in 2007, thus

representing a compound annual growth rate (CAGR) of 11.84% for the period spanning

2000-2007. Life insurance market had a growth of $22.46 billion within a period of 7 years

with a growth rate of 118.24%. Estimated life premiums rose to INR 1,470,800 million

($36.77 billion) in 2006 from INR 1,301,540 million ($32.54billion) in 2005. We envisage

that life premiums in 2011 will be $65.96 billion, a growth larger than they were in 2007. The

performance of the market is forecast to accelerate, with an anticipated CAGR of 9.78% for

the four-year period 2007-2011 expected to drive the market to a value of $65.96 billion by

the end of 2011. There would be a growth of $24.6 billion i.e. 59.48% in the next 4 years [8]

.

The life insurance industry (first year premium) has shown a growth of 37% for the period

1996-97 to 2000-2001 and 46.63% for the period 2001-02 to 2007-2008. Market share of

different Life Insurance Companies are as follow during the year 2008 is shown in Figure 1.

Figure 1 (Source: As per a report published in 2008

by Ms Pinky Walia-Financial Advisor)

In 2008-09, on account of the financial meltdown, the life insurance segment saw a

downward trend. The first-year premium, which is a measure of new business secured,

underwritten by the life insurers during 2008-09 was Rs 87,006 crore as compared to Rs

93,713 crore in 2007-08, registering a negative growth of 7.2 per cent. In terms of linked and

non-linked business during the year 2008-09, 50.9 per cent of the first-year premium was

underwritten in the linked segment while 49.1per cent was in the non-linked segment as

against 75:25 in the previous year. The shift towards the traditional segment is significant

during the year 2008-09 [10]

.

India's insurance sector is zooming to show an unprecedented progressive growth of more

than 200% by the period of 2009-10. The Associated Chambers of Commerce and Industry of

India has clocked out the fact that during this period, private players in the industry will see a

growth of about 140 per cent, owing to the adoption of the aggressive marketing techniques

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in comparison of the growth rate of 35 per cent-40 per cent achieved by the state owned

insurance companies. The chamber is expected to poise the business of insurance to reach at

Rs.2000 billions in coming 2 years from the present level of Rs. 500 billion. With the result

of adoption of the intense marketing strategies by the private players, the declination has been

witnessed in respect of the share of the state owned insurance companies captured in the

market.

Various Trends and Growth in ULIPs

IRDA has provided very specific guidelines for all different aspect related to ULIPs in

Annexure of CIRCULAR NO: 032/IRDA/Actl/Dec-2005 dated 21/12/05[1]. This guidelines clarifies about certain features of ULIPs like Benefit Payable on death, Calculation for minimum sum assured,

Minimum Policy term, Guarantees on policy benefits, Surrender Value, Loans, Partial withdrawal,

Settlement option, Unit Pricing, Computation of NAV, Riders and Terminology. But IRDAs guidelines do not specify the maximum limit for different charges.

First ULIP was from LIC, which launched its Bima Plus in 2001. Private players like Aviva started

off only with ULIPs and others were quick to follow. The response to these plans was so encouraging

that more and more players launched their versions. Up to January 2006, ULIP accounts for the bulk

of the first year premium income that most insurers earn going as high as 95 per cent for Birla Sun

Life and ICICI Prudential [6]

. As on 2004-2005, the total invested funds of ULIPs stood at Rs 7,528 crore, of which LIC contributed

Rs 2,759 crore and private players, Rs 4,769 crore. The total funds have increased by Rs 5,840 crore

compared to the year 2004-04, the main contributors being LIC (Rs 2,549 crore), ICICI Prudential (Rs

1,557 crore) and Birla Sun Life (Rs 651 crore) [6]

The life insurance industry underwrote 5.09 crore policies in 2008-09 reporting a growth of 0.10 %.

The share of ULIP business in the first year premium in 2008-09 was 37.30 per cent while the non-

linked premium was 62.70 %.

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Comparative Analysis of Child and Pension ULIPs

On the basis of the Market share during the year 2008, top five life insurance companies

where selected. Than mainly Child and Pension ULIPs where compared on the basis different

features.

Comparison of Unit Linked Child Plans

CRITERIA LIC

BAJAJ

ALLIANZ

LIFE

INSURAN

CE

CO.LTD.

ICICI

PRUDENTI

AL LIFE

INSURANC

E CO. LTD.

SBI LIFE

INSURAN

CE CO.

LTD.

RELIANC

E LIFE

INSURAN

CE CO.

LTD.

plan name

child

fortune

plus

young care

II smart kid

unit plus

child plan

Reliance

secure

child plan

min entry

age of child 0 year 0 year 0 year 0 year 1 month

max entry

age of child 10 year 15 years 15 years 15 years 15 years

min entry

age of

parent

18 years 18 years 20 years 18 years 21 years

max entry

age of

parent

55 years 50 years 60 years 57 years 50 years

min

maturity

age of child

18 years 18 years 18 years 18 years 18 years

max

maturity

age of child

25 years 25 years 25 years 25 years 25 years

max

maturity

age of

parent

75 years 75 years 75 years 65 years 70 years

min/max

term 10-25 years

20 & 25

years 10-25 years 8-25 years 10-25 years

payment

mode

regular/

single regular Regular regular

regular/

single

type of

premium

annual/half

yearly/

monthly

annual/half

yearly/quart

erly/

monthly

annual/half

yearly/

monthly

annual/half

yearly/quar

terly/

monthly

annual/half

yearly/quart

erly

/monthly

- 7 -

min.

premium

regular

premium-

Rs. 10000

p.a. single

premium-

Rs. 40000

p.a.

rs.20000 per

annum

rs.10000 per

annum

3 year PPT:

Rs. 84000,

5 year PPT:

Rs.60000,

7 year PPT:

Rs. 48000,

18 year:

Rs. 12000

regular

premium:

annualized

premium

multiplied

by half of

the policy

term single

premium:

125% of the

single

premium

amount

Top up

premium Rs.1000 Rs.5000 - Rs.2000 -

free look

period 15 days 15 days 15 days 15 days 15 days

policy

administrati

on charges

Rs. 60/- per

month

during the

first policy

year, Rs

20/- per

month

during the

second year

and

thereafter,

from the

third year

on wards till

the end of

the policy

term Rs.

20/- per

month

escalating at

3% p.a.

shall be

levied

Rs. 52.50

per month

inflating at

5% p.a. will

be deducted

at each

monthly

anniversary

by

cancellation

of units.

There would

be a fixed

administration

charges of

rs.60 per

month

Rs.60/-

then after

in first day

of policy

month after

1st April of

every year

@ of 2%

grows.

regular

premium: Rs.40 per

month,

limited

premium policies(dur

ing

premium

payment

term): Rs.

40 per

month,

limited

premium policies(afte

r premium

payment

term): Rs.

35 per

month,

single

premium: Rs.35 per

month

free

switches

4 in every

policy year Unlimited

4 in every

policy year

4 in every

policy year

4 in every

policy year

min. switch

charges

Rs.100 per

switch NIL Rs.2000 Rs.10000

Rs. 100 per

switch

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Rider

benefits

No rider

benefits

UL

accelerated

critical

illness rider,

accidental

permanent

total/ partial

disability

benefit rider,

Income

benefit rider,

accident and

disability

benefit rider,

waiver of

premium rider

Accidental

death and

permanent

disability

rider,

critical

illness rider

Accidental

death and

permanent

disability

rider,

critical

illness rider

Other

benefits

Death

benefit,

maturity

benefits

Surrender

benefit,

maturity

benefit,

death benefit

Death benefit,

maturity

benefit

Death

benefit

Death

benefit,

maturity

benefit

life assured Child Child Parent Parent Parent

beneficiary child Child/

family Child Child Child

Comparison of Unit Linked Pension Plans

CRITERIA LIC

BAJAJ

ALLIANZ

LIFE

INSURAN

CE

CO.LTD.

ICICI

PRUDENT

IAL LIFE

INSURAN

CE CO.

LTD.

SBI LIFE

INSURANCE

CO. LTD.

RELIAN

CE LIFE

INSURA

NCE

CO.

LTD.

Plan name Future plus

Retiremen

t

advantage

Life time

super

pension

1)Horizon ii

pension 2)

unit plus II

pension

Golden

years

plan

value

min age of

entry 18 years 18 years 18 years 18 years 18 years

max age of

entry 65 years 65 years 65 years 60 years 59 years

min vesting

age 40 years 40 years 45 years 50 years 45 years

max vesting

age 75 years 80 years 75 years 70 years 64 years

min premium

paying term 10 years 5 years 10 years 5 years 5 years

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min premium

Rs. 5000 p.a.

in regular

premium. RS.10000

p.a. in single

premium

Rs. 30000

p.a.

Rs. 10000

per annum

In horizon II

rs.12000 p.a.

in unit plus II Rs. 24000 p.a.

Rs.10000

p.a.

Premium

mode

yearly/ half

yearly

yearly/ half

yearly/

quarterly/

monthly

yearly/ half

yearly/

monthly

yearly/ half

yearly/

quarterly/

monthly

yearly/

half

yearly/

quarterly/

monthly

sum assured

Single

premium-

Equal to the

Single

Premium

Regular

premium-5

to 20

(integer)

times of the

annualized

premium as

per the

option

exercised by

the proposer

-

sum assured

is annual

premium

multiplied

by policy

term

age group 18-

35 yrs.:5 times

in horizon II &

125% in unit

plus II the

first

annualized

premium

subject to

maximize SA

of rs.10 lakhs

age group 36-

45 yrs.:5 times

in horizon II &

125% in unit

plus II the first

annualized

premium

subject to

maximize SA

of rs.5 lakhs

age group 46-

60 : fixed

rs.1.2 lakhs in

horizon II &

125% in unit

plus II

Minimum

sum

assured:

Rs.

25000

maximu

m sum

assured:

no limit

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Policy

administratio

n charges

No charges

For the first

year Rs.

560 p.a. if

policy term

14 years &

lossless &

Rs.720p.a.

if policy

term 15

years &

more

charge will

inflate

every year

at 5%p.a.

Fixed of Rs.

40 per

month

Monthly

administrative

charges are

fixed to Rs.

70/-.these

charges are

increased @

2%p.a.

No

charges

annual fund

management

charge

bond fund &

income

fund-1%,

balanced

fund-1.25%,

growth fund-

1.50%

1.35%p.a

of NAV for

equity

growth

pension

fund, mid-

cap pension

fund &

pure stock

pension

fund.

1.25% of

NAV for

equity

Index

Pension

fund II &

Asset

allocation

pension

fund.

0.95%p.a.

of NAV for

bond

pension

fund and

0.95% p.a.

of the

NAV for

liquid

pension

fund

Pension

flexi growth

II, pension

multiplier II,

pension

return

guarantee

fund: 1.50%

p.a., Pension

balancer II,

pension

flexi

balancer II:

1.00% p.a.,

pension

protector II,

pension

preserver:

0.75%.

Equity pension

fund-1.5%,

bond pension

fund -1%,

money market

pension fund-

0.25%,

growth

pension

fund:1.35%,

balanced

pension fund:

1.25%

capital

structure:

1.50% ,

balanced

fund:

1.50%,

growth

fund:

1.75%,

equity

fund:1.75

%

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Surrender

charges 2.50%

First 3

year: NIL.

year 4 :

15%

year 5 : 5%

year 5

onwards:

NIL

First 3

year: NIL.

year 4 : 4%

year 5 : 2%

year 5

onwards:

NIL

year 4-

year10:1% of

fund value

year 11

onwards: NIL

first 3

years:

NIL 4th

year:

10%, 5th

year: 5%, 6th

onwards:

NIL

Rider

benefits

Accident,

critical

illness

benefit

Not

available

Accident

death and

disability

rider, waiver

of premium

Horizon II: not available,

unit plus II

pension: accident death

and accident

total

permanent

disability

rider, critical

illness rider,

Accident

death,

total

permanen

t

disability

rider

Other

benefits

Death

benefit,

maturity

benefits

Death

benefit,

immediate

annuity

options,

surrender

benefit

Death

benefit,

cover

continuance

option

Horizon II: Tax advantage,

retirement

benefit, death

benefit

unit plus II

pension: death

benefit, option

to continue the

policy with

life cover

Open

market

option,

death

benefit

free switches 4 switches Unlimited 4 switches

plus II

pension- 4

switches

1 switch

Switch

charges

Rs. 100 per

switch NA

Rs. 100 per

switch

Rs.100per

switch

1% of

amount

switched

free look

period 15 days 15 days 15 days 15 days 15 days

min top up

amount Rs. 1000 Rs. 5000 Rs.2000

in horizon II-

Rs.1000 , in

unit plus II:

Rs. 5000

Rs. 2500.

Interpretation of Comparison

Out of above comparison we can understand that there is no much difference in general in

same kind of funds. The most important aspect for decision making is security and return

generated by Investment companies. Even costs related to ULIPs are near about same. Hence

it is important to analyse the risk-return relationship. But risk-return analysis is not a part of

- 12 -

the scope of this study, hence it is not done here. But in future some can do the same, which

could be useful for investor to take investment decision through ULIPs.

ULIP and Mutual Fund

Conceptually, in terms of the structure of the product, there is very little difference between a

Mutual Fund Scheme and ULIP schemes without risk coverage. Both these are market linked

for returns, carries the market risk and in both these options investor get returns based on the

performance of the stocks selected and invested by the fund manager who manages the MF

scheme or the ULIP scheme.But though they are similarities they are different from each

other in following ways.

o The way the products are managed and more importantly regulated varies significantly. MF is regulated by SEBI while ULIPs are regulated by IRDA.

o As an Industry, MF looks at low cost, better performance as its USP, while Insurance looks at distribution reach as their USP.

o Mutual Funds are generally sold by 'agents who distribute various AMCs products' while Insurance is sold by Agents who are tied to one single Insurance Company (except

insurance brokers who are far less in number when compared to tied agents). This is a

major factor to be considered as a tied agent tends to understand and position only the

products of his principal insurance company, while a un tied agent of Mutual Fund is

expected to be performance oriented in terms of choosing a fund when his fees is

dependent in todays context on the satisfaction of the investor.

o The transparency requirements of a Mutual Fund are far more stringent than the ULIPs. Daily NAV, Portfolio Disclosure etc which are followed in the MF industry is far higher

thus providing necessary information to the investor.

o Typically, the cost investing in MF is far lesser than that of a general ULIP scheme

o The liquidity available in MF scheme (other than close ended schemes) is not available in the ULIP scheme.

o The ULIP scheme, comes with a commitment to save and pay the premium in the future years, which can make a person 'committed' which is not the case with MF, where it is in

the investors wish to save and invest further.

Conclusion

Life Insurance sector is continuously growing sector and still in India large number of people

are not insured and this sector has good potential to grow. As continuous increasing

contribution of service sector in GDP growth of Insurance Sector will play its crucial role in

future for the development of Indian economy. In insurance industry well defined guidelines

about ULIPs and increasing rationality decision making of investor increases the chances of

development of ULIPs over traditional insurance plans. ULIP serves all the benefits of MF,

but at higher cost. But at the same time ULIP also serves one of the important purposes of an

investor i.e. Insurance financial support in future in case of casualty to investors life, which provides it an edge over MF.

- 13 -

References:

1. Insurance Regulatory and Development Authority, LIFE INSURANCE PRODUCTS-

Guidelines for Unit Linked Life Insurance Products, CIRCULAR NO:

032/IRDA/Actl/Dec-200, December 21, 2005

2. Silender Singh, Satpal, Customer Satisfaction in Life Policies, Southern Economist, Volume Number 13, November 1, 2009

3. Karuna K, Relevance of ULIPs as a Good Investment Tool Insurance, Chronicle, The Icfai University press, May 2009 (www.iupindia.org)

4. Pa. Keerthi, R. Vijayalakshmi, A Comparitive Study On The Perception Level of The Services Offered by LIC and ICICI Prudential, Indian Jounal of Marketing, new Delhi, Volume XXXIX, Number 8, August 2009.

5. Phalguna Jandhya, G. Naga Shridhar, ULIPs likely to be cheaper by 10-15 pc IRDA cuts solvency margin by 20 bps, Business Line, Business Daily from THE HINDU group of publications, Friday, Jan 02, 2009.

6. Tanvi Varma, Insurance may not be a regularly recommended instrument for the measly returns that it has offered in the past. But with ULIPs this perception could change, Out Look, Money, Jan 15, 2006

7. Sunil Dhawan, Tax relief: Here's what suits you best, Outlook Money, February 04, 2009

8. C. John Williams, A Comparative Study and Analysis of Unit Linked Insurance Plans (ULIPs)-An IDBI FORTIS Perspective, A Project Report submitted to ICFAI Business School Hyderabad, May 16, 2009

9. India: The Next Insurance Giant, http://www.indiaprwire.com/pressrelease/insurance/200805079347.htm

10. Financial Intermediation and Market, Economic Survey 2009-10 [http://indiabudget.nic.in/es2009-10/chapt2010/chapter05.pdf]

Websites Visited

www.licindia.com

www.iciciprulife.com

www.bajajallianzlife.com

www.sbilife.com

www.reliancelife.com

www.economywatch.com

www.bestinsuranceguides.com

www.iba.ie.com

www.irdaindia.com

www.esortment.com

www.bimadeals.com

www.business.rediff.com

Various Brosures of Insurance Plans of various life insurance companies