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The controversy regarding control of ULIP between SEBI and IRDA

Before knowing about the genesis of the controversy it is very important to know whatactually the UPIL is.

Ulip is a combination of insurance & investments. Unlike traditional subject to the risk

factors where the risk is borne by the policyholder, the investment risk is related with the

stock markets & accordingly the NAVs of the units go up & down depending upon the funds

performance & the factors affecting the capital market.

ULIPs are broadly similar to the mutual funds, except that they are required to segregate a

certain part of the premium towards the life insurance of the plan holder

y Genesis of the controversy

At present, over 70% of the new business premium for most insurance companies comes from ULIPs,

running into thousands. The genesis of the Sebi order goes back to the feud between MFs and

insurance companies.

When the latter started issuing ULIPs about 5-6 years ago, offered huge commissions to insurance

agents and flooded the market with these products which nearly mirrored mutual fund (MF)

products. ULIPs are products that combine insurance and investment for the insured and are mostly

market-linked.

Between 2005 and 2008, when the stock market was on a bull run, MFs lost business but insurance

companies mopped up large sums of money through ULIPs.

In December 2009 and January 2010, Sebi had issued show cause notices to 14 insurance companies

asking them why action should not be initiated against them for issuing investment products without

Sebis permission.

Then IRDA asked all the 14 companies to continue with their business as usual, "notwithstanding the

order of Sebi. "The IRDA.. is satisfied that the order of Sebi...will bring the insurance industry to astandstill which would not be in public interest and would be detrimental to the interests of the

policyholders and prejudicial to the interests of the insurers," the mail noted. Hence, IRDA "directed

to note" all the insurance companies that "they shall continue to carry out insurance business as

usual including offering, marketing and servicing ULIPs in accordance with the Insurance Act, 1938,

Rules, Regulations and Guidelines issued there under by the IRDA."

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Four days later, Sebi modified its order and exempted all existing ULIPs from the ban but maintained

that its prior permission was mandatory for issuing new ULIPs.

Then SEBI and IRDA moved to Supreme court to get regulatory control of ULIPs.

y Argument for and against giving control with SEBI, IRDA or both

Argument for SEBI

One of the main contentions for Sebi was that although a ULIP is an insurance product

which comes under IRDA, part of it is also an investment product which should ideally be

regulated by Sebi

ULIPs have been in news for all the wrong reasons for a very long time because of mis-selling

(promising of returns, selling it as a short term investment) by agents especially because of the factthat agents are not receiving commission on the sale of mutual fund products.Also there is very little

transparency on the cost-allocation affecting returns for the investors. IRDA has been working

towards making this product more transparent but not to the satisfaction of the investor

community.On the other hand, Sebi has done a good job on regulating mutual funds so Sebi's

move to regulate ULIPs may be a blessing in disguise for ULIP investors.

Sebi is of the opinion that because as ULIP has an investment component, it is akin to a mutual

fund investment and hence needs to be regulated and registered with the market regulator. The

Sebi Act clearly states that any product with exposure to the securities market comes under its

purview and ULIP has exposure to the securities market.

Argument for IRDA

y IRDA believes that directive by Sebi will harm the insurance industry, since a significant portion

of life insurance business comes from this product. Investor interest will also get affected as

drying of revenues could disrupt payment of benefits on maturity, death, etc.

y Ulips globally are managed by insurance regulators.

y Besides, insurance laws permit companies to sell an investment component along with

insurance. After all, LIC has been doing so for years only difference being ULIPs have stock

market risk which is borne by the buyer and not the insurance company

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y Decision of government

y Your own views and reasons for the same

Generally there should be a super regulator formed to sort out all the issue regarding hybrid product

like ULIPs.

But in this case the ULIPs should be remaining in purview of IRDA because:

y In all the other countries ULIPs are under the control of insurance regulators.

y In India more than 50% of the insurance product sold is ULIPs.

y Other insurance product gets more than 85% of fund from ULIPs, so decision in

favour of SEBI would drastically affect insurance industry.

y Basically the main purpose of ULIPs is to provide life cover for the insurer so it

should be looked as a insurance product.

But the IRDA should enforce some transparency on part of ULIP issuing company regarding the

investment made by the ULIP fund.