The turf war among regulators will result in better, standardised and cheaper products. But life insurers will be pinched with their break-even plans taking a back seat.
From Wednesday, life insurance companies will enter a new phase. The new regime is a fallout of the turf war between insurance and market regulators over unit-linked insurance plans (Ulips) mimicking mutual fund schemes.From now, anyone buying a Ulip will be subjected to lesser charges, but will be forced to buy a higher level of insurance.
A fallout of the cap on charges is that products will be more standardised with most companies offering two to three Ulip schemes as against half-a-dozen plans earlier. According to life insurers, investment performance, service, brand, product design and agents' training would be the key differentiators.
For life insurance companies, the outlook is bleak in the short term. These new pricing norms would have adverse effects on mediumterm growth outlook as well as new business margin – future profits from policies that have been sold – of private companies.
Given the pressure on margins, insurers will need to restructure distribution model and improve key performance metrics such as persistency ratio for break-evens. The expansion plans of insurance companies will also be on hold.
Products
There will be tremendous change in the product-mix of insurance companies. Life insurance companies have registered around 75 new unit-linked insurance plans with the regulator. Unlike in the past when companies cashed in new fund offer by launching new schemes, standardisation is now the buzzword in the Ulip space.
Earlier, all the companies had almost 5-10 Ulip products. But now, each insurance company would offer basic two-three Ulips, providing fewer options to the customers, at least in the short run.
SBI Life, which had eight unit-linked products, would have only four in their Ulip basket, including a standard plan, guaranteed NAV plan, pension plan and a child plan. Max New York Life and Kotak Life insurance have only filed for child and standard Ulips.
Insurance companies that had 80% of their business coming from linked business will now be focusing more on traditional products. The product mix of Ulip vs non-Ulip, which was almost 70:30 for most insurance companies, is now being reduced to 50:50.
With the regulator capping the charges on a yearly basis, insurers are left with not many options. Tweaking of products has become very difficult. Most Ulips will be similar to one another, particularly in terms of charge structure and product features.
Returns
Though insurers may be unhappy, for investors the products will be much more attractive now. Customer interest is expected to be better served, as charges will reduce and returns will increase, as the amount of funds invested is likely to go up.
The key differentiator for investors would now be the brand value of the company, innovative investment options (funds) offered as well as the investment performance of these funds. Another important element for investors to pick a particular product will be the service provided by the companies.
Insurers will now have to be on their toes to hear out their customer and help immediately. It is also likely that most companies will restrict the premium payment modes to annual and half-yearly, reckons Andrew Cartwright, chief actuary, Kotak Life insurance.
Earlier, the Insurance Regulatory and Development Authority (Irda) had announced a cap of 300 basis points on the difference between gross returns (returns had there been no charges) and net returns (what the policyholder gets after charges).
However, some companies worked around this requirement by announcing a maturity bonus. This was seen as a gimmick because the insurers continued to charge high cost and averaged it by giving some additional units.
Also maturity bonus would not be paid in policies that are prematurely withdrawn, which were quite high for Ulips. Now, with yearly cap, loyalty additions and maturity benefits have become unaffordable for insurers.
The Impact
Most of the insurers are of the view that the decrease in the discontinuance charges (surrender charge) might cause an increase in the churning of policies. Insurance regulator Irda has reduced the discontinuation charge from 20-50% of the annualised premium to 4-6% of annualised premium only with an absolute money cap on it.
Earlier, high surrender cost was a discouraging factor for investors, they would think twice before surrendering a policy. Current charges are rather provocative.
"The reduction in surrender charges has made it easy and profitable for clients to lapse the policy. It provides better value to those who leave early, while those who invest for long term get similar returns as they would get under old Ulips," says an industry expert who request anonymity.
Though churning has become cheaper, it would still be beneficial for investors to stay invested for long, otherwise life coverage will come at a higher cost.
The Bottomline
The new guidelines have adverse impact on the profitability of insurance companies. The current cap on charges has not left much space for the insurers to breathe easy. It has made making money a lot tighter.
Companies need to bring in more capital, as the working capital requirement has increased with the introduction of new guidelines. Most of the companies looking out for the break-even in 2011-12 will face difficulty in achieving this.
"There will be some impact on our profitability in the short term or for first three-four months, but everything would be manageable in the long term," says Amitabh Chaudhary, CEO & MD, HDFC Standard Life Insurance.
To avoid negative margins companies have to reduce their costs up to 30-40%, which may require rationalisation of branches and cutting down headcount so to manage things.
Rajesh Sud, CEO & MD, Max New York Life, says we will have to review the overall business model in light of the price control that has been imposed. This could reduce the initial investments we were making in increasing our reach through offices."
So, in all spheres, investors should be satisfied as the new insurance products coming to the market will be quite investor-friendly. For the insurance companies, there is a tough road ahead for profit-making. However, the insurance industry still has a lot of potential. Companies need to draw a longer-term road map for progress in a planned and timely manner.
Source: http://www.peerpower.com/et/2176/Born-again-Ulips-Bigger-Better-/
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