ULIPs need more reform

It is welcome news that the government has intervened, albeit belatedly, in the turf war between regulators to grant the insurance regulator full powers to oversee unit-linked insurance plans (ULIPs). The ordinance amends a range of securities laws, putting to rest the debate on whether ULIPs need to come under the market regulator's oversight. However, having won the mandate to regulate ULIPs, the Insurance Regulatory and Development Authority (IRDA) now needs to address the multiple investor protection concerns raised in the heated public debate on ULIPs these last few months.

IRDA has been tweaking its ULIP guidelines on a piecemeal basis to address some of these issues. It has made life cover mandatory on all market-linked plans, extended lock-in periods from three to five years and asked insurance agents to disclose their commissions to investors. However, these measures, dealing mainly with the product's structure, are simply not enough. In the best interests of investors, IRDA should raise the bar on the disclosure and marketing practices of ULIPs, which seem to lag behind other market instruments such as mutual funds and equity offers. For one, while mutual funds or equity shares are sold on the strength of a standard offer document filed with the regulator, investors in ULIPs have to rely on product brochures or dense policy documents put out by insurers, which are strewn with jargon. The recent string of ‘NAV-guarantee' ULIPs that hit the market are instances — they offered reams of information on death benefits, premium allocation and surrender charges on these plans, but left one clueless on how exactly they were going to manage a ‘guaranteed' return from equity-linked portfolios. Specifics on asset allocation pattern and risk profile are crucial for an investor to gauge what he or she is buying, and need to be a part of standard disclosures for ULIPs. Two, if investors are to entrust their savings to the fund management skills of an insurer, it is only fair that they be apprised of the company's previous track record in managing equity money. As of now, while mutual funds are sold on the strength of their performance record, ULIPs merely present a ‘benefit illustration' based on assumed (and unrealistic) rates of return. Three, given that ULIPs lock in investor money for five years, their ongoing disclosures on performance and portfolio need to be of the highest order. Today, for many ULIPs, even basic information on the year-to-date return or portfolio is hard to come by.

All this suggests that IRDA should look at a comprehensive review of its ULIP guidelines as a one-time exercise. Addressing their structural as well as disclosure, transparency and marketing aspects will make ULIPs a more investor-friendly vehicle through which long-term money can be routed into the stock market. The regulator should also make sure that investors, who have entrusted an estimated Rs 2 lakh crore to this segment, reap the benefits of ULIP reforms and enjoy a relatively painless transition.