If the Finance Minister's word is anything to go by, insurance companies who were caught in the spat between IRDA and SEBI over regulation of ULIPs could heave a sigh of relief.

Earlier this week, the Finance Minister, Mr Pranab Mukherjee, said the regulatory dispute over unit linked insurance policies would be resolved soon, though he did not elaborate on how or when it would happen.

It was barely two months ago that he had asked IRDA and SEBI to approach the court to get a verdict on who has the right to regulate ULIP – an insurance policy which provides a combination of risk cover and investment.

Now he appears to be singing a different tune. Speaking at a function in Mumbai on Tuesday, he had all the praise for the measures taken by IRDA to modify ULIPs. He said some of the measures like cap on charges, extending the minimum term of the policy to 5 years, making life cover compulsory for pension policies and the plan to fix maximum limits for surrender charges, have brought in the much needed reforms in the ULIPs.

“I am sure that the insurance industry and IRDA would continue to bring in these reforms so that the interests of all stakeholders are secured.”

His change of stance may also be seen from his views on the role played by insurance agents.

“I take this opportunity to commend the role of the intermediaries specially the agents in the insurance industry who have contributed in ensuring that the insurance products reach every nook and corner of the country. With a force of 30 lakh agents, it is a matter of pride that insurance industry is perhaps the only financial service arm that reaches out to all the villages in this country,” he said at the same event in Mumbai.

Until two months ago the Finance Minister was critical of the high commission paid to agents selling financial products. Referring to the ban on mutual funds entry load at a SEBI function in Delhi in April, he had said, “I believe India could set global standards by following a no-load-plus-fee model for the entire financial sector to ensure a fair deal for all market participants. I hope all financial sector regulators would work towards this goal.”

Now the Finance Minister sees a great role for agents selling ULIPs. Of course, IRDA has initiated a slew of measures to make ULIPs more investor friendly. From July 1, agents selling ULIP will have to disclose to the customer the exact amount of commission they will get. (It was alleged that ULIP, an investment product, offers 30-40 per cent first year commission.)

IRDA has also fixed the minimum term of ULIPs to five years, made life cover compulsory for pension funds, and proposed capping surrender charges.

Bone of Contention

ULIP, over which the two regulators at loggerheads, is a life insurance policy which provides a combination of risk cover and investment. SEBI's contention has been that ULIP is more of an investment product rather an insurance policy and therefore, the product falls under its regulatory jurisdiction. This was refuted by IRDA – the regulator for insurance products.

The SEBI-IRDA spat intensified in April after the former banned 14 insurance companies from issuing ULIPs without seeking its prior permission. When the dispute came to a head, the Finance Minister had directed both the regulators to jointly approach an appropriate court to get a legally binding mandate on the issue.

Interestingly, neither of the regulators took the lead to go to court. However, the matter is in the court thanks to the public interest litigations filed by some investors. SEBI had only approached the Supreme Court seeking transfer of all the public interest litigations to one court.

In fact, many in the industry were surprised by the Finance Minister's decision asking regulators to approach the court. As an analyst pointed out, “who will regulate what” is a policy matter, to be decided by the Government, not the court.

Insurance industry circles now believe that The Finance Minister may do something to sort out the issue out of court.

But the fact is that even after the proposed reforms, ULIPs will continue be an investment product, maybe with some more transparency.

Whether SEBI will be satisfied with these changes is something that remains to be seen.

Ref :- http://www.blonnet.com/2010/06/14/stories/2010061452300300.htm