The Securities and Exchange Board of India has at last discovered, what many knew for years, that unit linked insurance plans (ULIPs) are similar in structure to mutual fund products. One of the arguments being advanced to prove this discovery is that the premium charged for life cover under a ULIP constitutes only two per cent of the total premium (Para 14 of its order dated April 9). What the SEBI does not seem to know is that this is the practice under all insurance plans, both traditional and unit linked, except under pure term assurance plans. The insurance component increases along with age at entry and policy term.
Similar, not identical
The SEBI order also shows that an extreme step has been initiated without fully studying the basic difference between traditional and unit linked plans. A traditional plan of insurance has three components — risk cover, assured benefits and discretionary benefits. For example, for a stipulated annual premium, the insurer may assure that an amount of Rs. 2 lakh plus bonus will be paid on death of the life assured before the date of maturity and Rs. 1 lakh plus bonus on survival up to the date of maturity. Here, the risk cover is Rs. 2 lakh, assured benefit is Rs. 1 lakh and the bonus being declared each year is the discretionary benefit. A bonus, once declared, becomes an assured benefit.
Under unit linked plans, the amount payable on maturity may not be assured or may be assured partly, as ‘not less than a stipulated amount'. The excess of net asset value over the minimum assured amount will be the equivalent of discretionary element (bonus) under traditional plans.
The quantum of bonus under traditional plans is determined each year by the actuary based on the company's performance and will progress smoothly from year to year. Under unit linked plans, the quantum of bonus is determined by market forces and can fluctuate from time to time. Just because the design of the ULIP has similarities with a mutual fund product, it cannot be termed identical to a mutual fund product.
Many mutual funds, in association with insurance companies, provide accident cover, critical illness cover and the like.
No one, including SEBI, ever thought that mutual funds were marketing insurance products in the garb of mutual fund products. The Insurance Regulatory and Development Authority (IRDA) too never complained that such products were not submitted to it for approval.
The controversy between the two regulators is being dubbed a turf war. It is an unnecessary war since the hands of both are already more than full and neither is able to do full justice to its responsibilities.
SEBI's limited role
Look at the way mutual funds are managed. The trustee of a mutual fund holds only an honorary position, with no remuneration and with absolutely no resources. Under Chapter III of the mutual fund regulations, SEBI has defined the duties and responsibilities of trustees in such a way that they can be held responsible for anything and everything that is happening.
When such enormous responsibilities are cast on part time honorary functionaries with no independent resources to carry them out, one would expect officials of SEBI to at least hold periodic meetings with the board of trustees of each mutual fund and discuss their problems. How many such meetings were held by SEBI in the last 10 years? It would be interesting to know.
The SEBI concentrates only on regulatory aspects and takes no active interest in proper development of mutual fund industry. It does not ensure that mutual fund operations are systematically extended to smaller towns/rural areas and more and more individual investors are attracted.
The industry today resembles a school, having only a headmaster and no teachers. Is it not time for a separate authority to regulate and develop mutual funds?
Let these issues be answered first, before the least important issue, namely, the control of ULIPs is taken up.
Areas for action
Everything is for the good, goes the old saying. So also is the precipitate step taken by SEBI. It is a timely warning to the IRDA which, at present, gives an impression of being more concerned with the welfare of shareholders than that of policyholders.
It has to (a) stop approving purely investment plans with just a touch of life insurance, as plans of insurance; (b) place a cap on each type of appropriation made under ULIPs, instead of the ‘overall cap on charges', a methodology so designed as to facilitate easy circumvention; (c) place realistic ceilings on ‘surrender charges' (d) initiate steps to develop a good, stable and trained agency force and stamp out all dubious channels of distribution; (e) try to understand that thousands of crores of rupees are being pumped into the insurance industry only to pay for its overspending and not for meeting any solvency or capital requirements; and (f) strictly implement, before it is too late, the ceilings on expenses as prescribed under the Act, without indulging in indefinite procrastination.
The turf battle between the two regulators need not go to court and can be resolved by taking two simple steps.
Bring the mutual funds under a separate regulatory and development authority (MFRDA) and direct the IRDA to put an end to ULIPs being used as instruments for exploiting the policyholders.