Curtains on highest NAV guarantee cover plans

In a move that may further dent sales of unit-linked life insurance plans (Ulips), the Insurance Regulatory and Development Authority (Irda) is set to scrap the highest Net Asset Value (NAV) guarantee products.

Highest NAV guarantee products accounted for a fifth of Ulip sales after pension plan sales dried up following the stringent norms on Ulips from September 2010. Under the highest NAV guarantee products, customers are guaranteed returns based on the highest NAV a policy has achieved during the entire term of the insurance plan.

According to insurance industry sources, the insurance regulator is wary of a “systemic risk” associated with the way the funds are managed. Such products lay more emphasis on debt instruments and run the risk of a heavy sell-off in equities in case of a stock market fall.

CHANGE OF COURSE

* Notification by month-end

* Irda not renewing any such products

* Irda won’t approve new schemes based on highest NAV guarantee

* Highest NAV products comprise 20% Ulip sales

* MF players not allowed to have such schemes

Leading private insurers like ICICI Prudential Life, HDFC Life, Bajaj Allianz Life and Birla Sun Life all have at least one such product still in the market, but it is very unlikely that any new ones would be launched. The insurance regulator is neither renewing any existing products nor approving any new products. The markets regulator, Securities and Exchange Board of India, does not allow mutual fund houses to sell such products. Life Insurance Corporation of India (LIC) had launched two products — Wealth Plus and Samridhi Plus — which ensured returns based on the highest NAV. However, both have been withdrawn.

The insurance regulator is not comfortable with the way these products are being pitched to customers. According to industry experts, these products are not expected to do as well as simple equity oriented schemes, since insurers tend to invest substantial amounts in debt.

In addition to these, insurers are also charging an additional “guarantee charge” in these products, which ranges between 0.10-0.50 per cent of the fund value.

Over the last one year, all major life insurance companies launched highest NAV guarantee products and some of the companies also came up with more than one version.

The Life Insurance Council is also examining the issue with insurance companies and is likely to take up the matter with the regulator.

Term Insurance v/s ULIPs

Term insurance plans and unit-linked insurance plans (Ulips) are two completely different products and, therefore, cannot be compared. While, term insurance plans cover the life risk of the policyholder, Ulips are predominantly investment products laced with life risk cover. Term insurance plans are suggested over Ulips is that they are focused on risk cover which is the prime objective of opting for insurance policies. Also, since premiums in term insurance plans are low, one can go in for adequate amount of cover for relatively lower premium costs.

Source: ValueResearchOnline

New guidelines hit ULIP sales

THE recently issued guidelines to regulate the unit linked insurance policies (ULIPs) are expected to slowdown its sales and impact the overall insurance sector’s growth during the current financial year 2010-11, according to Insurance Regulatory and Development Authority (IRDA).

The industry grew at about 23 per cent during the financial year 2009-10.

ULIPs contribute about 80 per cent of the total premium collections made by private insurance firms. According to the data compiled by IRDA, first-year premium income of life insurance companies fell 20.4 per cent on year to `97.09 billion in December, 2010. While private life insurance companies’ collections fell 21.7 per cent, public sector Life Insurance Corporation of India’s collections declined 19.7 per cent.

First year premium collections indicate the quantum of new business generated by hte insurance companies. In September, 2010 the insurance regulator issued guidelines and asked private players to redesign products besides reducing costs.