Like many investment analysts, I firmly believe that in their current form, ULIPs are harmful for the investors’ financial health. However, I also believe that ULIPs are bad for the insurance industry, too.
Over a short-term, ULIPs provide the insurance companies and their agents with a wonderful flow of revenues. However, this product class has fundamentally converted the industry into one of subterfuge, whose financial well-being actively depends on NOT providing the very service that they claim to be providing.
It’s not just that selling investment products is lucrative for insurers. It’s that providing as little life cover as
possible is actually beneficial for them.
Here’s why. For every rupee of life cover that is underwritten by an insurance company, it has to have a certain amount of capital that its promoters have to invest in the business. Like many other financial businesses, regulations enforce a certain capital adequacy that has to be maintained. This is the biggest constraint in growing the insurance business.
The exact capital required depends on many factors and is different for different products. However, it’s much higher for offering life cover and for guaranteed products than for market-linked products.
This means that when an insurance company’s sales and marketing machinery has convinced you to put in X amount of money in his company’s products, then it is in the economic interest of the insurance company to ensure that as little as possible of that money goes towards life cover and as much as possible towards market-linked investments.
And that’s the explanation for a bulk of the “mis-selling” that customers report. Some of those who complain assume that the agent is the one who is misguiding them. However, this is not true. Agents’ behaviour and preferences are driven by insurance companies’ guidance and by the commissions paid on various products.
Insurance companies don’t want to sell real insurance. Instead, they want to sell investment products. They just dress up these investment products as insurance by adding a small percentage of insurance.
The business logic of what the insurance companies are doing is inexorable. If the same machinery is allowed to sell life cover and market-linked investments, then it will always sell as little life cover as it can get away with.
And that’s the real issue that is getting obscured. Which regulator regulates ULIPs is the least important problem. What really matters is that in a country with practically no social security, insurance is a critical need for crores of Indians. Insurance that actually is insurance, as in the money that a family gets for food and rent and education when the breadwinner dies.
What you are getting instead is an industry designed -— by regulations -— to actually de-emphasise life cover. And by the simple expedient of calling investments insurance, you get statistics that paint a fake picture of how well-insured the ordinary Indian is.