Last week, the Insurance Regulatory and Development Authority (IRDA) brought in new rules on Unit-Linked Insurance Plans (ULIPs) offered by insurance companies. ULIPs have been widely criticised (frequently in this column) for charging high costs and paying very high commissions to insurance sales agents. The new rules have two parts—a limit on costs and increased transparency. The cost controls mandate that the difference between the ‘gross yield’ and the ‘net yield’ of ULIPs should not exceed 3 per cent for terms shorter than 10 years and 2.25 per cent for longer.
I would love to be able to say that this cost reduction is welcome, but unfortunately, there are too many questions whose answers are needed before that can be said. After reading the IRDA’s circular and scouring the Websites of IRDA and insurance firms, I can’t find clear answers to some basic questions.
* Had the IRDA mandated an earlier, higher limit for the gap between gross and net yield? Or had it left the insurance
companies free to charge as much as they pleased?
* On an industry-wide basis, what is the actual gap between gross and net yield now?
* Is this 3 and 2.25 per cent a huge reduction, a small reduction or is it actually no reduction at all for some products?
There are laudatory headlines about the IRDA cracking down and making insurance cheaper but there’s zero public information or evidence on key details. How much are real customers actually paying? The real problem with the insurance industry is actually not high costs but the poor quality of disclosures.
Customers don’t know what’s going on. Only a small fraction are able to figure out what is happening to their money.
IRDA’s new rules have moved us somewhat closer to that goal, but a lot more has to be done. For example, it is strange that the most significant improvement in the disclosure has only been done to the statement that the policyholder will receive at maturity. So if your 15-year policy starts now, you have to wait only till 2024 to know the full details of what the insurer did with your money in 2009.
Perhaps the government should start a ‘re-education’ school run by SEBI and RBI, and send the IRDA brass to attend courses on how real regulators work.