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Don't mix insurance and investment

Dhirendra Kumar explores the new regulations brought in by SEBI on the last day of 2007 and the new regulation brought in by IRDA on the first day of 2008.

india Updated: Jan 13, 2008 20:14 IST

On the last day of 2007, The Securities and Exchange Board of India (SEBI) brought in new regulations that forbade mutual fund companies from charging load from investors in cases where investments were made directly to the fund company. And on the first day of 2008, another financial services regulator, the Insurance Regulatory and Development Authority (IRDA), also brought in a new regulation that has the potential to bring benefit to the public.



However, the IRDA's action has brought almost no media attention, perhaps because its positive effects will be indirect and are thus not clearly understood. The change is very simple. From February 1, insurance companies will have to inform policyholders buying Unit Linked Insurance Plans (ULIPs) exactly how much of their money is being invested and how much is being consumed by other charges that the insurance company is deducting. The IRDA's circular specifies the exact format in which these charges will be documented, and this document, which will be signed by the ULIP buyer and the insurance seller, will become part of the policy document.



Why is this important and why does it potentially have the power to change the way ULIPs are bought? Simply because ULIPs are being missold (mis-sold being a polite way of saying con job) like no financial product has ever been in this country. In India, ULIPs are a product, which have been cynically designed to maximise profits to insurance agents (or 'advisors' as they are supposed to be called now) and insurance companies while hiding the true numbers from investors. Nominally, a ULIP is a product that combines insurance and investment characteristics. In reality, they combine an extraordinarily high cost structure (meant primarily to feed agent commissions) with a non-standardised revelation of expense so that any meaningful comparison of investment performance between different ULIPs or between ULIPs and mutual funds is impossible. In other investment products, either there are no agent commissions (as in bank FDs) or agent commissions range from 0.25 per cent to 2-3 per cent. In ULIPs however, commissions range from 15 per cent to (hold your breath) around 70 per cent and are typically 25 per cent. And for some bizarre reason, everyone concerned considers this acceptable. On December 31, one financial regulator (SEBI) moved to push commissions down from 2.25 per cent to zero while another (IRDA) is okay with 25 per cent for what is essentially a competing product!



The writer is CEO, Value Research India Pvt Ltd and can be contacted at

dhirendra@valueresearchonline.com