| When it comes to Ulips, it appears that there are | | | | policyholders wanting to terminate Ulips after |
| no shades of grey: you either love them or hate | | | | three years because they believed three years |
| them. To put it in black and white, the industry | | | | was its tenure. That's why advice is important. |
| and potential purchasers love them, and most of | | | | Investors must understand their own profile to |
| the people who have them tend to hate them. | | | | make the most of products that are meant to |
| Accusations of mis-selling and hard-selling are | | | | address a financial goal or need. We are a very |
| hurled at the industry. Most investors admit that | | | | strongly regulated market. The stringent solvency |
| they don't understand how it works, but they | | | | margins ensure that the consumer's interest is |
| keep buying Ulips more than any other insurance | | | | foremost for us. |
| product. Hence, all kinds of records are being | | | | Devendra Nevgi, CEO & CIO, Quantum, |
| broken: there is an unprecedented growth in the | | | | AMC"We specially advertised that a fund we |
| number of Ulips sold and in the collection of | | | | launched wasn't for those looking for short-term |
| premiums. All of this serves to boost the cause | | | | gains." |
| of privatisation. This is why we decided to make | | | | Distributors are largely reponsible for rampant |
| Ulips the subject of the first Money Today Round | | | | mis-selling. They are not advisers and many are |
| Table, held in Mumbai last month. | | | | not qualified because our testing is not stringent. |
| Since a number of investors (existing and | | | | It's easy to lay the onus on investors' lack of |
| prospective) purchase Ulips without knowing much | | | | awareness, but every financial product must |
| about them, we felt it was the job of a magazine | | | | explain its costs and risks. Charges, costs and |
| like ours to give them more information. But what | | | | returns are very important because they indicate |
| are the industry stakeholders insurance firms, | | | | the tangible benefits of a product. Today, I do not |
| distributors and advisers doing about it? | | | | know how much of my money insurers or mutual |
| Surprisingly, many of them, who participated in | | | | funds spend. For instance, on an investment of Rs |
| the discussion, admitted that there was rampant | | | | 100, I get a statement that reflects a balance of |
| mis-selling. But in the same breath they added | | | | Rs 98; it does not tell me where the rest of the |
| that the system had become corrupted and they | | | | money has gone. |
| were only the byproducts of the system . They | | | | Product standardisation is essential for Ulips. There |
| felt that the consumers didn't wish to be | | | | has to be a way to compare performance, |
| (seriously) involved at the time that they bought | | | | something that the mutual fund industry has |
| a financial product. | | | | successfully done. Ulips account for 90% of the |
| When we prodded the experts, they admitted | | | | new business; most probably it is riding a cycle. |
| that agents push potential buyers to opt for Ulips | | | | Such unsustainable growth needs to be checked |
| instead of other insurance products that might | | | | for the good of the industry as well as that of |
| suit the latter better. Even the product | | | | the investors. |
| manufacturers were blamed for not being able to | | | | Ranjeet S Mudholkar, CEO, Financial Planning |
| realise the opaqueness in the manner in which | | | | Standards Board of India"Agents give service not |
| they operated. An additional complication arose | | | | as per rules but to further the interest of the |
| since it is extremely difficult to compare different | | | | companies they represent." |
| Ulip products. Many said that even the insurance | | | | Almost everyone is duly diligent about the mobile |
| regulator might be unable to solve the basic | | | | he buys, compares features and finally goes to |
| problems that the industry faces today. | | | | the shop that offers the best discount. But when |
| As a part of the Round Table, we invited six | | | | it comes to buying a financial product, most just |
| industry representatives to brainstorm and discuss | | | | say: I signed the document at the marked points. |
| where the Ulips were headed, and the problems | | | | I think that as long as the rules are not |
| that confront the industry at present. | | | | compromised and and a product delivers what it |
| The panelists were: Pranav Mishra, senior | | | | promises, it is good. Investors must consider two |
| vicepresident and head (products), ICICI Prudential | | | | important factors: asset allocation and costs |
| Life Insurance, V. Srinivasan, CFO, Bharti AXA Life | | | | incurred to get the best allocation. To this end, |
| Insurance, Ajay Bagga, CEO, Lotus India Mutual | | | | Ulips allow the best outcome from a single |
| Fund, Devendra Nevgi, CEO & CIO, Quantum | | | | product. |
| AMC, Jagdish Bhat, principal officer, Ambit | | | | The capital structure of insurance firms is such |
| Insurance Broking & Advisory, and Ranjeet | | | | that they are tightly regulated. We have to |
| S. Mudholkar, CEO of the Financial Planning | | | | maintain stringent solvency margins. As insurance |
| Standards Board of India. Acting as moderator | | | | is a long-term product, there are cost and |
| was R. Krishnamurthy, managing director, Watson | | | | investment calls that we can take, unlike in many |
| Wyatt Insurance Consulting, who kicked off the | | | | mutual funds. The insurance regulator has |
| debate by raising four important aspects | | | | standardised a sales guideline, which stipulates that |
| concerning Ulips product structure, regulatory | | | | the agent must illustrate the product benefit, the |
| issues, distribution and, finally, customer service. | | | | value of investment and take consent from the |
| He thought that the structure of the products | | | | client at the time of the sale. There is a place for |
| was not transparent. There was no point in | | | | both funds and Ulips as long as customers |
| clubbing insurance features with those of | | | | understand what they are getting. |
| investment. Archaic laws led to distribution-related | | | | V Srinivasan, CFO, Bharti AXA Life Insurance"The |
| issues, and the less said about customer service, | | | | impact of upfront charges is lower compared with |
| the better. We present how these | | | | the annual charges of other products." |
| representatives responded to these issues. | | | | An insurance agent is tied to an insurer and so is |
| Excerpts from the debate: | | | | bound to sell its products, which may not serve |
| Pranav Mishra, Senior Vice-President and Head | | | | the purpose of the client. This is a huge stumbling |
| (Products), ICICI Prudential Life Insurance"It's not | | | | block as it discourages agents from selling the |
| just Ulips; even mutual fund investors don't know | | | | best product. |
| what fund they own or why they bought it." | | | | Advice must be unbiased. If it is influenced by the |
| We have a very young population 500 million | | | | company that is represented, it is not advice but |
| below 30 years. Of the 320 million working people, | | | | sale. To a large extent, the certified financial |
| 87% have no retirement pension. That apart, of | | | | planner (CFP) certification takes into account such |
| the 90 million senior citizens, a large chunk has no | | | | lacunae. Irda exempts CFP certificants from |
| pension protection or virtually no retirement plan. | | | | taking the mandated 50-hour training from the |
| Surveys show that Indians plan retirement with | | | | tied insurer which focuses on educating the agent |
| life insurance and bank deposits. Nowhere in the | | | | about their product suite and nothing else. |
| world does this happen. | | | | I appreciate Irda for being a proactive regulator. |
| Worse, people start thinking of retirement very | | | | The new Ulip guidelines issued in December 2005 |
| late in life in their 40s and 50s. The political class | | | | for change in product structure was the first step. |
| has done lasting damage to the nation's investing | | | | In August 2007, it sought greater transparency |
| pool by postponing pension reforms. This is why | | | | with a fixed 6% and 10% on benefit illustration. |
| Ulips have served as a retirement-planning tool for | | | | And in January 2008, the regulator insisted on |
| Indians in the past few years. This has effectively | | | | policy illustration to indicate all charges and the IRR |
| transferred a lot of individual wealth to the | | | | of the product. But the regulator needs more |
| distributors, and it builds their nest eggs instead of | | | | teeth; until such time, agents will continue to |
| that of the customers. | | | | function in the interest of their principal |
| Then comes the issue of agent commission. Till | | | | organisations. |
| recently, there was no transparency or adequate | | | | Jagdish Bhat, Principal Officer, Ambit Insurance |
| disclosures. Changes have to be legislative. The | | | | Broking & Advisory"Some fund agents ask |
| product design should be simple and at least the | | | | clients to churn holdings every 18 months and buy |
| default option should be easy and low-cost. Only | | | | new, similar funds." |
| then should a product be allowed in the public | | | | An intermediary's role is to protect the |
| domain. | | | | consumers' interests. The biggest challenge is to |
| Ajay Bagga, CEO, Lotus India AMC"Of 100 | | | | explain why they must understand their insurance |
| customers, 85 hold their returns, 10 compare it | | | | needs before looking for a product. Often, I come |
| with the benchmark and only 5 compare it with | | | | across a consumer who wants a specific product |
| peers." | | | | from a specific company. The reason: a friend |
| Banks and mutual funds were the first to gain | | | | made good money from it. That this person is 40 |
| from liberalisation, with insurance companies | | | | and his friend is 25 and that they both have |
| setting up operations seven-eight years ago. Over | | | | completely different financial needs and risk |
| the past 15 years, consumers have evolved and | | | | profiles is not considered. |
| adapted to the financial products launched in this | | | | The primary reason for life insurance is protection, |
| period. The shift from NSC and PPF-like products | | | | for which term plans are best. But when a |
| to mutual funds is good. But investors are still | | | | consumer figures that he gets nothing in return |
| unaware of their risk appetites, and the benefits | | | | from the premiums, he loses interest in them. |
| and limitations of financial products. All | | | | Ulips were conceived to combine protection with |
| organisations, banks, fund houses, wealth | | | | investment. They are transparent and regulated, |
| managers, brokers, even insurers, try to educate | | | | so there's uniformity in charges. As a product |
| consumers. | | | | category, insurance was the first (and the only) |
| Our entire distribution service is a pure transaction | | | | to offer a free-look period, wherein one can |
| model and it often happens that a consumer is | | | | return a policy within a month if he realises it is |
| sold a product that he later realises was not what | | | | unsuitable. This checks mis-selling to a large |
| he wanted. There have been instances of | | | | extent. |