In the recent past, while the Insurance Regulatory and Development Authority of India (IRDA) has adopted strict vigil to regulate the insurance industry, their seem to be some lacuna left unattended to, which is enabling insurance companies to derive some abnormal benefits.
After cracking the whip on the Unit Linked Insurance Plans (ULIPs) for the charges they earlier levied, insurers are now busy promoting traditional insurance policies, as their isn’t any cap on charges / expenses of such policies. Hence, by doing so they (insurers) are capitalising on the arbitrage available in the charges levied under traditional insurance policies and ULIPs.
It is noteworthy that a policyholder’s expense in ULIPs (which invest mostly in capital markets) is capped at 4.0% of the net and gross yields, depending on the term of the policy. Moreover, the IRDA has categorically imposed a cap on:
- Policy administration charges
- Allocation charges
- Surrender charges
- Mortality charges
- Fund management charge
But interestingly there is no such cap on the traditional insurance policies, even as the finance ministry wants IRDA to close the expense gap between ULIPs and traditional insurance policies.
Insurance agent too have changed their focus and prefer to sell traditional insurance policies, after the regulatory overhaul in ULIPs have shrunk their commissions in ULIPs (from 15.0% to 7.5%). And thus today, insurance companies get nearly 80% of their income from sale of traditional or non-linked policies.
We are of the view that, the IRDA should soon bridge the gap between the charges levied for the policyholders in traditional insurance plans and ULIPs, before rampant mis-selling occurs and policyholders feel betrayed with inappropriate products being pushed. Although the insurers may cry foul over the profitability of business, we think that IRDA should prudently regulate the industry in the interest of policyholders, and not permit lacunas to persist.