This article was written by Personalfn for Business India, and was carried in its July 16, 2006 issue with the title, “Be more transparent”. The original draft, in its entirety, has been retained here.

Traditionally, life insurance products have usually been considered as ‘safe’ investment options, which also offer a life cover. However, since unit linked insurance plans (ULIPs) burst onto the scene a few years ago, the rules and definitions of life insurance have undergone a sea change. The popularity of ULIPs can also be attributed partly to the scrapping of ‘assured return’ insurance schemes and falling interest rates which rendered conventional products like endowment plans unattractive. At Personalfn however, we feel that individuals need to understand ULIPs a lot better before they make a decision to invest in it.

Simply put, depending on their mandate, ULIPs can invest in the stock and debt markets in varying proportions. How a ULIP can invest its money is laid down by the insurer in the product literature. A few life insurance companies also declare their ULIP portfolios on a regular basis, which reveal the stock and debt holdings across their ULIP products. However, given the disparities in ULIP portfolio disclosures, we believe the Insurance Regulatory and Development Authority (IRDA) needs to look at various issues related to portfolio disclosure so that individuals can make informed decisions. Given below are our concerns pertaining to ULIP disclosure norms.

1. Declaration of portfolios
With the growing popularity of ULIPs, we decided to analyse ULIP portfolios from across various life insurance companies. However, to our dismay, we found that not many companies make their portfolios available in public domain. While this information may be available to individuals who are ‘insiders’ (i.e. company employees), fact of the matter is that investors have a hard time accessing these portfolios

 It is pertinent that an investment avenue as complex as a ULIP is understood appropriately before making investments in it. With the numerous variations available across products and companies, it becomes necessary that individuals study the portfolios to understand the philosophy adopted by the ULIP in question. Just to cite an example, the portfolio will reveal the quality and nature of companies that form part of the ULIP portfolio. While four insurance companies i.e. ICICI PruLife, Kotak life, HDFC Standard Life and Aviva Life declared their portfolios on their websites, we failed to procure the same for other companies.

2. Lack of consistency across portfolios
While evaluating the ULIP portfolios of life insurance companies, we observed that the presentation of data lacked consistency. For example, relevant data points like the assets under management (AUM) and the benchmark indices were missing for some ULIPs under our scanner. Barring ICICI PruLife, no one declared their AUMs. On the other hand, Aviva had not even mentioned the benchmark index for its ULIP. The AUM becomes relevant in that a higher AUM helps in achieving economies of scale, which in turn, could result in reducing costs like transaction and brokerage. The benchmark on the other hand, serves as a yardstick for understanding how well a ULIP has performed during a given timeframe.

3. Investment mandate
Another important factor is the investment mandate. It is critical for individuals to know the investment mandate of ULIPs before they consider investing in it. For example, our research team noticed that while ULIPs from HDFC Standard Life, Kotak Life and ICICI PruLife invested predominantly in large cap companies, Aviva Life invested liberally in midcaps.

While it is not ‘wrong’ to invest in midcaps, we feel that insurance companies should ideally reveal the investment mandates for their products; this in turn will educate investors about how their investments will be managed. A risk-averse investor may be unwilling to participate in a ULIP that is heavily invested in mid cap stocks. Mid cap stocks tend to be high risk high return investment propositions vis-à-vis their large cap peers. We believe that ULIPs should have an explicit investment mandate. For example Bajaj Allianz clearly states that one of their ULIP options can invest in companies in the mid cap segment. At least the individual knows what he is getting into while buying life insurance.

4. Standard format
Another problem we faced while analysing ULIPs was the manner in which the data was presented. For example, while most ULIP portfolios declared their holdings alongwith the percentages held in each individual stock, MetLife in their quarterly portfolio update chose to declare only the names of stocks invested in without any information on how much it had invested in each stock. Another observation was that the benchmarks were not made available alongside the ULIP portfolios under review - we had to ‘hunt’ for them. ULIPs should ideally give out a consolidated portfolio that contains all the relevant information and data points like net assets, benchmarks, past performance among others in one place.

ULIPs can take a leaf out of the books of mutual funds. Mutual funds have a guideline, which requires them to declare their portfolios (‘fact sheets’ in mutual fund industry parlance) once every quarter. Most mutual fund houses on their part however, declare their portfolios on a monthly basis. They also display the portfolios on their company websites. This helps the investing community in understanding the investments better and take an informed decision.

Unfortunately, insurance companies haven’t been proactive as far as declaration of portfolios is concerned. In fact, at the time of writing this article (June 23, 2006), HDFC Standard Life still had the April 2006 portfolio on their website while in case of Aviva, there was no sign of a portfolio beyond the one declared for March 2006. While the IRDA needs to be commended for its efforts to modify the basic structure of ULIP products, it’s time the authority took steps to ensure that sufficient guidelines for the declaration of ULIP portfolios are in place and that information is made easily available to the retail investor.

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