Insurance
How your lapsed ULIPs have fattened life insurance companies

Lapsed ULIP policies have significantly added to insurance companies’ profits. Toxic ULIPs trapped the policyholder between high charges on entry and well as exit while insurers made money. It was a case of damned if you stay with the policy and damned if you went out. Either way, the insurers laughed their way to the banks

In September 2010, the Insurance Regulatory and Development Authority (IRDA) implemented new ULIP (unit linked insurance plan) regulations. It acted ‘tough’ by banning existing ULIPs but did not bring relief to toxic old ULIP policies that are still in force. Either the insured are still paying exorbitant ‘charges’ for no real value given by an insurance company or they have surrendered the policy only to get peanuts. Old ULIPs levied high charges even after completion of three years and/or gave next to nothing for surrendered policies. No wonder the insurer’s profits zoomed with higher number of ULIP surrenders. Nearly 40% of the insurance company’s profits are solely on the loot from policy surrenders. With the bottomlines looking fabulous, it may be IPO (initial public offer) time.

 

Goldman Sachs India’s life insurance report (26 October 2012) has tracked six leading private life insurance companies and states that they have lapsed policy profits of Rs1,553 crore (39%) out of the profit-after-tax (PAT) of Rs 3,952 crore for the fiscal ending March 2012. In the previous year, there was lapsed policy profits of Rs163 crore (68%) out of PAT of Rs242 crore for the same companies. 

 

The ULIP surrender charge as a percent of AUM (assets under management) has been steadily increasing for the insurance companies ranging from 2% in FY10 to nearly 17% in FY12. According to the Goldman Sachs report, “The high surrender charges associated with old ULIPs were one of the key drivers of the profit.”

 

ULIP surrender charges /AUM (%)

FY10

FY11

FY12

Bajaj Allianz Life

7.3

13.3

15.4

HDFC Life

6.1

10.5

8.9

ICICI Pru Life

13

16.9

13.2

Kotak Life

7

12.3

16.9

Max Life

3.6

8.6

10.9

Reliance Life

4.1

10

14.3

SBI Life

2

8.2

12

Source: Goldman Sachs report

 

Traditional surrender charges as a percent of AUM has been low even though traditional products also have steep surrender charges. According to the Goldman Sachs report, “There have been fewer policy surrenders in traditional products, which in our view are due to the way these products are sold.”

 

Traditional surrender charges /AUM (%)

FY10

FY11

FY12

Bajaj Allianz Life

1.5

1.6

3.5

HDFC Life

1.5

1.8

1.3

ICICI Pru Life

1.1

0.6

2.3

Kotak Life

7.6

3.1

5.2

Max Life

2.0

1.9

1.9

Reliance Life

0.5

0.3

0.2

SBI Life

0.6

0.7

1.2

Source: Goldman Sachs report

 

According to the report, “Lapsed profits have accounted for a wide range of 10%-190% of the total profit after tax for companies under coverage in FY12.” Moneylife had contacted the six insurance companies and got varying feedback, insurers with higher lapsed profits played different tune than the ones with least lapsed profits.

 

Insurance company

FY11 PAT

FY11 Lapsed Profits

FY12 PAT

FY12 Lapsed Profits

FY12 lapsed profits / PAT (%)

Bajaj Allianz Life

1,057

367

1,308

480

36.7

HDFC Life

-99

223

97

184

188.3

ICICI Pru Life

807

737

1,384

672

48.6

Kotak Life

102

104

146

117

80.3

Max Life

194

184

459

47

10.2

SBI Life

366

22

555

52

9.4

Source: Goldman Sachs report. PAT and Lapsed profits in Rs crore

 

Bajaj Allianz Life— “Cannot comment as we don’t know from where lapsed profits numbers in the report come from. Our financial statements can be accessed by the public.”

 

HDFC Life —“FY12 PAT is Rs271 crore instead of Rs97 crore as given in the report. It means that lapsed profits as percentage of PAT is 67.89% instead of 188%.”

 

ICICI Pru Life— “Cannot acknowledge or deny the numbers at this time. We take steps to prevent policies from getting lapsed.”

 

Kotak Life—“FY12 PAT is Rs203 crore instead of Rs146 crore as given in the report. It means that lapsed profits as percentage of PAT is 57.63% instead of 80.3%. Moreover, we are unsure of lapsed profit numbers in the report. It is not possible to calculate it for traditional policies. ULIP lapsed profits are also not available, but it is possible to be derived from fund-future-appreciation of the policies that are unlikely to be revived.”

 

Max Life—“Numbers confirmed. Lapsed profits are not in financial statements, but can be derived. While lapsed profits results in a short-term accounting profit at the time of surrender, this does not reveal the full financial impact of surrender. Due to surrenders, life insurers loose future profits. Max Life has the highest conservation ratio of 80% (Jan-Oct 2012) in the industry, even higher than the LIC.”  
 

SBI Life—“Numbers confirmed.”

 

IRDA chairman J Hari Narayan realised the unhealthy trend and had given following comment at an industry seminar. “Insurance company profits should not be driven by lapsed policy profits.” If IRDA can have new regulations (September 2010), protecting the insured for getting back the funds of a discontinued policy after earning bank savings interest rate (4% p.a.) till the lock-in period of five years, why can’t it be made applicable to customers trapped in old ULIPs? Why can’t this be applied to policies sold before September 2010? Why does some old ULIPs levy surrender charge even after having the policy in force for 10 or more years?

 

One Moneylife reader had completed three years of premium payment for Bajaj Allianz New UnitGain ULIP and wanted to surrender. He was deterred by surrender charge formula. [1 - (1/1.06)^N ] * first years’ annualised premium (where N is 10 years, less the elapsed policy duration in years and a fraction thereof). The policyholder finally decided to keep the policy for 10 years as there is no surrender charge after 10 years.

 

In recent times there has been increased number of calls from dubious sources claiming to be insurance company or IRDA representatives. They pitch for the policyholder to surrender the old ULIP and buy new one by giving a fear overdose of the product being discontinued by IRDA. Obviously, someone wants to push the policyholders who are already sitting on an edge to give up on their old ULIP policy. Do not fall into this trap.

 

Read - Are you trapped in toxic ULIPs? Blame IRDA – I

 

Read - Are you trapped in toxic ULIPs? Blame IRDA – II
 

Read - Are your insurance details all in the public?

 

User

COMMENTS

KVRAO

4 years ago

Sir

You have brought out the most excellent information to the notice of the common man. The Life Insurance industry is in one of the most neglected one and after the making it into open the companies always looking into things how to make profit. The concept of profit is not there in Insurance industry. It is only called surplus and profits have to be shared with the policy holders. As an Insurance man I argued with the officials way back in the year 2006 itself. Thanks for enlightening. It is still surprising how the Regulator allowed the insurance companies to charge like this ? It deserves to be sent to CVC and a probe is required to find out the truth?

REPLY

raj

In Reply to KVRAO 4 years ago

thanks for your valid comments

chsrao

4 years ago

accepted

Pankaj Butalia

4 years ago

I am one of the few who has been fighting this - and appreciate what you have written about. Recently I trapped a HDFC life executive who was trying to get me to take out a policy under the guise of helping me out of an old ULIP one in which I was trapped.

This is the link : http://www.livemint.com/Money/38rt7xqAu3...

How meaningful change can come about

We should demand that all government orders with financial implications be made available on the web, complete with record of proceedings with a time limit of seven days allowed to any citizen to appeal. A wrong order can be challenged in court with all the evidence available in public domain. This simple change in Government Business Rules can make a huge impact


Currently, the primary purpose of the government is to (mis) manage trillion-rupee budget for selective advantage of a few. This has become possible by using the executive privilege of secretly (mis) interpreting the law. The government issues orders ostensibly in public interest, but it is not always so. This special privilege to keep files secret and issue orders has attracted the corrupt to the government power.

 

The primary interest of the government is the business of money management. Maintaining law and order, or promoting sports, safety on roads or railways, technology development, exploitation of women by criminal elements, all become distractions to the government’s main thrust of handling trillion rupee cash flows. Only opportunities where cash flows can be used for private benefits get the highest priority.

 

This process is driven by corporations, media management and heavy funding of elections. Criminal elements necessarily find a place in such a set-up. Politics is designed to divide the electorate along caste and creed and with various kinds of appeasement. The purpose is not public interest. The power has to be gained at any cost to control the mammoth cash flow.

 

This has become possible by those innocent-looking file covers—all sworn to secrecy, like in a mafia organisation, in the name of the nation's security and protection of constitution, but abused to subvert public interest. The files remain secret. Orders issued with confidence merrily misinterpreting public policy and rules made under law. Many of those who start by being honest end up as villains of circumstances. Also even when the government does the correct thing, it is viewed with suspicion because the processes are kept secret.

 

In this Right to Information (RTI) is just another sop, to offer sanitised crumbs of information to the barking dogs. Another group of stakeholders are created, who think they are heroes fighting for public cause, but actually playing into the hands of another set up of additional bureaucracy, creating a maze of rules and regulations, as to how to get information. They get lost in appeals and court cases. The government continues in its main activity, having successfully diverted the so-called activists. Further, they are asked by the government to wait for computerisation of processes before the promised transparency in working can be achieved. No time frame for that. The government is not really interested to do that. They will say huge infrastructure is needed and training of personnel, etc.

 

One major symptom of this malaise is the profile of Parliament. Many are charge-sheeted leaders. Rapes and murder charges are quite common. Elections are such that no honest man can hope to win. That is because the corrupt bring in huge sums of funds and liquor, along with bought off opinion makers, local strongmen and convert the state organs of police or civic bodies into villains of circumstance.

 

The stakes are so high in the business of running the government involving trillion rupee returns, that human greed takes over and all values are thrown overboard. We get a show of democracy where many good persons are made useful idiots, through smart perception management techniques.

 

We see horrendous events occurring in society but media and intellectuals very cleverly fill the spaces of newspapers and TV time with serious sounding verbose debates, carefully avoiding the root cause of why the government has become what it has become—a honey pot for the corrupt who hardly care for public service.

 

So we find over 60 years of this model of governance, dying cities, a creaking railway, failing airways, dismal sports, increased misery of poor, mind-boggling rise of the wealthy, rich boys mowing down poor on roads in expensive cars, poor public healthcare but high-end corporate healthcare for the wealthy, no protection for common women but special protection for the rich and powerful.

 

The police, law and order machinery, all get tuned to serve the purpose of the government’s main thrust of protected mismanagement of public funds and assets. Public service is secondary. Rapes are common along with murders. Judicial processes are allowed to become dysfunctional by overloading the system with more and more crimes. In more than 70% to 90% of the cases it is the government which keeps on appealing to next court and also causes adjournments, delaying investigations.

 

Public service is not the main thrust of a public servant. Innocent youngsters take out candle-light matches, show placards, the media dutifully cover this and mouth the appropriate words. Poems written and encouraging words like we join and fight together, etc, and statements like zero tolerance to crime, offered soberly to just tide over the moment. Soon all is forgotten. The same thing repeats all over again. But every time people protest with same gusto as if it is the first time. This criminally dysfunctional state is protected by innocent youth working as jawans at borders putting at stake their lives.

 

Any outburst of the anguished crowds on street are managed with tear gas, water canons, detentions, promise of inquiry, crocodile tears of sympathy, a commission of inquiry…

 

The highest sop the government offers after lot of struggle is another stronger law, poorly drafted, to add insult to injury. That is a harmless concession for them. After all it is the government which has to investigate, file a charge-sheet, pursue in court of law, with multiple opportunities to kill the effect law by sheer procedure and time. This is our democratic republic. In the history of our nation over 60 years, not one political leader’s daughter got raped and killed. While security is promised to citizens, in practice it is all provided to the VIPs.

 

India's intellectual capital also suffers in such a regime. Invariably any budding technology of Indian origin, which can threaten very expensive foreign and imported technology, gets crushed by the government under its iron boots of bureaucracy using committees to discredit and condemn. In this the government is joined and prodded by the considerable financial muscle of foreign technology giants who naturally would like to protect their business.

 

The result is obvious. India keeps on importing technologies which are not denied by foreign countries, but where denied, like space and earlier nuclear energies, Indian engineers have proved their mettle. It shows nothing is wrong with Indian intellect, but it is a matter of how to maximize cash flow benefits for the favoured. So imports are done at huge mark-ups. The file covers hide the facts, as to how facts were misrepresented and how committees of prejudiced persons and useful idiots brought in, to serve the rulers’ main thrust of making money.

 

Like wealth, security to family, good education, good food, best of things in the world remain promises for all citizens, but really provided only to those who are in charge of coffers of the government and their friends in business of managing the show.

 

Another symptom of corrupt ruling is forming committees to take every decision, to avoid accountability. All being of the same feather, the issue is pre-decided. Here again proceedings are kept secret so that enough time barriers are erected for discovery of misdeeds. So, do we still want to help only the corrupt to rule us? How long we collectively want to act innocent victims of the system? Or some of us try and jump over the dividing barrier to be on the side of winners? Yes, this does happen. We are humans.

 

A time comes in the life of every nation and humanity in general, when this process of sucking the blood of many by a few reaches intolerable limit. The Delhi case is one such moment. If you allow this moment to pass, this generation too will fail the nation as the earlier ones. We must now seriously try and expose the well-hidden and protected secrets of evil power in the government. The link between the government abusing and molesting public interest in the secrecy of file covers and our daughters, wives & mothers losing the right to fearlessly move out of home must be understood.

 

What we need to do not to get another law but modify the government business rule.  A lot can be achieved overnight.

 

We should demand that all government orders with financial implications be made available on the web, complete with record of proceedings with a time limit of seven days allowed to any citizen to appeal, point out mistakes sand request the government to correct it. In case the government finds it justified, it has the opportunity to revise the order and finally issue the order, without anyone being held responsible for the mistake. But if the government sticks to the original order, despite being challenged, then court’s review can be sought by the citizen. If the government is found wrong, then the accountability for wrongdoing wantonly gets fixed on the government functionary with adverse consequences, while the order also gets set aside. This process becomes fast because all proceedings are readily available to all concerned. There is no time delay for collecting information. Then the executive and judge will be on the same footing interpreting the law/public policy and passing orders openly and not in secrecy.

 

If this is done, it becomes difficult, almost impossible, to rape the fairness and justice because the politicians will be denied the shroud of secrecy granted by file covers as now. So their interest to acquire power evaporates. By nature they are not for public service, which is the only thing the government power will allow under this modified Government Business Rules. So they will leave. They will not invest anymore in elections to get into power by hook or crook. It will help to build a new India.

 

It will need just one cabinet meet to adopt this and the cabinet secretary will have to notify it under the Government Business Rules for working of ministries. The states will follow. How do we get it done is the challenge. First we have to be aware. Let people know where the evil is hiding. Instead of fighting too many shadows and wasting energy, we can concentrate on this issue. Public knowledge will expose the media games and lay bare the tricky perception mangers’ schemes. Constitutionally, a public official cannot enjoy privilege of secret interpretation of the law, a privilege even Supreme Court does not enjoy. That gives an opening for judicial intervention. We are not helpless. We can do this. We need not suffer anymore.

 

(Rajaram Bojji or B Rajaram as he is popularly known is former managing director of the Konkan Railway and also inventor of ACD Technology.)

User

COMMENTS

LALATENDU SWAIN

4 years ago

There is a lot of negativity running right through the article.
It is impractical to expect that the suggested process will reveal what RTI has allegedly failed to uncover! On the contrary, your suggestion will end up clogging the system so badly that whatever little good is currently being achieved, will have to be abandoned in the pursuit of "Transparency."

Vaibhav Dhoka

4 years ago

To maintain SANITY in society our country needs to overhaul justice delivery system.

HC asks IRDA to specify roles of TPA in settlement guidelines

Directing the IRDA to go ahead with the process of finalising the regulations, the HC asked the authority to specify the role of TPAs and state whether more powers could be given to the Ombudsman while hearing consumer complaints

Mumbai: The Bombay High Court has said the Insurance Regulation and Development Authority (IRDA) can go ahead with the process of finalising regulations for settling insurance claims and for the role of third party administrators (TPAs) and powers of Ombudsmen, reports PTI.

 

The division bench of Chief Justice Mohit Shah and Justice AV Mohta was hearing a public interest litigation filed by social worker Gaurang Damani about the hardships faced by Mediclaim policy holders.

 

IRDA told the court that it had submitted draft regulations which would be placed before the Ministry of Finance for final approval.

 

Directing the IRDA to go ahead with the process of finalising the regulations, the HC asked the authority to specify the role of TPAs and state whether more powers could be given to the Ombudsman while hearing consumer complaints.

 

"The ombudsman as of now only has power to decide the approval or rejection of a claim but he has not been empowered to impose penalty or increase the claim amount," the Chief Justice said.

 

The next hearing would be on 12th February.

 

Damani has alleged there are no standard guidelines to settle claims and it is left to the whims and fancies of the TPAs who are in fact not entitled to settle claims but are found to be doing so in several cases.

 

"TPA receives financial incentives to reduce claim ratio," Damani's petition says, adding there is discrimination in settling insurance claims of individuals and that of corporate clients.

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