Ashvin Parekh of Ernst & Young, says ULIP products are complex and difficult to evaluate and all agents may not be trained correctly to guard against mis-selling
Ashvin Parekh, partner and national leader - Global Financial Services of Ernst & Young Pvt Ltd believes that the regulatory process is lagging behind the insurance industry. In an interview to Moneylife, he discussed the recent changes in the business and likely trends in insurance products going ahead. Excerpts from the interview.
Moneylife (ML): A recent Moneylife cover story discussed how new ULIP charges spread over the years are actually more than old ULIP charges.
Ashvin Parekh (AP): The policyholder is riding on the market (equity or debt) performance, not on the ULIP product performance. There was no way to evaluate the performance of ULIPs as compared with mutual funds. The controversy started from the policyholder asking, "What am I being charged for?"
The impression I get from the article is that despite regulatory intervention the objectives are not met. The purpose of the reforms was to protect the policyholder and to try to move the ULIP product away from mutual funds so that customers have two clear differentiated options.
It is sad that the regulatory process is lagging behind the industry. They will only realise this after product performance reviews take place. The regulator as usual lags behind businesses who take the lead. The regulator will then understand misinterpretation and misapplication of reforms, when policyholders pay more charges or their returns reduce. That time the reforms process will get challenged.
ML: ULIP charges under different headings are loosely used. There are so many charge heads. The customer does not know all the charges nor understands all the benefits.
AP: ULIP products are complex and it is difficult to evaluate all the charges and benefits. How can three million agents be trained correctly? Agent mis-selling is a very valid argument. The total charges of old and new ULIPs are more or less the same. Insurers have managed to push a lot of charges over the period, just that they are not upfront. The charges are there, not gone away. The authorities have to address the issue. Where is the ULIP product headed at the end of the day?
ML: Agents will still get the same commission over the period due to persistency. There will be commissions for each renewal.
AP: The commissions over the period may not be as much as earlier. The renewals are not guaranteed, but persistency helps everybody. The policyholder invests every year irrespective of whether the market is up or down. Agents get a renewal commission and the company has the hope of recovery with the lowering cost of acquisition (of customers).
ML: The surrender charges for new ULIPs have been reduced. The policyholder may lapse the policy if the market underperforms.
AP: Single premium provides comfort with some insurance component. ULIPs have nothing to distinguish from mutual funds. If the market does not perform for one year, people will look beyond the regular ULIP. Pension ULIP is an exception and will gain importance. If one has fewer years of working life left, then pension ULIP is a decent product-4.5% guaranteed is not exciting, but it still offers protection of capital. LIC pension ULIP has not made an impact because the market is doing fine.
ML: Many insurers have avoided the pension ULIP because of the 4.5% guaranteed returns. Is there valid concern?
AP: There is concern about a liability mismatch. The liability is for a much longer period and the investment papers available are for a lesser duration. If the interest rates drop, then it is a problem (for insurers). There is demand for capital, consumption and savings in India. The cost of capital cannot be brought down to zero in a developing country like India.
The policyholder today is not worried about death, but of living longer. In another 10-15 years more people will be worried about pension than life cover. The healthcare costs will increase. Pension ULIP and Health ULIP will gain importance. Pension and annuity will have a larger market. The industry will take the lead, run faster than the regulator and create opportunities for themselves. When earnings grow, protection also needs to grow. This has not happened in Indian behaviour, and it is beyond comprehension. The size of the cover has to depend on the income group. It is not recognised or accepted. It is a strange situation. In other places like the US there are social security and medicare benefits that are absent in India.
ML: Why health ULIP will gain importance?
AP: Health indemnity too will gain importance, especially if it evolves into managed care. Health ULIP will be a longer-term product than the annual renewal for mediclaim. People were offered mediclaim products at a lower premium, due to cross subsidisation and hence they expect it at low premium. The regulators need to take a hard look at group mediclaim pricing. Mediclaim has qualified indemnity. There are limits and exclusions. Health ULIP can be important in future.
ML: Mortality charges have been increased by some insurers.
AP: Past data of insurers suggests that the chances of a younger person dying have increased. There is actual data to prove it. It may be food habits, accidents, and so on. There is a different mortality rate for different age groups.
ML: Reliance mediclaim had a 500% premium spike after three years of low premium. The reason given is market conditions, high claims ratio, and so on. They sold policies at a low premium to attract customers who are stuck because portability is not there.
AP: I don't know about this particular case. A standalone insurance policy without cross-subsidy is the answer. The health product is to be designed for specific income group targets. The income range should be smaller. It can't be a wide range like up to Rs10 lakh. The premium can only be so much percent of income for the segment targeted. If an insurer does not perform, he has no right to recover (losses) from the policyholder. The products have to stand on their own with no cross-subsidy. There has to be risk-based pricing. The insurers can go for volumes or value. The hedge has to be clearly defined. It may be within the huge volume of business too.
ML: What are your thoughts on insurance companies planning IPOs?
AP: The investor should know if there is a hedge within the group. They should know if an insurer is going for high volume or high quality. The insurer should tell if the underwriting is aggressive, if they are able to manage and weigh the risk. Insurance company IPOs is new for insurers, the regulator and investors who do not know all the information. There are no benchmarks in the industry for IPO valuations. Disclosures for profitability of different product lines should have been made long ago. It would have helped not just for IPOs, but also for corporate governance. The regulators have already missed the boat on Embedded Value (EV) disclosure.
ML: The New Pension Scheme (NPS) is getting a makeover.
AP: The point-of-purchase (POP) and pension fund managers (PFM) need to get economic incentives and a larger role to make NPS succeed. The Bajpai Committee is taking the right direction. The earlier reforms were wasted on the assumption that people would queue up to buy pension due to the low-cost structure. As a nation, we wasted six-seven years. The low-cost model works fine in mandatory situations (like in the case of government employees). But to voluntary investors it needs to be sold.
ML: Is NPS exit for policyholders an issue?
AP: There is no real problem with exit. The Direct Tax Code will bring in clarity. Money can be used the way investors want. How much is to be taken out and how much is to be converted into annuity will be flexible. There will be encouragement to buy more annuities due to the tax benefit from EEE (the exempt, exempt, exempt model). It is a persuasive argument, but not mandatory. The annuity can be useful for children's marriage, education, and so on.