The changes may have been cosmetic and won’t rock the boat of insurance companies

The Insurance Regulatory and Development Authority (IRDA) introduced sweeping changes in Unit-linked Insurance Plans (ULIPs) yesterday. Among the measures are-a five year lock-in, even-out commission over the first five years and graded charges for the subsequent years.

How will these changes affect ULIPs? Are they competitive now with mutual funds (MFs) as long-term products? Nothing has really changed for the investors.

All IRDA has insisted is that the fat commissions, which insurance companies were paying, would have to be spread over five years. Insurance companies were doling out upfront commission as high as 30%-35% to distributors in the first year.

 They will now have to spread this commission over the five-year lock-in period. But this will put off distributors used to making a fat upfront income. "It's not attractive for distributors anymore," said a top official from a fund house. He points out that for mutual fund investors, there is no entry load. If you invest Rs1,000, you will get units equivalent to Rs1,000. Considering a commission of 6% in ULIPs for the first year, if you invest Rs1,000 in a ULIP, your investment will be worth Rs940 after deducting the 6% expenses.

The insurance regulator has attempted to cap the charges at 4% annually for 5 years, and 3% for 5-10 years and 2.25% for products of above 10 year terms.

These are more expensive than mutual funds. The total maximum permissible expense for a mutual fund stands at 2.5% on the first Rs100 crore of the average weekly net assets collected by the fund. This is then reduced to 2.25% for the next Rs300 crore, 2% on the subsequent Rs300 crore corpus, which finally comes down to 1.75% for the balance assets. The expenses consist of Investment Management & Advisory fee (1.25%); Custodial fees (0.05%); Registrar & Transfer Agent (RTA) fee (0.25%); marketing expenses including commission paid to distributors (0.65%); Audit fees (0.10%); Costs of fund transfer from location to location (0.10%) and other expenses (0.10%).

Moneylife contributor R Balakrishnan says, "The ULIP changes are cosmetic in nature. Maybe the product becomes a little more efficient than it used to be, but in no way has it become comparable to a mutual fund. In a mutual fund, the total damage is limited by law to 2.50% per annum. In ULIPs, the selling commission has not been reduced. The only thing that has happened is that instead of front ending, it is now supposed to be spread evenly. In effect, a marginal improvement."

Some industry experts believe that ULIP charges will still be opaque and can differ from company to company. Insurance companies can still charge a lot of money to investors under the garb of administration and management expenses.

Mr Balakrishnan pointed out that in all investment products of the insurance industry, "There is a management charge, administration charge and some other charges. Typically, these aggregate over 3% per year, assuming a typical monthly investment of say Rs20,000 per month. These charges are separately deducted from the contribution paid by the customer."

He added, "ULIPs are the sole survival mechanism for the insurance industry. And they are perhaps the biggest prop for the stock markets. The government just does not want to rock the boat. Hence they have legitimised what they have been doing."