How important are ULIPs to the insurance companies?
Unit linked products contribute ~90% of new business premiums for the private sector insurer companies. Linked Life and Linked Pension together contribute majority of the premiums for the private insurers. Traditional insurance products contribute less than 10% of first year premiums. Traditional products are difficult to sell because they are difficult to understand, deliver poor returns because of a 50% cap on equity exposure and involve longer-term commitments of premium payment.
What is at the core of the SEBI/IRDA dispute?
The SEBI/IRDA dispute is that the former believes that linked products are similar enough to mutual funds to warrant a common regulator. If SEBI has its way, we think that it would impact all unit linked products of the insurance companies and these contribute >90% of the total first year premiums.
How badly could the industry size be impacted?
In India ~20% of domestic financial savings is invested in insurance. This has improved from 10-12% in 2000 as private insurance companies entered insurance. Introduction of unit linked policies has mainly led to the share of insurance increasing in the financial savings pie. Unit linked plans have led to an increase in the share of domestic financial savings in insurance. The SEBI/IRDA dispute could potentially reverse this trend – we estimate a 20% correction in the size of new business.
How Sale of ULIPs will come to a Halt ?
Average front loads (called allocation charges) for ICICI Pru, HDFC Standard Life, Kotak and SBI Life were 16-18% of the total premiums in FY07-09. Of this, ~45% was paid out as distributor commissions. SEBI would probably bring this down below 5% (and might abolish it). Average ticket size for life insurers is ~Rs15000, and it takes 2-3 touch points to complete a sale. At these low commission rates, most agents would simply stop selling ULIPs.
How would the existing book be affected?
Most policies have a three-year premium pay-in. The feedback from wealth managers is that policyholders are reluctant to continue to pay premiums beyond the minimum contracted period. This will see a fall in the premium conservation ratio (renewal premiums/previous year total premium) and will impact insurers' ability to build assets via renewal premiums and impact long term profitability. If policyholders start redeeming funds, the pressure will be exacerbated.
