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SEBI Bans ULIPs from 14 Insurers; IRDA Reacts

On Friday, SEBI issued an order banning 14 companies from issuing any more ULIPs, with immediate effect. SEBI full time member Prashant Saran said in the order that ULIPs had an investment component similar to mutual funds, and therefore are securities that are regulated by SEBI; the insurers must take SEBI’s permission before marketing them.

SEBI had earlier to Insurers asking them why it shouldn’t regulate them. They replied with various points, each of which was countered by Saran:

MF argument SEBI
Insurance contracts are exempt from SEBI Regulation ULIPs have both insurance and investment. We regulate the investment part.
ULIPs are not “securities” Oh but the investment part is just like a mutual fund, which is a “security”
Mutual funds are transferred freely but ULIPs are not Bull. Open ended funds are bought and sold only from the issuer; same as ULIPs.
ULIPs are not owned by Trusts like Mutual funds Doesn’t matter; SEBI can regulate any pooled investment vehicle where the investor has no day-to-day control over the management of the money
ULIPs have an insurance part that is “predominant” Utterly misleading. Nearly all ULIPs take only 2% of the annual premium for insurance – how can it be “predominant”?

Keeping this in mind, these companies must not sell fresh or additional subscription to ULIPs. The companies are:

a. Aegon Religare Life
b. Aviva Life
c. Bajaj Allianz Life
d. Bharti AXA Life
e. Birla Sun Life
f. HDFC Standard Life
g. ICICI Prudential Life
h. ING Vyasa Life
i. Kotak Mahindra Old Mutual Life
j. Max New York Life
k. Metlife India
l. Reliance Life
m. SBI Life

Absent from the list is LIC. But SEBI has told Mint that LIC will be included soon, and any others that aren’t part of this list.

IRDA, the Insurance Regulator is miffed that their turf is being encroached on. In a quick weekend reply – and this is remarkable for a regulator that is largely sleeping even during the week – IRDA has told insurers to go sell whatever they want freely, with no heed paid to SEBI, Prashant Saran, or to customers. Okay, they had to remove the “customers” part. Their argument is that if ULIPs don’t keep conning customers, the industry will have problems. Yeah, right.

The IRDA observes that in the year 2008-09, 7.03 crore ULIP polices involving a
total premium of Rs.90645 crores were in force. Further, as on February, 2010,
during the period 1-4-2009 to 28-2-2010, 16.7 lakhs policies have been sold with
a premium of Rs.44611 crores. It is also observed that the 14 insurance
companies have an equity capital of Rs.16281 crones as on 31st March, 2009.

The observance of the above referred SEBI order would cause the stoppage of
all renewals of insurance policies already invested by the insuring public, may
result in the forced premature surrender of insurance policies causing substantial
loss to the policyholder and to the insurers
. The effective stoppage of the sale of
the said products will cause a complete drying up of the revenue flows to the
insurance companies which could disrupt the payment of benefits on maturity, on
death and on other admissible claims, putting the policyholder and the general
public to irreparable financial loss. The financial position of the insurers will be
seriously jeopardized thus destabilizing the market
and upsetting financial

The mentioned direction of the SEBI to insurance companies not to raise money
by way of new or additional subscription apart from other restrictions will
seriously jeopardize and adversely the interests of the policyholders and the
interests of the insurers.

The IRDA, in the light of the above , is satisfied that the order of the SEBI
mentioned above will bring the insurance industry to a standstill which would not
be in public interest and would be detrimental to the interests of the policyholders
and prejudicial to the interests of the insurers.

Therefore, in exercise of the powers vested in the Authority under Section 34(1)
(a) and (b) of the Insurance Act, 1938 , and after due consultation with the
members of the Consultative Committee , all the 14 insurance companies which
are mentioned in the order of SEBI are directed to note that notwithstanding the
said Order of the SEBI, they shall continue to carry out insurance business as
usual including offering , marketing and servicing ULIPs
in accordance with the
Insurance Act, 1938, Rules, Regulations and Guidelines issued thereunder by
the IRDA.

IRDA is largely a bunch of suck-up-to-industry losers, and have not even batted an eyelid while insurers took upto 100% commissions, or even 65% commissions. They should be dismantled and SEBI should regulate everything. Not that SEBI is the best, it could get better; but it’s definitely head and shoulders above the blind-bat behaviour of IRDA.

But given that LIC will be involved, and LIC has just rescued a couple of government IPOs, I have very little hope that SEBI will prevail. I think they are more fair to investors, but when did fair matter when it comes to insurers.

  • Anonymous says:

    >- Previously i never thought about this angle; Sebi order makes a lot of sense. (Companies can now run a predominantly MF like business without the regulation of a MF – which is wrong)

  • Deepak Shenoy says:

    >Anon: only caveat is that if a company sells equity to get mney and then invests in other companies, that does not come under "collective investment" concepts. So if you buy a Reliance Capital share, and it invests in say Adlabs, then Reliance Capital is not going to need SEBI registration.

    If 10 people put in money together into a pvt. limited entity or an LLP and get equity/partnership in return, and the company goes and invests in the market, then there is no SEBI registration required.

    Where the entire investment risk is borne by the investor and not by the managing entity then that might come under SEBI purview (PMS, Mutual funds, collective investment schemes).

  • R John Christy says:

    >Well said. IRDA's quick order didn't serve any investors interest. We should congratulate and support SEBI for this good move.

  • Anonymous says:

    >seems like irda is a buch of corrupt rats .

  • Px says:

    >Its good that the whole issue is finally garnering public attention.
    Congrats on being the first few to put it up so openly when u put it up so frankly with
    IRDA is largely a bunch of suck-up-to-industry losers,…
    SEBI (which is very silent about demat issues and high charges)and finmin and clb (which talks more and does little) have miles to go as small investors are still an unprotected lot.

  • Anonymous says:

    >well said, every word is true.
    i wish all good luck to sebi.
    every one in life insurance business knows in their heart what is really happening.
    irda sofar protected life insurance companies only.
    40 % plus sales incetives really spoiled the industry.
    kindly add.
    your views and support sebi.

  • Anonymous says:

    >A consumer is paying his hard earned money as premium to cover the risk of his life and his payment is subjected to market risk by the insurance companies. I think IRDA should have the answer to this question, Does the consumer practically feel relieved of one risk (life risk) by hiring another risk (Maturity amount), as expected by the policy makers? Isn't it the right time to to ask the investors and admit that ULIP are not insurance products?

  • Venkat says:

    >"IRDA's quick order didn't serve any investors interest" ULIP is an insurance product not an investment product. It is unit linked just to convince the term insurance hating Indians to take good life cover if not adequate cover. I fail to understand why people put their money in ULIPs when they wanted to invest.

  • Gaurav says:

    >Hey Deepak. I know how much you hate ULIPs and I truly share your distaste for them.

    However, I wanted your take on the new ULIPs being offered by Metlife- the "Met Smart Premier", which is offering insurance cover up to the age of 100. The 1st year allocation charge also seems lowish at 5% (compared to 20-30% for others).

    My question is, where's the catch? Lemme know your take on it.


  • B Rajesh says:

    I am certain ‘all’ ULIPs are financial instruments used by companies to con people . The agent shaves 30-50% of first premium and are not at all accountable afterwards. It is only when you find the fund value at the time of surrender , you realise that you are creamed. STAY AWAY FROM ANY GUY OR GAL WHO SELLS YOU ULIPS OR MUTUAL FUNDS. I am aware of agents (ladies) who are willing to sleep with customers if you buy a hefty policy. Sad state indeed.