The Hindu Business Line : Welcome cover

THE INSURANCE REGULATORY and Development Authority (IRDA) has quite rightly proposed that life insurance plans linked with an investment component — more popularly known as ULIPs — cannot be redeemed earlier than three years and that such plans must include a minimum assured sum in the event of death in order to highlight the risk component of insurance contracts.

Unlike in developed markets of the West, where insurance is synonymous with `pure risk' — a cover against the loss arising out of the risk of mortality — in India, insurers have been forced by the market to come up with plans that marry the benefits of mortality risk with investment returns. The logic is unexceptionable. Those who want to take a life insurance policy are as likely to have other money for investment. It is only natural for an insurance company that is already managing the investment of risk premiums to want to handle this additional surplus as well. Viewed thus, insurance companies have every reason to continue in the space of investment management that the mutual funds industry is better known for. But when the risk component of the insurance premium that a policyholder pays is so minuscule as to obscure the character of the contract between an insurance company and a policyholder — namely, that it is a cover against the risk of untimely death — the question that necesssarily arises is this: Is the investor being sufficiently informed as to what he/she is contracting for? The stipulation of a minimum assured sum does divert a larger portion of the premiums paid towards the financial goal of leaving a meaningful amount to the beneficiaries in the event of the policy-holder's death. Together with a minimum lock-in period, the focus will shift away from short-term returns to long-term performance and, thereby, emphasise the insurance character of the relationship.

The industry, too, should benefit from lower customer churn. The frenzied activity seen hitherto in the unit-linked insurance plans market may be sobered by the latest guidelines. But shaken the industry will not be. Indeed, the guidelines only serve to strengthen the long-term nature of the investments in the insurance sector. The development need not result in a slowdown in the growth of unit-linked plans. For one, insurance companies have a time window, till June 30, 2006, to make the transition for their existing products to conform to the guidelines laid down by the IRDA. Till such time, the growth momentum appears set to continue.

With Indian insurance industry still evolving, the separation of investment and risk cover, a characteristic of more mature markets, is still some time away. But, till then, the IRDA should mandate more disclosures on portfolio composition as an additional measure of investor protection.