The Hindu Business Line : IRDA working on ULIP norms

THE Insurance Regulatory and Development Authority (IRDA) is preparing guidelines that will likely increase transparency and tighten marketing norms for unit-linked insurance policies (ULIP).

The new norms are expected to give mutual funds which felt threatened by the tax-free income of ULIP and big-budget marketing by insurers, a somewhat level playing field.

IRDA is likely to complete drafting the guidelines in about a month, Mr C.S. Rao, Chairman, IRDA, told Business Line.

"Since the risk of investments in ULIP is borne by the unit-holder and there is no underlying risk to institutions, IRDA had not yet looked at it. Now I have put some people on the job and the consultation process is on," Mr Rao said.

The mutual fund industry had complained to SEBI, which in turn, had apprised IRDA of the industry's fear that ULIP was competing unfairly with mutual fund products because they were "less regulated" and followed easier norms. "Their (insurance companies') disclosures such as risk factors and expense accounting in net asset values are far less than ours," said the CEO of a mutual fund.

Mutual fund investors who buy products such as equity-linked saving schemes get very little benefit under Section 88 of the Income Tax Act, while ULIP income is fully tax-free. Also, SEBI norms allow mutual funds to incur only limited marketing expenses while insurers are free to spend any amount to market their products.

A top SEBI official said IRDA was consulting the capital markets regulator to devise the guidelines. He said the guidelines are likely to be developed on the lines of SEBI mutual fund norms. IRDA has written to SEBI assuring it that it is seized of the matter and will come out with the norms for the investment part of ULIP soon, he added.

ULIP, which constitute nearly 90 per cent of new life insurance policies sold by private insurers, are by nature investment vehicles that come with a small insurance cover.

A large part of a ULIP `premium' is divided into units and invested in equities and debt instruments, the mix varying according to each policy-holders' risk appetite. The units are akin to mutual fund units and the investor can redeem them at maturity at net asset value. However, since the maturity date is predetermined, ULIP act more like a closed-ended fund.

Since most of the premium is channelled to investments, the risk to the insurer is substantially low compared to pure term assurance. Their capital requirement also comes down because they need not put up large solvency reserves.

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