Surge in ULIP redemptions as poor returns disappoint policy-holders

A volatile equity market is prompting insurance investors to surrender their unit-linked insurance plans (ULIPs) and stay with traditional policies. There has been a surge in the surrender of ULIPs with policy-holders unhappy with their returns even after the lock-in period of three or four years.

Rajesh Sud, MD and CEO of Max Life Insurance, said recently: “Part of the reason (for the surrender) is the disappointment in many cases that these products have not been able to give commensurate returns even after five years. Also, many people who are squeezed for funds are exercising the redemption option.”

According to Insurance Regulatory and Development Authority (IRDA) data, in fiscal year 2013, life insurers paid ₹1,05,822 crore on closure of all types of policies against ₹71,155 crore the previous fiscal year.

Increase in payout

ULIP redemptions amounted to ₹41,042 crore for state-owned Life Insurance Corporation in 2013 compared to ₹28,197 crore in 2012. For private companies, the number rose to ₹47,826 crore against ₹28,690 crore.

During fiscal year 2013, ULIPs accounted for 73 per cent of total surrenders for LIC, and 96 per cent for private insurers.

Industry sources say ULIP products are barely generating any new business for life insurance companies and are far from compensating for earlier withdrawals.

This has led life insurers to re-jig their product portfolios and shun ULIPs in favour of traditional endowment and whole-life policies. The shift has also been driven by new regulations, which require changes in the product and commission structure to make policies transparent.

LIC’s focus

LIC, the country’s largest life insurer, has not launched a single ULIP after the new guidelines came into effect on January 1 this year. In a recent interview, SK Roy, Chairman of LIC, said: “We want to concentrate on the traditional platform of products, which has always been the mainstay of LIC. So, we are not looking at ULIPs at the moment.”

After accounting for more than 90 per cent of their total portfolio, private life insurers have seen the share of ULIPs come down to less than 10 per cent over the last two years.

IDBI Federal Life insurance, for instance, says that its new sales have been generated only by traditional products.

According to Max Life’s Sud, Indians don’t associate life insurance with too much volatility in terms of returns and prefer traditional products that provide stable if moderate returns.

Aneesh Srivastava, Chief Investment Officer of IDBI Federal Life Insurance, is convinced the industry will see the number of redemptions come down in the coming fiscal year with most investors exiting the ULIPs they purchased before 2010.

(This article was published on February 21, 2014)
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