Lacklustre returns due to volatile conditions in the equity markets coupled with regulatory changes relating to ULIPs (unit-liked insurance plans) and pension plans have affected the life insurance industry in the country.

According to recent IRDA data, first-year premium collections by life insurance companies fell 28.36 per cent in April-June 2011, compared to the corresponding period last year. The 23 life insurers collected Rs 18,283 crore by underwriting new policies, compared with Rs 25,522 crore mobilised in the year-ago period.

Experts feel that this trend will continue with industry growth remaining slow to moderate in the next 2-3 quarters.

Life insurance companies' product portfolios are highly skewed towards ULIPs . These products constitute around 90 per cent of most private insurers' product portfolio.

In August 2010, the IRDA had tightened regulations in a bid to put an end to rampant mis-selling by agents who were aggressively pushing the product as it garnered high commission.

Regulatory guidelines

The new regulatory measures include an increase in the lock-in period from three years to five years, a cap on commission charges on first year premiums and offering minimum guaranteed returns of 4.5 per cent on all pension and annuity products.

After the new guidelines came into force, ULIPs previously sold in the market were rendered redundant and the insurers were asked to re-file products based on the new norms.

Insurance companies took some time to launch new ULIPs which complied with the new norms and the regulator too was able to approve only 2-3 products per insurance company, according to a senior official with a private sector life insurance company.

Owing to the regulatory requirement of providing guaranteed returns, very few companies launched regular premium-linked pension products post-September 2010. This has also resulted in a decline in individual pension business.

“In the first quarter of the last fiscal, individual pensions accounted for around 38 per cent of the gross individual new business premium, of which, a significant proportion was on account of linked individual pension sales,” said Mr Vivek Jalan, Director, Risk Consulting, Towers Watson India.

Companies are also in the process of realigning their distribution strategies and retraining agents to help them understand the benefits of the new ULIPs. Agents who made a living out of selling insurance products have had to make do with reduced commissions and think of alternative options.

“The slowdown can be attributed to the new regulatory guidelines which have resulted in decline in sales in ULIPs and pension products. However, there has been a growth in traditional products but it is not enough to offset the slowdown. Insurance companies are making efforts to reallocate their product portfolios,” said Mr G. V. Nagaswera Rao, CEO and MD, IDBI Federal Life Insurance.

Market conditions

Compounding the woes of insurers is the fact that Indian equity markets have been underperforming owing to global cues such as the downgrade in the US' sovereign rating and the Euro zone debt crisis.

These factors, coupled with rising interest rates, have resulted in investors being lured to bank fixed deposits and other debt oriented schemes.

Period of Adjustment

Most insurance experts also feel that 2010 was a turning point for the life insurance sector, with ULIPs logging high sales during the first half of the year and a substantial decline in the second half.

“Last year was an unusual year. It was a period of adjustment for the life insurance industry. January to August was a very good period for the life insurance sector. However, after the regulatory guidelines came in September, ULIPs business has declined for the industry” said Mr Rajiv Jamkhedkar, MD and CEO, Aegon Religare Life Insurance.

“The new regulatory guidelines have also resulted in a judicious mix of traditional products and ULIPs which will give impetus to the long-term growth of the life insurance industry,” Mr Jamkhedkar added.

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