SEBI – IRDA spat

by Manshu on April 13, 2010

in Opinion

By now most of you would be aware of the SEBI – IRDA spat about ULIPs that has been going on since the past 4 days. The back-story is that SEBI banned issue of all new ULIPs from 14 insurance companies stating that they have not registered their product with SEBI, so they can’t issue new ULIPs.

The next day – IRDA sent out a notice stating that insurance companies can continue business as usual, as they don’t fall under SEBI jurisdiction.

The finance minister intervened yesterday, and the ban on ULIPs was lifted. All this is interesting on its own, but a particular statistic on Business Standard really caught my eye today.

The piece is about why SEBI feels the need to regulate ULIPs, and lists out a development that happened a few months ago.

A few months ago – SEBI had banned entry loads on mutual funds, and due to that the sales of mutual funds are getting hurt severely. Agents have lost interest in pushing mutual funds, and they were pushing insurance products instead. But, here is the part from the article that got my attention:

According to distributors, Ulips earn 15-20 per cent upfront commission on each scheme sold, while MF schemes yield a measly 0.5-1 per cent. So, distributors have started luring MF investors towards Ulips, resulting in good growth for insurance companies.

15 – 20% is a bit steep – don’t  you think?

Investors need to realize that this money is going to come from what could have been their profit, or even capital (if the fund makes a loss).

Normally, a higher price means a higher quality, but this is not always the case with mutual funds, ETFs, or ULIPs. If you are being charged a steep price – there should be clear evidence that you are getting a better product. If not, then you are better off with low cost index funds and term insurance.

{ 4 comments… read them below or add one }

sagar April 14, 2010 at 5:39 am

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?

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Manshu April 14, 2010 at 3:45 pm

I was never a big fan of ULIPs, and although I feel bad about unit holders who get into this product – I think this whole situation will at least increase awareness among people.

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RaviR May 30, 2010 at 11:40 am

I think Deepak is overstepping his role. As of now he’s no one to decide what govt. should be doing. aS far as spat between regulator goes, SEBI is fighting a losing battle from day one. As I had analysed earlier. if SEBI was so competent in getting Insurance industry regulated why IRDA was formed. That was Govt. initiative only. Addtionally, SEBI has it’s foot in mouth by cheery picking 14 insurance company, when LIC is biggest distributor of ULIPs. Additionally SEBI goit it’s fundamental completely wrong when they passed order against ULIPs only, when even traditional business premium is also invested in Govt. bond etc. So I do not understand what was the premise of passing such an order which has no technical basis and no jurisdiction. I think it is SEBI’s fear of controlling smallar industry than insurance industry brought a basic question, that as a regulator it would be less influential in future as compared to IRDA. Because that is the true world over – Insurance Industry is larger that MF industry

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sagar April 14, 2010 at 6:39 am

ULIP : life was subject to natural risk, so it was also subjected to market risk.

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