September was the first month in which the life insurance industry worked with the new guidelines for policies put out by the Irda. As expected, business was dull; annualised premium equivalents (APE) for the industry rose just 1.3% year-on-year while for the private sector players it fell 13% year-on-year. In July, the APE for the industry had risen 20% year-on-year. Some of this can be explained by the fact that life insurers worked overtime in August, selling as much as they could before the new rules became applicable. But it?s not as though life insurers are going to be back in business any time soon; given the manner in which charges have been brought down, bottom lines are going to take a hit before they recover. More important, for at least some time before companies optimise their cost structures, small savers are not going to be on their radar. With the regulator changing the rules, it may be unviable for private life insurers to cater to individuals who pay premiums of less than Rs 15,000 a year. In fact, some players believe that if they have to make money, monthly premiums need to be upwards of Rs 3,000. That?s a pity in a country where there?s no social security but, over the long run, the economies of scale should allow life insurers to also cater to the relatively less affluent.

One can?t really blame the regulator because many customers were being billed high charges on Ulips and many of these plans were being missold.

As much as 30% of the first year?s premium was taken away in the form of one charge or the other, with the percentage coming down over the life of the product. A fair share of this was paid to the agent and on average, for the industry, agents were making a commission of close to 15-16% of the premium. That says the consensus will now come down to sub-10% in the new regulatory framework.

Logically speaking, this should be incentive enough for an agent because if he was selling mutual products at commissions that were far lower of 2-3% or maybe a slightly higher amount for a New Fund Offering (NFO), 8-9% is way higher. It?s true that although a Ulip may be nothing more than a mutual fund scheme bundled together with an insurance cover, it is harder to sell simply because most individuals in this country don?t recognise the importance of insurance. To that extent, Ulips are more of a push product than mutual funds. But a commission of 7-8% should be incentive enough. In the UK, for instance, commissions are going to be reduced drastically by 2012. Perhaps the reduction could have happened in phases; knee-jerk reactions don?t help anybody. Customers will, no doubt, benefit from the lower charges, and ideally cheaper products should translate into bigger volumes. But given the general apathy of buyers to such products, this will happen only over a longer period since right now life insurers will need to scale back sales and distribution.

Irda has done a good thing by asking investors to pay premiums for at least five years and also stay invested for a longer period of five years?earlier it was three?if they have bought Ulips. The lower surrender charges may seem customer-friendly but may also encourage unnecessary exits and unnecessary churning, too.

What?s quite unbelievable though is that life insurers now need to guarantee a minimum return of 4.5% for pension plans. This can?t help either the insured or the insurer. Understandably, fund managers will want to play it safe by allocating most of the premium collected, through pensions schemes, to fixed income products to make sure they can return at least 4.5%. But, when an investor could be willing to commit long-term money, why deter him from investing in equities that typically deliver good returns over a long period? Fund managers need long-term money to be able to deliver returns and this would have been an ideal product for a consumer wanting an exposure to equities. The world over, pension money flows into equities. At a time when the Indian market is clearly the most attractive investment destination in the world, and the India story is expected to hold good for several years, it seems a pity that Indian investors should not be sharing the returns.

Also, while a return of 4.5% may not seem too high a benchmark today, when interest rates are ruling at higher levels, there have been instances in the Western world, where companies have gone bankrupt because interest rates have fallen to very low levels. Also, the 4.5% return prescribed can apparently be changed, at the discretion of the regulator, and if it is lowered, customers once again could lose out. Pension schemes are ideal products for investors wanting to participate in the equity markets but if the product is designed such that it has to guarantee a fixed return, the purpose is defeated.

It seemed, not so long ago, that investments by life insurers could match foreign flows into the Indian equity markets, creating a balance of sorts. Last year, LIC invested a net amount of just over Rs 40,000 crore while private sector players put together would have invested around Rs 20,000 crore. This time around, LIC may invest a similar amount but private players are unlikely to be able to chip in with too much. Since foreign investors of every hue are now flocking to India, that balance seems a long way off.

shobhana.subramanian@expressindia.com