LIFE Insurance Corporation is likely to gain market share if the dispute between Sebi and Irda over Ulip regulation is not resolved. Insurers say the finance minister’s decision asking both regulators to refer the dispute to a court would turn prospective Ulip buyers wary.
Given the uncertainty, buyers may be more comfortable with conventional products where LIC is on a strong footing. The state-owned corporation has the largest array of traditional products which are outside the realm of the dispute between Sebi and Irda.
Another advantage for LIC is that it has a large section of its million strong agency force focused solely on traditional plans. Although Ulips account for over 60% of the premium generated by LIC, in terms of number, traditional plans still outnumber Ulips. Given the circumstances, LIC is best placed in the industry to fill in the vacuum created by the uncertainty over Ulips.
A senior official from LIC said: “Our mix of Ulip and traditional products is about 65:35. We had taken a conscious decision to bring in a balance between traditional and unit-linked policies in the last number of months. However, our agents have been doing a need-based selling all these years. Nevertheless, selling only Ulips is not sustainable for them since the commissions for them is very low compared to traditional products. Hence, they go for a mix of both traditional, where the commissions are high and Ulips, which a number of their clients ask for.” He added that the corporation has about 35-40 traditional policies in force while the number of Ulips are about 10-12.
Another factor that supports LIC’s traditional business is that the corporation has a mature life fund, which has been consistently generating a large surplus for distribution in the form of bonus. In case of many new private insurance companies, the policyholder’s funds are yet to generate surplus as most of the expenses are charged to the life fund. Some private companies have been declaring bonuses under their traditional plans by transferring shareholders’ funds to policyholders’ account to make sure that there is a bonus every year. However, these transfers may get affected as Irda has said while insurers can transfer shareholders’ funds to the policyholders’ account, shareholders cannot take back their money once the life fund gets into a surplus position.
A claim made by tax authorities could discourage private insurers from transferring shareholders’ funds to policyholders’ accounts for bonus distribution. In some cases, tax authorities have said any surplus would be taxed, irrespective of whether it came from actual earnings generated by the fund or was an outcome of funds being transferred.
Last year, in the aftermath of the sub-prime crisis when investors had turned wary of equity-linked products, LIC had introduced Jeevan Aastha, which helped the corporation round up close to Rs 10,000 crore within a matter of few weeks. Such guaranteed return products have a tax advantage as far as LIC is concerned since the entire sum assured (which includes the guaranteed return) is treated as a policyholder liability and not taxed as part of surplus funds.
Interestingly, a senior officer from LIC said: “Our agents have been asked to push the recently-launched Wealth Plus — an unit-linked policy — till May 10.
The product was launched for three months which is getting over on May 8. A two-day grace period has been allowed till May 10. We are not expecting any other directives during that period.”