IRDA to review ULIP cost structure

Insurance regulator IRDA has decided to undertake a fresh review of the cost structure of Unit Linked Insurance Plans (ULIPs) to make the product affordable and attractive for retail investors in a choppy market.

In a news item in the Economic Times News paper, it mentioned that one option is to pare the commission charges to make ULIPs attractive for investors. Currently, insurance firms are allowed to pay a maximum commission of 40% of the first year premium, 7.5% in the second and third year and 5% thereafter. The commission structure is hence front-loaded as a bulk of the agents’ commission is paid in the first year.

The regulator has already given an indication to the Life Insurance Council — an association of life insurance companies — that the commissions are too high and opaque.

A few firms have responded by pruning their commissions. Bajaj Allianz, whose commissions were close to the upper limit, has halved commissions and expects average payout to agents to be around 17.5%.

Investors pay a host of charges to the insurer in the beginning of the year including premium allocation charge, policy administration charge, mortality charge and rider charge. The difference between the premium payable each year and total charges is the money that is available for investment. Charges are paid at the end of each policy year. These include fund management and surrender charges.

IRDA is reviewing the entire cost structure now. The move needs to be viewed against the backdrop of a spate of complaints from the mutual fund industry on the hefty commissions being paid to insurance agents selling ULIPs and other traditional products. Sebi, on the other hand, has capped the expenses of the mutual fund industry. Until now, high returns from stock markets made it possible for insurers to generate great returns despite hefty commissions. Recently, the IRDA has indicated that the charge structure in ULIPs should be more transparent by adopting a uniform nomenclature for all charges and the same structure should be followed by all the insurance companies so that there is a level playing field for investors when they compare ULIPs.