Chennai: According to the insurance grapevine there is a full-fledged, no-holds-barred war raging in the life insurance market with the bigger companies having unsheathed their swords to cut their competitors to size.

This speculation was sparked by the ban last month by the regulator, Insurance Regulatory and Development Authority (IRDA), on the sale of actuarial-funded unit-linked life insurance policies.

The reason for the ban is said to be the opaqueness and complexity of these unit-linked products for a lay policyholder to understand. According to industry sources, a financial powerhouse too is said to have exerted pressure on the regulator for a ban.

What is an actuarial funded product that had the bigger companies gunning for a ban on them? Normally in a unit-linked insurance policy (ULIP), an insurer declares upfront the fund management and other charges. This enables policyholders to be aware of how much of his premium is available for investment and the number of units to his credit at any point of time with the net asset value (NAV) attached to this.

In the case of an actuarial funded product, an insurer would tell his prospect that the entire premium paid would be invested without any deduction towards charges. This does happen in the first year and the prospect is allotted capital units. Nevertheless since the insurer incurs some expenditure and tries to work out what the expenditure cost would be after 10 or 15 years, with an interest component attached to this.

This higher expenditure is spread over a longer number of years in the investor''s fund. The prospect is not aware of this computation, which is not shared upfront, or every year. He is allotted only a number "notional" number of units as opposed to actual capital units because the deductions are not declared.

A policyholder only realises the shortfall in his account when he surrenders his policy before maturity.

Actuarial or artificially funded products
Says R Ramakrishnan, a consulting actuary and former executive director, Life Insurance Corporation of India (LIC), "A life insurer offering 100 per cent allocation in the first year compensates itself by charging higher administrative and fund management charges compared to normal ULIPs."

As actual expenses will be lower than the charges added to the notional units, the insurer will take advance credit for future profits arising from the additional load.

"Such advance credits are not permissible under any accounting standards. So life insurers do that through actuarial standards computed through a complex formula. The proportion of the assets held vis-a-vis what is told to the policyholders will increase as the years go by and when the policy matures it will become 100 per cent," Ramakrishnan explains.

According to an actuary, even the surrender value of a policy is not told in simple terms but expressed as a factor of a complicated formula which is understood only by persons with good grounding in mathematics, often only by an actuary.

It should be noted that no other advanced country sells such opaque products. In the UK where this product originated, life insurers there have stopped selling such policies.

Behind the ban
The two companies affected by the ban are the Rs758.2-crore equity based Aviva Life Insurance Company India Pvt Ltd, Gurgaon, near New Delhi and the Pune-based Bajaj Allianz Life Insurance Company Limited having a capital base of Rs700 crore.

For Bajaj Allianz the ban is effective from 16 September and from 1 January, 2008 for Aviva Life.

The impact of the ban will be particularly harsh for Aviva Life as its entire product portfolio consists of actuarial-funded policies. During its five years of operations, the company did not disperse its product risk and is, therefore, now facing a crisis.

On the other hand Bajaj Allianz launched its Bajaj Capital Unit Gain only 11 months ago and notched up strong sales. Says Sam Ghosh, CEO, Bajaj Allianz, "Nearly 70 per cent of our fresh premium this year is from this product."

Corporate rivalry
According to the industry, the competition did not take notice of Aviva Life and its products or their basic design as it ranked low in the pecking order and had been quietly doing good business on a comparatively low equity base.

Seeing the success of Bajaj Allianz with its actuarial funded product, however, another private life insurer wanted to launch a similar policy. Its promoters have been infusing large doses of equity capital at regular intervals and it wanted to accelerate the topline growth while reducing the pressure on its promoters for additional equity.

However, its appointed actuary refused to design such a policy on the grounds of non-transparency and its complexity for a lay policyholder to comprehend. It is also said that the company would have had to make a sizeable investments on software before it could launch this product.

Now the story takes an interesting turn. Unable to launch its product unit-linked product, this company (lets call it company A) decided to cry foul and moved to put a full stop to actuarial funded products altogether.

Industry sources say the compulsions for this company to scuttle others'' growth are many. It is among the more heavily capitalised life insurers in India and though it has a healthy top line growth, its bottom line is in the red and its expense ratio high.

On the other hand Bajaj Allianz, on a lower capital base and smaller top line had declared a net profit last year. Its CEO Sam Ghosh has also said that his company will also declare a net profit for the first quarter of the current fiscal.

This would naturally lead to questions from the investors of company A as to how Bajaj Allianz is able to show profits at a lower capital base while their company is not able to do so.

With Dr R Kannan, member, actuary, IRDA, has been sounding out appointed actuaries of insurance various life insurance companies as to the undesirability of such actuarial-funded products months before the actual ban, the cry from company A queered the pitch for those who had thrived on such products, say industry insiders.

IRDA will not succumb to pressures
Strongly refuting any suggestion of IRDA having succumbed to pressure from anyone, Dr Kannan says, "We are not interested in any corporate rivalry nor are we a victim of it."

Explaining the background of the ban he says, "The primary issue is the product''s opaque nature. Policyholders are promised one thing at the time the policy is sold to them, but what actually happens is something else."

In addition around five life insurers have sent their actuarial-funded products to IRDA for approval.

"In a country like India, market conduct is important in the financial services sector, more so in life insurance, which deals with people''s long-term savings. Allowing more players to sell such opaque products would distort the market. It will be difficult to take corrective action latter. We wanted to nip it in the bud," Dr Kannan added.

According to him, it was not IRDA that unilaterally took the decision to ban the complex product. "The decision was based on the recommendation of all appointed actuaries," he maintains.

In July IRDA had asked the Institute of Actuaries of India, formerly called the Actuarial Society of India (ASI), to advise on the desirability of actuarial-funded products.

The institute convened a meeting of its sub committee called the life insurance board, to discuss the matter with the members that consist of appointed actuaries and senior actuaries.

"At the board meeting the discussions were good," says G N Agarwal, executive director (actuarial), LIC and president, Institute of Actuaries. "There were agreements on many aspects of the product amongst the members. There were concerns expressed about the level of disclosures made while selling the actuarial funded product."

The life insurance board constituted a six-member committee under Agarwal''s chairmanship to deliberate further on the issue and come up with its recommendations. But instead of coming out with a collective report, after its deliberations, the committee decided to ask the chairman to come out with a report.

Agarwal says the report will be submitted soon.

Industry officials say the decision to ban the product should instead have been referred to the Life Insurance Council, an association of life insurers, and not to a small group of actuaries, a charge to which Dr Kannan says, "The product is called actuarial funded product and hence it was decided that the actuarial profession should take a call on it."

According to him five companies have filed for approval to launch actuarial-funded products with IRDA and a decision had to be taken fast in the interest of customers.

"The Life Insurance Council was kept informed. As a matter of fact IRDA''s member (life) is the chairman of the council. The chairman and the general secretary of the Life Insurance Council were kept informed of the developments," he emphasises.

Intriguingly, none of the two affected companies, Aviva Life or Bajaj Allianz, took the matter to the Life Insurance Council. "No one has made a compliant to us," says S V Mony, general secretary, Life Insurance Council.

Perhaps the companies do not want to cross swords with the regulator for a product that is opaque and customer-unfriendly in nature. They seem to be lying low waiting for an opportune moment to strike back.