ULIPs ban would cost insurers big business losses

Private life insurers in the country are lucky that the recent Securities and Exchange Board of India ban on unit-linked insurance plans (ULIPs) was cancelled. According to a report in The Economic Times , they would have lost almost half their businesses if the market regulator's ban on 14 insurers from raising funds through the investment-cum-insurance product had been enforced.

That is because ULIPs constitute 46 per cent of the total business in the life insurance space. ''ULIP has taken a prominent place in the global insurance market and India is not far behind. It has become the growth engine over the years in the Indian insurance market,'' Rajesh Relan, managing director of Metlife India, told the paper.

Of Rs2,00,000 crore-plus life insurance premium collected in the first 11 months of 2009-10, a little over Rs91,000 crore came from ULIPs, according to the Life Insurance Council of India, an industry body representing 23 life insurers. Premium collection from renewal of ULIPs registered a 33 per cent year-on-year jump in the April-February period to Rs46,927 crore, showing that majority of the consumers are banking on ULIPs for better long-term returns. In 2006-07, the renewal premium collection of ULIPs was a mere Rs8,800 crore.

The scheme, where the money in invested in equity and debt and the return is linked to the market, was the epicentre of a standoff between capital market regulator SEBI and the Insurance Regulatory and Development Authority (IRDA) after SEBI last month banned 14 life insurers, including SBI Life, ICICI Prudential and Tata AIG, from raising further money from these schemes.

But IRDA asked insurers to ignore the directive. The finance ministry intervened and it was decided that the status quo would be maintained till a court verdict on the matter.

Insurance firms also mopped up Rs44,462 crore as new Ulip premium in the 11 months, up 17 per cent from Rs37,948 crore a year earlier.

ULIPs are the biggest products for private insurers who derive 70-80 per cent of their premium collection from its sale. The country's largest life insurer, the state-owned Life Insurance Corporation, derives a little more than half of its total new premium collection from ULIPs.

There has been significant rise in the ULIP renewal premium collection since 2007 and that goes to show that there is a huge appetite for the products, said S B Mathur, secretary general at Life Insurance Council. ''The appetite for ULIP products is unlikely to go down even as the controversy erupted as people are bothered about their long-term returns,'' he said.