When Madhavan, who runs an NGO in Uttarakhand, called up, he was driving to the station from Sitla. His cabbie was talking about this amazing insurance policy from Life Insurance Corporation of India that would return Rs 16 lakh (Rs 1.6 million) on just Rs 30,000 (Rs 10,000 invested a year for three years) after 20 years. Madhavan said that people were lining the streets to buy this 25 per cent per annum guaranteed return product from LIC in Kathgodam and surrounding areas.
On March 2, the regulator, the Insurance Regulatory and Development Authority, cautioned investors against Money Plus, the unit-linked insurance plan from LIC, and those of some other insurance companies, because the returns claims were inflated and misleading. But this warning is already too little and too late. That the unit-linked product has been unravelling for sometime and is being grossly mis-sold is old news. What is new in the latest LIC episode is that the mis-selling reached a frenzy that caught the regulator's eye.
The Indian insurance industry has made a huge leap from the opacity of an endowment or a money back plan, where costs and returns were not clearly marked out, to a ULIP where the costs are disclosed and return strategies are left to choice. The industry seems very happy with this bump up in product structure, but is unaware that there is a lot of catch-up to be done, specially when compared to mutual funds (which a ULIP pretends to be). Some issues:
Benchmarked returns. The 6 and 10 per cent illustration route that Irda uses is not working because agents routinely talk about doubling or tripling money in so many years instead of comparing returns like funds with third party benchmarks like the Sensex or the Crisil MIPBI.
Portfolio disclosure. Most mutual funds declare their portfolios once a month, though the regulator's requirement is only twice a year. There are no clear guidelines on portfolio disclosure for insurance companies. Of the 15 life companies, just 10 make their portfolios available on their websites and some of them still display their December 2006 portfolios.
Cost structure. The costs of a financial product should be simple to understand. Funds, for example, have entry, exit and annual costs with simple caps. ULIPs have different costs, names and rates. Worse, costs are frontloaded, handcuffing investors to a product that may mis-fire.
Asset allocation. The investment mandate of an equity-oriented ULIP is not clear. You don't get to know whether you have got a large-, mid- or small-cap plan. Funds do it better. Though asset allocations in some schemes are way off their mandate, by and large, one gets what one buys.
Switching cost. Frontloading of costs makes switches due to fund manager inefficiency very costly. ULIPs can charge up to 70 per cent in the first year. The similar cost in a fund is 2.25 per cent.
The insurance industry talks of the long term. But its own approach is short-sighted.