The bull run in the stock market after May, when the Bharatiya Janata Party came to power with a thumping majority, is fuelling the sales of unit-linked insurance plans (ULIPs). As a result, ULIPS are making a comeback of sorts, with many life insurers aggressively pushing the product that had once drawn controversy for rampant mis-selling in 2005-08. Are ULIPs coming back into fashion because of the insurance regulator IRDA’s intervention in 2010 to prune the charges related to such products, or is stock market buoyancy fuelling demand?
BusinessLine spoke to Anup Rau, Chief Executive Officer, Reliance Life, to seek his views on ULIPs and the strategy the company intends to follow. Edited excerpts from an online interview:
No, we do not think the current surge in ULIP volumes is a result of rationalisation of cost structure. If that were the case, we should have seen this phenomenon after 2010. In fact, it was just the reverse; the ULIP contribution actually went down. This (latest surge in ULIPs) is linked to the upswing in the stock market.
Do you think ULIPs are harmful to the financial health of consumers?
ULIPs are largely sold as short-term investment product, which is counter-productive for customers and insurers. In a buoyant market, ULIPs attract high cash-flows. But in a declining market, there are incidents of higher lapses and persistency declines.
This volatility in cash flows is not good, as it makes it difficult for an insurer to optimise long-term investment decisions and provide stable returns. The investor also tends to lose money in declining markets. This has a ripple effect and dents the investor’s belief in insurance as a protection tool.
What is Reliance Life’s current mix between traditional and ULIPs?
Our current mix is 26 per cent ULIP and 74 per cent traditional.
We believe this is a balanced approach and reflects the percentage of our customers who have the risk appetite for buying ULIPs. There is a segment that understands and accepts the downside risk along with the upside and this product should be sold only to such market-aware customers.
Going forward, what will be your strategy? What is the traditional mix you will aim for?
Our strategy will not change, we will sell the right product to the right customer, and we expect the ULIP-to-traditional mix to be range-bound at 15-25 per cent of ULIPs.
Do you think the stock market surge (after May 2014) has led to a comeback of sorts for ULIPs?
There is no doubt that it did. This entire ULIP rush is bull run-driven. However, this has also increased redemptions, reiterating the volatility of ULIP cash flows.
Do you have a ULIP product in which you levy only mortality and fund management charges?
No, we do not. Regulations leave little room for any significant charges. Our ULIP products will yield good returns if consumers stay invested for the long term.
Which kind of investors are ULIPs best suited to?
Largely, high net-worth and the mass affluent segment have deep pockets to weather downside risks. This segment also has the patience to reap the benefits of ULIPs by staying invested over a longer term.
Among the salaried class, the percentage is relatively low, but we still have a lot of salaried people who take an informed decision to buy ULIPs.
Is there more scope for regulatory intervention by IRDA in the ULIP space?
No, we think the current level of regulation adequately protects the customer. Most developed insurance markets around the world have not undergone such regulatory reform. The industry needs to honestly follow the sales process and give the right advice.
Is there still need for more user awareness on ULIPs?
Absolutely. Customers need to be educated about ULIPs so that they can take informed decisions and not get carried away by the stock market story.