New insurance premium is waning, says Sunaina Vasudev at BS. Overall, nwe premiums have fallen 21% with Reliance, Bajaj and ICICI seeing their new premiums cut but more than a third.

In quantity, LIC is the biggest player out there with about 36,000 cr. in new premiums, down from 45,000 earlier. But of the rest:

IRDA has released guidelines for “web aggregators”. (I’ve written about this earlier) These are final guidelines and will be applicable from February 2012.

There has been some consternation regarding these guidelines. Medianama believes that these are “disastrous for the industry”. PolicyBazaar.com – which will have to get regulated now – is unhappy and says “the guidelines will result in companies like us not to function”. But before we go around getting knee-jerk reactions on overregulation, note that this is not really huge information.

Simplified:

• Aggregators that show multiple products on their web sites need to pay 10K to register with IRDA and have a minimum net worth of Rs. 10 lakhs
• Aggregators can’t be an insurance agent or a related party.
• Insurers are allowed to pay aggregators a LOT of money:
• Upto Rs. 1 lakh per product (each insurer has about 20-30 products),
• Plus Rs. 10 per lead,
• Plus 25% of the commission paid on an actual sale.
• That 25% is only for first year premium.
• Insurers can’t pay aggregators in any other way than the points above.
• Aggregators can’t show ads.
• They can’t have “opinion” pieces – that is, they have to only show facts (comparable or otherwise), but can’t say that they don’t like this insurer or even that, look, so many people have disliked this product. They can only present facts.
• Aggregators can’t have ratings
• If a user asks for a particular insurer, his details can only be shared with that insurer. If he doesn’t specify, the aggregator can pass it on to a max of 3 insurers.

What are "Aggregators"?

Aggregators are web sites that give information on insurance products of multiple insurers. One part of their business model is to get money from the actual insurers or from large agents, on a per-lead basis - users compare products and like some of these products; a "lead" is thus generated, for which the insurer or agent might be happy to pay.

According to industry sources, the average pay per lead today is Rs. 80 to Rs. 100 (fairly generous if you ask me)

Lead-gen is ONE business model for aggregators. There are many more:

a) Advertisements. Sadly the industry wants to get ads from insurers. What a dumb model that is. How can you be an unbiased comparison site if you allow ads from some insurers to be prominently displayed? It’s like going to a competition where a judge is a close friend of one contestant’s mother. [According to me, an online insurance lead is much more likely to buy books, or clothes, or watches, or a car; get those ads instead.]

b) Charge the customer: This model has, quite simply, not worked for a pure comparison site. But consider that any insurance advisor – or financial advisor – needs to offer the best kind of solution to her customers. So if you have technology to aggregate information, and an advisory layer on top that provides the hand-holding and the decision support, you can charge the customer for advice.

(Note that the above three models are independent of each other.)

But Can IRDA regulate a web site?

IRDA has no jurisdiction on web sites which are a media property. If I’m not an insurance broker,agent or insurer, IRDA cannot regulate me, period. It can huff and puff, but it can’t blow the house down. The issue of jurisdiction, though, is complex and I’m not a lawyer, but you have to note a few things:

1) IRDA is about regulating insurance. It has power over insurance companies, their products, their commissions, the agents and that ecosystem.

2) IRDA doesn’t even regulate all insurance. Postal insurance and RBI deposit insurance are out of it’s ambit, for instance.

So basically, before we get our knickers in a twist, it’s important to note what IRDA is trying to do here and who they’re planning to address.

They can’t regulate a generic web site. They can, however, control what payments are made to what kind of organization – because if they didn’t, the insurers would easily be skimming off money to agents as commissions (which are regulated strictly now). Commissions are a sore point for insurers, who like to build complex products that no one understands and sell them to people who trust them, and eventually charge 100% of some premium as commissions. To stop that habit, IRDA has grudgingly made rules to compel the insurers to reveal who they pay for what and how much, and restricted total commissions to a certain pre-approved level.

Therefore, yes, IRDA can control who insures and brokers pay.

And it follows that many comparison sites earn from lead-gen, so IRDA can regulate what they do as well, and they stand to lose their revenue source. But only for paid-for-lead-gen sites.

An aggregator that survives on advertising or on charging the customer direct is not going to be subject to these rules. If you choose not to be a lead-generator, you don’t have to follow these rules.

Why Do You Keep Saying That?

Because while it seems to me that while web sites are complaining, they do have a choice.

You couldn’t get into the press box in the IPL if you didn’t adhere to the strict guidelines of BCCI. You can’t show more than X minutes a day, you can’t do this, you can’t do that. But that doesn’t stop people from covering it after seeing it on TV. Or by being in the regular crowd. No, they wanted the press recognition and the invitation to events, so they decided to go with the rules. That’s the way the game is played.

Apple doesn’t allow you to sell an app on its app store if they don’t like it. In some cases they have no logical reason to deny apps, but they do. And developers CAN get around it, by doing something for Android instead, for instance. There is a choice. If you want to play, you play by rules of those that own the playground.

IRDA ring-fences the insurance playground. So if you want to work with their jurisdiction, you must play by their rules. Otherwise, you can continue to be an aggregator site without getting paid for leads by the insurers or brokers.

So Is The Regulation OK?

Not necessarily. Like I’ve said, it’s dumb to put a 10K fee plus a 10 lakh net worth requirement. Dumb, because it’s pandering to the rich. Today, anyone can create a comparison site – technology, greps and calculations are all it takes. But then, as I’ve said, this guideline only applies if you’re willing to give up any lead-gen based revenue – which I argue is a short-lived concept in India anyhow.

I also find the “only two insurers” excessive. Instead, IRDA should improve its ombudsman and actually respect complaints.

Much of my arguments are the same as earlier, which you’ll find here. To summarize, I think IRDA needs to increase its addressing actual misselling and fraud, instead of putting blanket rules. Also I think IRDA is probably within its limits to restrict payments from entities they control.

(Note: my advice of having a sister entity that does an actual agency still applies – while aggregators can’t be brokers, brokers can have an aggregation web site that has the no-ads/no-opinion content criteria of the regulation)

And Is The Criticism OK?

Much is lost in the translation. Mechanisms to rate insurers, or to regulate the income of aggregators for leads, or to disallow advertisements have been railed against, but what was missed was that you don’t need to be paid for leads. 

If you don’t get paid for leads, then yes, you can compare, you can rate, you can put ads. IRDA is not in the picture.

Some will say, boss, there is no money in client advice or ads. But the flip side is that lead-gen creates issues with malpractice. An aggregator might push one product because of higher commissions, even subtly. Ads will confuse the user about site bias. IRDA has a right to regulate this where they can.

Finally, the business model of getting paid to give a name and phone number itself is very very shady (I always enter ASDF and a random birthday or phone number on all these sites anyway). There is spam abuse, and also abuse of trust – aggregators today might liberally share your information without fear of a law to restrict them.

That these rules are too restrictive or that regulators are getting too high handled needs to be understood better. We often accept silly, arbitrary regulation in other places (App Store, IPL, even Abhishek and Aishwarya’s baby media coverage) because it’s what you “pay to play”. I expect that this regulation will be toned down eventually as the market matures.

Meanwhile, web aggregators have to explore different models. I personally think IRDA is doing them a favour and stopping what I think is a dead ended model anyhow (lead-gen)

Insurers have been losing some steam over the last two years, but how much? Taking new premium over all products, bought by individuals since 2009 shows us how things are:

August saw a strange spike last year in individual single premium policies last year so the –61% looks like an anomaly. (And indeed, therehave been a huge incerase in “group” single premiums this year in August too).

But the overall graph has a downward trend and the degrowth is informative. Watch insurer stocks for notes as well. (ICICI, Bajaj Finserv, HDFC etc.)

What are "Aggregators"?

Aggregators are web sites that give information on insurance products of multiple insurers. One part of their business model is to get money from the actual insurers or from large agents, on a per-lead basis - users compare products and like some of these products; a "lead" is thus generated, for which the insurer or agent might be happy to pay.

Of course, IRDA has no regulation on web sites - it's a media property that IRDA has absolutely no jurisdiction to regulate - so IRDA is simply trying to regulate payments to such entities from insurers and agents that it regulates. If you build such a site and want to get paid anyone in the industry, you'll have to adhere to the guidelines (which are "draft", not final).

Why?

No one knows. The IRDA has very little experience with actual regulation, considering the massive amounts of mis-selling that happens even now with insurance schemes. I get a call a day - I know.

The only thing I can think of is the IRDA wants to be known as doing its job with an entity that is barely surviving online (aggregator web sites) and who really don't have the money to fight back. All insurers meanwhile are getting their agents to sell money-back policies as great investment products.

An aggregator has to register with IRDA.

This is a silly idea, in my opinion. You have to pay 10K to IRDA to register. That's 10K down the drain, and a process that can be stalled under random whims and fancies. And then you can get inspected at any time. This is a sure way to create corruption - demand that every business entity get itself a "license". Already, insurers and brokers need to be licensed from IRDA, now even people who give information do? We're back to the license-raj anyway.

Minimum Net Worth

The Aggregator has to have a net worth of 50 lakhs, for the past three years, and on an ongoing basis. Why? This is a strange requirement for a business which needs capital of less than a lakh to start - heck, you could write a full policy comparison and lead-gen engine for about Rs. 5,000 (the cost of the domain name and some PHP/database hosting). You don't even need a physical office. In fact, you're not selling the insurance, so you aren't even liable for the sale (for misinformation, yes, but there's a fraud law against that, and that's criminal procedure, not IRDAs domain) Why 50 lakhs? As Medianama says, this needs to go.

Payment terms

• Aggregators can only get paid by insurers or brokers if a "lead" converts to a sale. This is obviously to avoid massive numbers of leads randomly through databases or such, and siphoning out money from insurer kitties. Don't laugh, worse has happened. But instead of punishing the perpetrators - and IRDA knows who they are - they choose to introduce regulation instead; I wish they actually worked on enforcement also.
• Only 25% of the insurer's first year's premium, or the agent's first year brokerage can be paid to the aggregator.
• No subsequent year commissions for such leads. While this is strange, it might make sense in that the website isn't really involved in servicing the customer post the lead-gen phase. But if you want to create a web site that helps customers understand how their policies (which they have bought) perform over time etc., you are out of luck if you expect longer term payoffs.
• No advertising or other payments: The regulations have a very strange funda: 
  

An Insurer / Broker shall not pay the web aggregator fees or remuneration, by whatever name called, towards the costs incidental to the web aggregator’s activities including maintenance of the data base, infrastructure, training, entertainment, development, communication, advertisements, sales promotion etc.

So an insurer can't even advertise or pay to register. IRDA thinks this will avoid confusion to customers. But of course, IRDA won't even bother to address actual mis-selling of banks selling insurance policies to customers, disguised as fixed deposits, not even ACKNOWLEDGING the problem with a press-release or anything. Well done.

No Lead Sharing

So if I want insurance but don't know which, then there are stranger regulations proposed. You can only share info with one broker or five insurers, not both. This is micro-regulation at its finest. Imagine if TRAI were to tell you that you can speak to five friends per day, or two business partners, otherwise you have to buy a new phone.

Yes, lead duplication is a problem but this kind of regulation isn't a way to solve it. If users complain, then act on individual complaints. (remember, it was the user who went and said I don't know which insurer, but I'm interested, tell them to contact me!) The warning/fine/suspension argument situation is fine.

What is the solution?

Yeah, yeah, I know, if I think these regulations are nuts, what else would I suggest?

No registration required. No minimum net-worth. No payment term regulations. No concept of scrutiny. Just a statement saying you're all welcome, but if you are found guilty of mis-selling, fraud, spam or such, we will Warn + Fine + Blacklist you, and create a mechanism for appeal and whistleblowing. Finished. That's all you need, plus one or two heavy enforcements of big players - suddenly everyone behaves.

But if these regulations actually go through, what to do? You can't be in the "lead-gen" business alone, that's for sure. You have to be a broker. But since getting one composite license to service multiple insurers is a pain in the neck, you need to setup 10 companies to get 10 different insurance agent licenses. Then, have another company to run the information web site, but don't let it get paid by the agent/broker companies - transfer leads to them, and they'll make money from the lead conversion anyhow, and as a "group" you'll make money.

You need to make money from actual transactions, not from leads. But the lead-gen model is full of fraud in India anyway, so you wouldn't make much from it in the longer term.

This is crazy, I know, but eventually regulations will change. When they do, you can work at merging entities. I know from experience that this is not difficult or costly; you need a good accountant, that's all. But it does raise the bar - this is no longer a basement/garage business, and you'll need a few lakhs to get this working.

This post is written by Deepak Shenoy, at Capital Mind.

The concept, prior to September 2010: if you bought a ULIP and stopped paying premiums after say 5 years, you could choose to continue to have

• Insurance cover continued
• in which case, Mortality charges and policy admin charges would get deducted from fund value.

Now, with the new regulations this is no longer allowed. If you stop paying premiums, you have to take back your money. Subramoney also mentions this in his blog.

What this means now is: there is no way to stop payments and still continue cover. Let's look deeper.

Why did this rule come into place?

ULIPs had horrendous surrender charges, upto 100% of fund value. IRDA said boss, you can't charge more than Rs. 6,000.  And you have to pay back the fund value to the customer, or if five years are not completed, leave it in at 3.5% interest and then give it back. That prompted the question: what, exactly, is a "surrender"? If you stop paying premium, that is equivalent to a surrender.

Now, ULIPs must return the money or move it over to a low grade investment area if you stop paying premiums. What is required, perhaps, is a tweak to the regulation that allows users to continue (at their own behest) the risk cover. The specific wording of the current regulation is:

A policyholder shall be entitled to exercise one of the following options upon discontinuance of the policy:

    (i) Revival of the policy, or

    (ii) Complete withdrawal from the policy without any risk cover.

This could be augmented with (iii) Continue with the risk cover, with mortality charges being reduced from the fund value from time to time, and the option to withdraw completely from the policy under (ii) above at any time.

Is the cover continuance practical?

Most ULIPs had absolutely crappy insurance limits, and in practice, almost everyone took 5x of annual premiums as cover. Many ULIPs provided the sum assured OR the fund value, whichever was higher. For them, the continuance meant very little insurance - probably 3x-4x annual premiums - practically, if you paid Rs. 50,000 you would have cover for about 2 lakhs, which, one must admit was unreasonably small.

Some others offered risk cover of sum assured PLUS fund value, which is where the continuance option may be useful, so let's explore some more.

What happens if risk cover continues?

Let's say you were paying Rs. 100,000 for a sum assured of Rs. 10 lakhs, and after year 5 you decide to stop premiums.

In a cover continuance scenario, you would get the Rs. 10 lakh cover to continue. With age, your mortality charge increases - that's how ULIPs work - and eats into your fund value. From the Rs. 3,000 a  year if you were 35, it will go to Rs. 10,000 a year if you're 55. Even at that, the cost is reasonable.

But think about it - for someone who can afford Rs. 100,000 a year: is a 10 lakh cover worth it? You obviously need more - if you can save 1 lakh a year for insurance, chances are that you spend more than 5 lakhs a year (15% saving) and therefore, the 10 lakh insurance is utterly useless. In current ULIPS, though, you may be allowed to take on a larger insurance cover, and to that extent, there is likely to be a practical need.

By the way, policy administration charges nowadays can be substantial (sometimes, 3% a year, of the premium amount!).

The cover continuance option could be useful for those who are younger, and gives them the ability to stop paying premiums; and I would definitely recommend that it be made available as an option.

With the caveats : This should not be the default option. It should not be allowed less than 5 years from the policy date. It should also let you exit fully at any time.

Other Options

Till then of course, your options are:

• Take the money, buy a term plan and put the rest into an investment like a mutual fund or stocks.
• Invest in a single premium plan if you still like insurance. I don't recommend this but there are those that swear by insurance, or can't get rid of annoying agents.

Overall, the current regulation must be augmented, to allow cover continuance if you stop paying premiums after 5 years.

* I got this information from a survey being conducted by Money Life.

This post is written by Deepak Shenoy, at Capital Mind.

(Posted in entirety)

It was the day they’d talked about 9 years ago. The first day of 2011.

“I’m on my way.”

Ganesh Raghupathi sighed. He had known Arnold would be late. But then, Arnold had two kids, and you always give that species a little more respect, and a little more time.

Arnold D’Souza was looking forward to the meeting. He walked in to the coffee shop, while Ganesh was clumsily switching on his laptop.

“Over here”, said Ganesh, raising his hand.

“Hi Guns!”, said Arnold. “Happy New Year! Let’s get started. To recap – it’s the 1^st of January, 2011 and we are here to compare our retirement choices. I chose a Unit Linked Insurance Plan (ULIP) and you bought something else. Let’s see where we are today.”

“Thanks for the wishes, Arnie, and the same to you.”, said Ganesh. “Let’s see the chart:”

	Arnold	Ganesh
Plan	Invest 50,000 per year for retirement
Option	ULIP	Mutual Fund + Term plan for insurance cover
Insurance	5 lakhs	10 lakhs
Premium	Part of the money paid Ceases when fund>5lakhs.	Separately, Rs. 3,000 per year. 47,000 left for investment
Investment choice	ICICI Pru LifeTime	Zurich India Equity Fund (Now HDFC Equity Fund)

“Let us now compare. Now only with current values of our investment, like we had discussed; let’s dissect and see how each investment has done in different areas..”

“First, let’s look at costs. For the ULIP, the commissions were fairly hefty – 18% in the first year, 7.5% in the second, and 4% every year after that. For the mutual fund, the entry loads were 2.25% till 2009, and after that, zero.”

	Arnold	Ganesh
Upfront commissions	26,750	8,460

Arnold gasped. “Whoa. I paid more in the initial years? That means less of my money compounded itself, and thus would have destroyed my return. Okay, my fund had better have given stellar performance!”

“Look at the NAV comparison in this chart I plotted, mapping both funds together. “

“Purely from an NAV perspective, the mutual fund has done better, with a 35% annualized return, versus 22% for the ULIP”.

“What does that mean, Guns?”

“Well, remember our conversation at that time? That insurance advisor told us that even though the ULIP was a high-cost product, it would do so much better in terms of performance because it was a new fund. The mutual fund I chose was one of the best at that time; it is no longer among the top 10, but it still has beaten the ULIP comprehensively. In the performance area, the fund has returned 15x, while the ULIP, only 6x.”

Arnold whistled. “Wow. Okay, that’s another piece for you. What about insurance?”

“We both decided to take insurance for 5 lakhs. For you, it was part of the ULIP. For the first year, you would pay a risk charge – called a mortality charge – for 5 lakhs minus whatever your fund value was. The minute your fund value reached 5 lakhs, there was no more mortality charge.

“For me, as an investor in a mutual fund, I could not replicate that structure at all, with a reducing cover. And no one would sell me a term plan for 5 lakhs - the premium was too little. The best I got was an offer of Rs. 3,000 for a 10 lakh insurance. It was higher insurance, but it was constant – that means if I died my family would get 10 lakhs PLUS the value of the fund, but in your case it would be only the higher of 5 lakhs or the fund value. Even then, what it means now is that I paid about 27,000 as insurance; you probably paid less than 4,000”.

	Arnold	Ganesh
Insurance costs	3,600	27,000

Arnold half-smiled. “Okay, but the two aren’t necessarily comparable. You had a higher cover, but I admit that the insurance cover was hardly useful to either of us. I mean, if we could put in 50,000 per year, a cover of 5 lakhs was woefully inadequate. Let’s leave those alone. What about taxes, Guns?”

Ganesh replied, “Yeah, that’s where the ULIP scores. My tax saving, at about 30% a year, purely on this product was Rs. 1,000 per year for the term insurance. For you with the ULIP it was Rs. 15,000 per year. The difference, if invested back into the ULIP, would have bumped your returns to much higher levels. But again, we have a problem with reality.”

“Darn. Just when I was showing signs of winning. What reality?”

“The fact that our tax saving potential has been capped under a collective investment limit. See, we both started to get bigger salaries, Arnie. Today about Rs. 8,000 per month for each of us goes to our provident fund account, which takes up most of our tax-saving limits. If you ignore that, your housing loan principal repayment will take it. Or, your children’s school fees. Or the principal repayment on my housing loan. Or, like we mentioned, our insurance was inadequate, so we took on much larger term policies – even that premium may be used under the same tax saving limit, currently of Rs. 1 lakh per year. Effectively, the ULIP didn’t help with saving taxes – reality bites.”

“Guns, you’re right. My accountant laughed when I asked him for tax-saving schemes. I already had too much in them, and the new Direct Tax Code might make the tax angle redundant, he said. There may be no tax saving for insurance schemes like mine, and worse, the maturity proceeds may be taxable!”

“You have till 2012 to withdraw, though. So what’s the verdict, Arnie?”

Arnold let the information sink in. “Look, Guns, it’s not about rupee amounts – in those terms, the Equity mutual fund approach has done far better. In fact, just a rough comparison of the two using their real NAVs shows that one approach has been vastly superior.”

“It’s the Term Plan + Mutual Fund, without doubt. Not only did it have far lower costs – it has provided a far better return. In terms of saving tax, the ULIP might have done me some good initially, but other avenues took over my tax-saving limits, and there was no real tax-saving eventually. Both our approaches were inadequate for insurance. You win - here’s your one rupee.”

Ganesh took the coin and nodded. “But, what happens, going forward”, he asked. “If you had to decide on a retirement strategy today, what kind of product would you invest in?”

Arnie said, “Here’s my four lessons:

1) I won’t bother about tax saving. So much has changed since I bought a product 9 years ago, and so much more will change going forward, all towards taxing of potential gains. The only thing I care about is that I mustn’t be taxed while “accumulating” my growth – only when I exit. In that regard, fixed deposits are out.

2) Costs matter. The more you pay for a product, the more it hurts you later. In fact, a product that costs higher in the initial days seems to destroy your compounding potential.

3) Performance matters. While I might have chosen a badly performing fund and you a great one, in the end the fund that does better will win. But fund performance cannot be taken for granted or assumed, the only thing you must have is the ability to shift out of a badly performing product. With a ULIP you really don’t have that freedom – you can’t just shift to another ULIP without paying huge upfront costs.

4) Don’t mix insurance and investment. The advantage of “insurance” was cursory – it was terribly inadequate with the ULIP in any case.

In that context, I wouldn’t go with any of the ULIPs they have to offer today either – even though some of them offer lower upfront costs, they are not low enough. I might choose a long term strategy of allocating money to different kinds of assets – debt, gold, real estate and stocks, and to get there, I am likely to choose either a mutual fund or go direct. There’s also the New Pension Scheme (NPS) which has even lower costs, though I don’t like the fact that they force you to buy an annuity at the end. There are Exchange Traded Funds that have even lower costs. For insurance, a term plan works best, and it seems like the insurers are reducing costs every month!”

Ganesh was impressed. “You’ve come prepared, Arnie!”

It was now Arnold’s turn to sigh. “I had put aside the one rupee coin a few years ago, Guns. And the strangest thing is – I made a substantially higher return from stock options in a startup that was just acquired. That takes care of my retirement, but wouldn’t it be crazy to discuss that as a retirement strategy?”

More Yahoo Columns:

• Taking Stock of Commissions (Comments)
• Innovations and Curses (Comments)
• Free Money (Comments)
• The Illusion of Low Risk (Comments)
• Tips about the Tipsters (Comments)
• The Good, Bad and Ugly of Credit Cards (Comments)
• The Problem with Multi-Level Marketing (Comments)
• Planning for the Grim Reaper (Comments)
• Of Options and Choices (Comments)
• Riding the Equity Wave (Comments)
• The Art of Picking Stocks (Comments)
• (The Whole Lot)

This post is written by Deepak Shenoy, at Capital Mind.

The new ULIP regime is here, and insurers must be balking in fear. The changes? Spread commissions over the lock-in period of the scheme, the minimum of which is now five years from the earlier three; a cap on surrender charges to a maximum of 6% (or Rs. 6,000); a guaranteed 4.5% on pension products and forcing investors to buy annuities on exit; and higher minimum sums-assured on ULIPs.

The one aspect that must trouble insurance companies the most is the cap on surrender charges. For many insurers, this has been a significant source of revenue, since these fees directly line insurer pockets. Prior to September 1, a significant number of ULIPs would charge huge amounts as surrender charges – from 100% of your fund value if you exited in year 1, grading down to 5% in year 5 and so on. The idea was something like:

Phase 1: Entrapment

“Sir, you should invest in this ULIP. All you have to do is pay for three years, and you’ll get a tax-saving, and a fantastic deal! Just 20,000 a month.”

Phase 2: Realization

“Mr. Agent. It’s been a year now, and I’ve paid Rs. 240,000 in premiums. The Sensex has gone up 20% in the last year. So why does my account balance show just 120,000?”

“Well, there was 60% first year premium allocation charges, which meant only 96,000 was left; that grew to 120,000 which is pretty good growth!”

“Good? What good? I pay 240K and am left with 120K and that’s good?”

Phase 3: Exit!

“Get me out of this plan now.”

“Sir, if you stop paying your premium you will lose another 50% of whatever is left, as surrender charges”.

“Oh. Wait. I don’t care. I’ve been cheated!”

People still surrender their policies, sometimes choosing to pay two or three more years of premiums before doing so – and primarily because they had been sold a “three-year” policy, which turned out to be a much longer, 20 year product instead. The surrender charges they paid after three years may be small – of the order of 5% or so - or massive, in some cases losing whatever little was left after commissions. When you’ve lost 90% of your money, you’re unlikely to pay more for a few more years just to recover what’s left (and pay even more commissions).

Insurance companies are seeing tremendous amounts of money leave through surrendered policies. Look at the L-7 (“Benefits Paid Schedule”) of most insurers (eg. ICICI, Birla Sun Life) and you will find that more than 90% of money going out is on account of surrenders. A further look at L-22 (Analytical ratios, Persistency) shows that only about 1/3^rd of customers choose to continue policies after the 36^th month.

We don’t know what the average surrender charge is – but for most policies before September 1, these charges were pretty hefty – let’s say the average is around 10-20% when you consider all surrenders. When this drops to a maximum of 6% (or Rs. 6,000) for policies above Rs. 25,000 premium, this will impact all insurers. The three insurers I checked – HDFC, Birla Sun Life and ICICI – had surrenders of 430 cr, 330cr and  2,400 cr. respectively; the surrender fees are likely to be above 50 crores for each insurer, just for the last quarter.

Consider now that the high salaries in the sector have largely been justified by the high fees. Salaries are sticky – no one likes to take a pay cut – so the obvious impact will be to retrench; and going by the grapevine, that retrenching is already happening. The impact of the Direct Tax Code is also negative, starting 2012, with the loss of tax-saving status of most existing policies (the DTC provides tax-saving coverage to policies with a premium of less than 5% of sum assured – most ULIPs don’t qualify). Plus there’s a tax deduction at source for insurance maturity payments, making them less attractive.

What about agents? They complain that commissions are now sub-10% which is very less. Well, the point is this – no other financial product offers even half the “lower” insurance commissions. So there is really nowhere to run anymore – insurance still provides a multiple of what they would get otherwise.

Why is this relevant to you?

What is important to understand is how the dynamics of the industry changes – and therefore what new spiel you’re going to receive, and how to decode it.

Endowments: We’ll get to hear about traditional endowments – non-unit-linked – as a great way to invest. I wouldn’t even bother – endowments are opaque products with very high but hidden charges. Additionally, surrendering the policy early costs a very large amount – usually you would be happy to see even 1/3^rd of what you’ve paid should you want a premature exit. Endowments might have their uses (for example, a “waiver of premium” rider helps continue a policy in case of disability, or a cheap way to transfer wealth when you die) – but for the purpose of investment, it is a fairly useless product.

Why sell them, you ask? Agents continue to get great commissions and the non-transparency of the product and high fees ensure you get stiffed without your realizing it.

The sales pitch of the ULIP might change – to force you to pay higher premiums, or to disguise the product as something it is not. With bankers who would gleefully sell you a ULIP when you ask for a fixed deposit, you have to be careful! So here’s a set of steps

First, don’t sign a document if it contains the word “insurance” unless you receive the complete detailed brochure for the investment.

Second, check for phrases that steal your money away from you: Premium allocation charge means they’ll take that much away. Policy Administration Charge is another premium stealing measure; earlier it used to be miniscule but now they have “tweaked” the policies around. “Administration” charges can add up to 5% of your fund value per year and what you will see is 0.4% per month, another dirty way to hide theft. Fund management charges apply at about 1.5% per year, which is okay – this is charged even by mutual funds. Mortality Charges are, again, okay because this is what the real charge of insurance is – what they take to give you the sum assured in case you die.

Lastly, add up the charges (other than mortality). Most policy charges will add up to 10-15% in the first year. Then, throw all these documents away.

I would invest in a long-running, diversified mutual fund instead; because paying 10-15% for investing your money is financially stupid, when you’ll pay only management fees in a mutual fund. (For funds like HDFC Top 200 or HDFC Equity, the total recurring fees, including trustee, registrar and other fees, adds up to 1.8%)

Yes, you will ask me about insurance – for that, I would buy a term plan; online term plans are available from ICICI Prudential and Aegon Religare for extremely low premiums. (A policy of 1 crore for a 35 year old will cost less than Rs. 25,000 per year) More insurers will offer low cost term plans, and as our life expectancy grows with better medical care, we will find premiums coming down over the next few years. I don’t like ICICI and Religare Claim payout ratios are horrible so I’ll wait.

My method does not help the profitability of insurers either, especially those who wanted to make money stealing it from us. The good old method of making profits from the practice of insurance must take center stage; the method of making money without killing us in the process.

• ULIP Surrender Charge Limited to Rs. 6,000
• On Yahoo: The ULIP War
• Beat ICICI ULIPs by Upto 77%, the Do-It-Yourself Way
• More on ULIPs

This post is written by Deepak Shenoy, at Capital Mind.

This is fairly cheap, but the only problem I have is that this is ICICI insurance and I’ve had a bad experience with their claims process.

Their comparable other product, the offline Pure Protect, offers 50 lakhs of insurance for 18,000 (30 year term). The online product, for the same conditions is 30% cheaper at 12,850.

I like this competition to Religare’s iTerm, and I really hope LIC jumps in. I trust them a lot.

This post is written by Deepak Shenoy, at Capital Mind.

Ulips have been around for several years. The structures are known. Every financial newspaper and business magazine of repute has analysed Ulips and shown in detail why investors should avoid them.

In themselves, Ulips are not fraudulent; it's just that investors can get far better deals. So this is a classic case of “buyer beware”. If investors insist on buying Ulips, there isn't much more that can be done since there are already ample warning signs in the public space. It is also easy to understand why agents push Ulips - due to huge front-loaded commissions.

Ulips offer a combination of insurance and investment, paid for in an annual lump sum. The insurer combines a term cover, deducts the premium. Then it deducts commissions. It invests what's left in the policy-holder's choice of debt and equity. One good thing is that Ulip allocations are flexible. The same scheme will allow very large variations in the ratio of debt:equity investments.

…

The reasons why a separate term cover plus a fund portfolio always outscores a Ulip are simple. Term covers have nominal commissions and so do mutuals. Much more money is therefore, actually invested. Second, there's no “either/or”. In the event of the death of the holder of a term cover who also holds a fund portfolio, the nominee receives both the policy payout and inherits the portfolio.

None of these Ulip details are concealed as such. It is written there in black and white on the agreements you sign. You can easily do the maths on the term cover (many insurers have calculators on their websites). However, it is not in salesmen's interest to point it out and they don't.

The mistake people make is to confuse insurance with investment. Insurance is a bet you want to lose. Investment is a bet you want to win. Two entirely separate intentions. Use two different instruments.

For all my vitriol on Ulips, I believe DD is correct – the instruments are not fraudulent, and they do reveal exactly how they plan to extract your money from you. And even the most cursory search on Ulips will make you feel like this:

If we still continue to buy Ulips, our problem. Devangshu’s articles are always a pleasure to read, and he provides a great unbiased view of Ulips.

This post is written by Deepak Shenoy, at Capital Mind.

"I need some more help," said Sharma. "I'm getting hounded by calls for buying life insurance."

"Before we go there," said Abacus, "do you understand how car and home insurance works? You pay some premium every year, and if something goes wrong you get paid, but either ways the premium's gone. And you're fine with that. You insure your car or house against damage, so that you can replace their services without losing a lot of money."

"Yeah, so what is he getting at?" wondered Sharma

Note: Some of you have asked – where do I get the Life Insurance Claim Statistics on www.irdaindia.org? Go to "IRDA Journal". Click the Year. Then click the "Quarterly supplements to Journal" and select the quarter. LI claim stats are usually on the last page of that PDF. (I don’t know why it is so complex. But this is not just IRDA, all our regulatory sites have a lot of information and work hard to keep that info hidden)

Do read the other articles I've written on Insurance. Some of them:

• Insurance: A primer
• How much Insurance do you need?
• ULIPs versus Term Plan + Investment – the Winner is Clear
• Low Annuity Returns in India

Please leave your comments below or in the “Buzz Up” section of the article at Yahoo. Thanks in advance!

This post is written by Deepak Shenoy, at Capital Mind.