SEBI, IRDA cross swords over regulation of ULIPs

MUMBAI: A turf war has broken out between the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (IRDA) over the regulation of unit-linked investment plans (ULIPs), which have emerged as one of the hottest investment products in recent years.

ULIPs are insurance plans that are similar to mutual funds and have been around for a decade now. The latest salvo from Sebi, the capital market watchdog, is a show-cause notice to all life insurance companies, including the biggest player Life Insurance Corporation (LIC), that sell this product. The insurers have been asked to explain why they have not taken Sebi’s approval before selling ULIPs.

Sebi’s display of authority has not gone down well with IRDA. When contacted, R Kannan, member, IRDA, said: “ULIPs are internationally sold by insurance companies and not by any other segment of financial services. They are a composite insurance product, but the investment is shown separately because the investment risk is borne by the policyholder.”

“This product is structured as per international practice and is well within Section 2(11) of the Insurance Act. We have asked for a copy of the show-cause notice and will take up the issue with the government,” he told ET. While the particular section in the Act recognises life insurers’ right to sell such products, Sebi probably feels the schemes that generate a return on investment are similar to collective investment schemes which come under its jurisdiction.







ULIP is a generic term used to describe insurance plans where the choice of asset lies with the investor. The structure is similar to that of a mutual fund. Just like in a mutual fund, ULIP money is allocated to either an equity or income or balanced fund and any gain in the value of these assets is reflected in the appreciation of the net asset value of the units. Charges towards insurance and asset management are recovered from policyholders -- a practice that mutual funds also follow.

More than 80% of new premium collected by insurance companies from policyholders is in ULIPs. The product is responsible for insurance firms emerging as dominant players in the stock market. Under the circumstances, a curb on ULIP may also impact the stock market.

The move comes less than a month after the insurance regulator wrote to Sebi explaining that apart from providing a maturity benefit, ULIPs also incorporate mortality and morbidity benefits, and, therefore, come under the purview of the insurance regulator.

It is unclear what provoked Sebi a decade after ULIPs hit the Indian market.

However, with ULIP sales picking up, there have been shrill complaints from the mutual fund industry that life insurers were selling mutual funds under the garb of protection plans. Fund houses argue that insurance companies sell ULIPs by paying hefty commissions to distributors, while they are bound by the maximum fee that can be given to brokers. Also, ULIP fund managers were turning into significant players in the equity markets with equity assets under management of the life insurance industry running into several billions.

Worldwide, there are not many instances of such regulatory dispute. One reason is that internationally most insurance companies, which mobilise funds under ULIPs, farm out the management of these funds into asset management companies that come under the purview of the markets regulator. In India, life insurers are barred from using the services of mutual fund managers, even though almost every life insurance promoter has a mutual fund within the group.
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