MUMBAI: Finally, mis-selling of financial products, mostly life insurance products led by unit-linked insurance policies or Ulips, which lead the mis-selling bandwagon ever since the industry was born, may ebb, forget ending it as such, with the regulator Irdai over the weekend ordering life insurers to nearly end advertising Ulips, one of the biggest asset classes in the stock markets as investment products.
In fact, one of the primary goals of the Insurance Regulatory and Development Authority (Irdai) ever since its establishment in 1999, has been to stop the mis-selling of Ulip, which is a combination of an insurance policy and an investment product. In fact, if compared, the incidences of misspelling of Ulips/life insurance policies and mutual funds, the latter is a pale shadow of the former with the number of complaints against Ulips mis-selling being almost 99.9:01. The next in line are credit card issuers and banks.
The regulatory crackdown comes after it has been repeatedly found that insurers have been hawking Ulips as a pure investment product and are coming out with misleading advertisements to vouch for this. The regulator, while prohibiting insurers from advertising Ulips as investment products, said these are hybrid financial products that combine insurance and investment.
“An advertisement on the unit linked insurance product, index linked product and annuity products with variable annuity pay-out option shall contain adequate, accurate, explicit and updated information, in simple language,” says the Irdai master circular issued over the weekend.
The circular has also asked insurers “to form an advertisement committee, which is approved by their respective boards, and appoint a senior-level officer of the distributor channel to examine and approve advertisements to ensure that the advertisements are true and not misleading.”
Ulip ads “must contain adequate, accurate, explicit, and updated information, presented in simple language”. According to the Irdai, all ads for participating insurance policies must disclose the following risk factors: the projected bonus is not guaranteed; past performance does not indicate future bonuses; these products are subject to the insurer’s overall performance in terms of investments, management of expenses, mortality, and lapses.
Why is mis-selling rampant?
So, what do we understand by mis-selling of Ulips and why is mis-selling in this space so rampant? According to an analyst at Motilal Oswal, Ulips are mis-sold primarily for three reasons. First, most sales personnel are not trained to handle a complex product like Ulips, which is nothing but a hybrid life policy. Most of them have been selling plain vanilla products till the time LIC dominated the market but the arrival of private life players has seen the market dynamics changing radically.
As a result, traditional life policy agents are unable to understand a hybrid like Ulips. LIC used to have over 90% of its products as participating policies or par policies also known as with-profit policy, which entitles a policyholder a share of the profit of the insurer in the form of bonuses or dividends. But since its listing in May 2022, the share of par policies has come down to around 83% as of March 2024.
On the contrary, private life players have mostly non-participatory or non-par products which do not offer profits/dividends to policyholders. As opposed to a non-par plan, which offers guaranteed and fixed benefits, a par plan offers no guaranteed benefits and the returns depend on the profits of the company and therefore future bonuses can never be guaranteed.
This is also the reason why non-par products carry a relatively lower premium rate. Secondly, banks are now permitted to sell insurance under the open architecture model wherein they can sell as many as insurers’ products as they want to, creating competitive pressures with sales targets, leading to mis-selling. The third reason is the lack of proper investor education by insurers.
Ulips and MFs
The main difference between a Ulip and MFs is that Ulip is a type of insurance plan providing insurance coverage to the policyholder offering triple benefits such as investment return, insurance cover and tax benefits while a mutual fund is purely an investment product and does not have any insurance cost embedded in it nor offers n insurance cover.
Economics of mis-selling
But the economics of mis-selling is that it is not just competition or lack of awareness that breeds mis-selling, nor the if-I-won’t-do-it-someone-else-will-do-it-approach, but it’s the encouragement agents get from their employers that emboldens them to mis-sell because it’s a part and parcel of working in the financial services sector.
According to industry analysts, the main reason for mis-selling in Ulips is because this is sold as an alternative to mutual funds and this in fact is the primary method of mis-selling. Because when you sell Ulips as MFs, people tend to believe the returns on a
Ulip can happen as fast as in mutual funds.
What is the way out?
All this berating does not mean Ulips are bad products but good products sold badly. Ulips can still thrive given the tax benefits it offer but the challenge of course is to prevent them from being mis-sold. If one were to appreciate a financially literate salesperson of financial products, the prospective customers also need to be financially literate. But unfortunately the twains don’t always meet. In fact, they rarely meet. Which is why it is easier to just mis-sell an investment scheme.