Unit-linked insurance plans (Ulips) have come under regulations causing sales to drop precipitously. While consumers have benefited, the insurance industry has suffered a tremendous reduction in cash flow and profits.
Unit-linked plans offer coverage directly linked to another product such as a mortgage. Distributors were making commissions as high as 35 percent of the first year’s insurance payments. Regulators introduced a flat 4 percent commission to protect consumers from hard-sell tactics. The product was also regulated to stop insurance churn, a practice which leads consumers to purchase the product but eventually drop it. This turnover provides cash flow to companies without benefits to consumers.
Unit-linked insurance plans had become the life-blood of new growth. Starting in 2000, the insurance industry was deregulated. A new industry emerged including private ventures with foreign ownership. It fueled speculation and investment, and this created a steady increase in capitalization.. With the introduction of Ulips, insurance earnings mushroomed. At its peak, Ulips accounted for 90 percent of all new monies.
In six months of regulation, sales fell 45 percent. It has shrunk working capital, has driven away stockholders and may account for increases in life insurance premiums. This has happened at the same time that mutual fund regulations have steered investments to traditional savings plans, and poor market returns have hurt stock portfolios.
Insurance experts are hoping that the Ulips decline can be offset by sales of other products such as bancassurance. Insurers are reaching out to banks for cross-selling products. This already contributes some 25 percent in growth for some insurers. Savings protection plans are expected to become a new avenue for sales. Of course, insurance companies are also hoping for a rebound in India’s economy to improve overall sales.