IRDA bars sale of complex unit-linked products

KOLKATA/MUMBAI: Insurance regulator Insurance Regulatory and Development Authority has banned sales of complex unit-linked products, which involve actuarial-funded units. The ban will adversely affect the country’s second-largest private insurer Bajaj Allianz Life Insurance which generated most of its premium through sales of such products. It will also affect Aviva Life Insurance, the only other company to have similar products.

Actuarially-funded units or capital units have a sophisticated structure, where the insurance company allocates significant sums to the policyholder’s account in the first year. However, these initial allocations are notional i.e. in the form of actuarial units, which convert into real money only in the future. The downside of such products is that there is not much balance in the policyholder’s account in the initial years, which he does not realise.

Both Bajaj Allianz and Aviva insist that over a period of time, there is no disadvantage to the policyholder vis-a-vis regular unit-linked policies. Speaking to ET, IRDA chairman CS Rao said, “There is lack of transparency in these actuarial-funded products, and we are concerned that policyholders may suffer. These units are not totally backed by actual investments, and hence, actual expenses are loaded at a later stage of the policy. Last week, there was a meeting by a group of actuaries and it was decided that such products will be disallowed. In any case, there are not too many companies that sell such policies and we have asked them to disallow these products in the next 15 days.”

Insurers will, however, honour policies that have already been sold, Mr Rao said. In the past, actuarial-funded products were cleared by the regulator. In fact, one of Aviva’s actuarially funded products was approved as recently as May 2007. However, following complaints from rival companies and faced with a fresh proposal for a similar product, the regulator decided to have these products re-examined by a committee of actuaries.

The committee found that the level of transparency in this product was low while its complexity was high and decided that such products do not suit the Indian market. The regulator has decided to go along with the recommendations of the committee of actuaries. IRDA sources said one reason why the regulator chose to ban the product rather than insist on better disclosure norms was concerns over rampant mis-selling.

With over two million agents now selling insurance, the regulator has decided to standardise terms to make it easier for policyholders to understand costs and risks. Actuarial-funded policies increase the complexity.

In a statement issued here, Aviva Life said, “None of our products are detrimental to the interest of any existing or prospective customers.” Bajaj Allianz Life Insurance had managed significant profits last year and in the first quarter of this year because of this product. The flipside for the company is that future earnings from this product would be lower than what it would be in traditional Ulips.