ULIP premiums of private insurers surge even as mutual funds attract inflows

Even as mutual funds attract inflows, many investors are accessing equity through Unit Linked Insurance Plan (ULIP) policies. A large part of premiums of most private insurance companies in the past one year has come from ULIP policies.

ICICI Prudential Life Insurance, the largest private life insurance company, has had 85% of its new premiums coming from ULIP schemes in FY15 — up from 66% in FY14. Similarly, HDFC Life’s premium share from ULIP policies touched 62% in FY15 against 49% in FY14 while ULIP contributed 45% of SBI Life’s premium in FY15 against 34% in FY14.

Higher inflows into ULIPs can be attributed to three factors. “Regulatory changes have made life insurance products more customerfriendly both in terms of product features and charges,” said Arijit Basu, CEO & MD of SBI Life which manages equity portfolio of Rs 23,000 crore, of which 90% comes from ULIPs. Irda has now capped the percentage limit an insurance company can charge on a ULIP policy. For a 20-year policy, the maximum charge an insurance company can levy is 2.25% on the notional return of 10% — better known as reduction in yield (RIY), which is a measure of the gap between what the customer’s funds earn and what the customer gets after deduction of charges. Similarly, for a threeyear and four-year policy, the maximum charge can be 3% and 5%, respectively. Thanks to fierce competition, insurance companies are charging as low as 1-1.5%.

Secondly, the lock-in period of ULIP has increased to five years from three. Lastly, surrender charges have also been capped. For the first year, the surrender charge is Rs 6,000 and it is nil from the fourth year.

Besides, the average ticket size of ULIP is usually 3-4 times the conventional policy. This means that the premium collected by private insurance companies on ULIP is also higher than conventional policies. This is why the weighted received premium (WRP) growth of private life companies in 2014-15 has been more than that of Life Insurance Corporation.

“ULIPs have regained their popularity and this can be attributed to the government pushing a growth agenda. Customers are allocating more funds towards financial assets and instruments, including life insurance,” said Sandeep Batra, ED at ICICI Prudential Life insurance, which manages Rs 1 lakh crore of funds of which 50% is invested in equities. ULIP, being an urban market product, has benefited insurers using Bancassurnace channel — selling insurance through parent or other banks.

The top three private insurance companies derive nearly half of their new premiums from their Bancassurance channel support.