A couple of smug rookies posturing as 'Relationship Managers' at my bank, an almost equally minuscule clique that seeks me out for investment advice, and hordes of DNC-dismissive telemarketers peddling insurance — all can stand testimony to my ULIP-agnostic personal finance strategy. My stance is hardly original — most experts of any standing shun ULIPs in their shopping cart must-haves. Despite this rare unanimity and strong arguments against the product class, it has drawn investor interest consistently. Reasons behind this ostensible anomaly, or the product's long-term prognostications, have assumed centrestage with recent developments in the shape of a SEBI-IRDA jurisdictional battle. At the heart of this are changed regulations that address opacity and investor-unfriendly practices that ail ULIP sales and service, or inherent design.
To appreciate the context of the proposed changes, one must recognize that ULIPs have been sold in a manner completely antithetical to the fundamentals of the family to which they ostensibly belong. (Most people one knows, when buying a ULIP, actually believe they are taking 'smart' life cover.) The lure of entering an asset class where 'your money is not idle' but 'deployed to maximize returns' and offer 'better term cover', has been irresistible for the typical gullible investor, fed on years of stodgy state-run insurance firms’ (often unfairly so dubbed) unimaginative offerings and dull salesfolk. A general expectation of market efficiency over public sector sloth thus plays into the aggressively positioned ULIP schemes promising lay investors the moon.
Again, an investment offering of this kind, with significant dependence on market performance, usually comes into its own in the long run (and this is not 3 or 5 years that qualify as 'lifetime' to 25-year-olds nowadays). Think 10-15 years, or 20 if not more, and cyclical noise is factored out of markets and sensible stockpicking yields results fully. Admittedly, this is market investment spiel (for, say, equity MF) but unfortunately not what many newbie investors readily bite, obsessed as they are with 'timing' the market. The same investor, when thinking term cover, expects longer tenors in line with life expectancy. The resultant surge of patience, sweetened with promise of exceptional returns, draws savings to ULIP schemes by the boatloads.
Of course, it is obvious that such troths of exponential growth do not sit well with life cover. Yet, spurred by extraordinary incentives that can only come from heavily front-loaded cost structures (45% of Y1 premium, no less!), a bevy of insurance salesmen position ULIP as a best-of-both-worlds insurance product generating assured returns over months and years. The post-sale dissonance that naturally results (it is difficult to think a worse period of investor sentiment and market return than the last two years) leads to massive exits. Yet, unlike market instruments where such attrition is visible (and actionable), ULIP truancy figures are hardly the most advertised. Hence the ecosystem of under-informed investors, malintentioned agents, and lazy insurance firms continues to flourish unashamedly.
At another level, ULIPs represent a large (if invisible) problem for private sector insurance companies. There is a highly credible school of thought that unravels what drives this disproportionate focus on the win-today-worry-tomorrow rat race for the investable rupee. The motivation seemingly comes from higher capital adequacy norms for guaranteed (term insurance) vs market-linked (investment) assets. This makes minimization of life cover (per rupee vested) a lucrative short-term strategy. Unfortunately, this evanescence creates not merely an economic but a potentially significant social issue that can wreck us in the long run. In an under-insured nation like India, with rising healthcare demand (and costs) yet inadequate social security structures, such mis-selling of investment in the garb of insurance can lead to consequences far more dramatic than most of us care to think. (Term cover, after all, is for those eventualities of life that leave us at our most frail and disturbed.)
All this has been known for a while. Yet, aside from individual decisions like mine (big picture-inconsequential, likely), not much was attempted to correct this systemically (or if something was in the works, it was certainly not PDQ pace!). To this extent, the very public spat between our hyperactive market regulator and their largely somnolent insurance cousin was most welcome. In characteristic Bhave fashion, SEBI initiated measures to clear the mess under an investor friendly bias. In the ensuing turf battle, however, the IRDA came up trumps (SEBI's knock on the Supreme Court’s doors was in vain: GoI nipped it in the bud with an IRDA-primacy ordinance before milords could weigh in — all while CBB was away on business in Canada!).
Cynics in our midst ought to be unsurprised - the venerable J Hari Narayan has impeccable credentials to win any back-room battle. Years spent in the government have admirably equipped the ex-IAS officer to work the Establishment. (Interestingly, despite similar pedigree, Bhave does not have the same reputation.) Equally, while missing the visible zeal of his no-nonsense SEBI counterpart, the charitable can point to JHN’s record of not shirking from a tough stand in the face of controversy. In any case, he has Pranab-da’s mandate.
Regardless, the verdict in the territorial fracas is hardly the key issue. Of essence is whether and how the Govt and its now unequivocally empowered regulator finally set the house in order. Even if one were to ignore my arguably over-pessimistic predilections on the social impact of messing with the small saver, there can be little doubt that Shri Hari Narayan presides over a window of opportunity — to serve the lay investor well, while providing an overdue lifeline to ULIPs. Else, the victory, so to speak, may remain Pyrrhic.
To appreciate the context of the proposed changes, one must recognize that ULIPs have been sold in a manner completely antithetical to the fundamentals of the family to which they ostensibly belong. (Most people one knows, when buying a ULIP, actually believe they are taking 'smart' life cover.) The lure of entering an asset class where 'your money is not idle' but 'deployed to maximize returns' and offer 'better term cover', has been irresistible for the typical gullible investor, fed on years of stodgy state-run insurance firms’ (often unfairly so dubbed) unimaginative offerings and dull salesfolk. A general expectation of market efficiency over public sector sloth thus plays into the aggressively positioned ULIP schemes promising lay investors the moon.
Again, an investment offering of this kind, with significant dependence on market performance, usually comes into its own in the long run (and this is not 3 or 5 years that qualify as 'lifetime' to 25-year-olds nowadays). Think 10-15 years, or 20 if not more, and cyclical noise is factored out of markets and sensible stockpicking yields results fully. Admittedly, this is market investment spiel (for, say, equity MF) but unfortunately not what many newbie investors readily bite, obsessed as they are with 'timing' the market. The same investor, when thinking term cover, expects longer tenors in line with life expectancy. The resultant surge of patience, sweetened with promise of exceptional returns, draws savings to ULIP schemes by the boatloads.
Of course, it is obvious that such troths of exponential growth do not sit well with life cover. Yet, spurred by extraordinary incentives that can only come from heavily front-loaded cost structures (45% of Y1 premium, no less!), a bevy of insurance salesmen position ULIP as a best-of-both-worlds insurance product generating assured returns over months and years. The post-sale dissonance that naturally results (it is difficult to think a worse period of investor sentiment and market return than the last two years) leads to massive exits. Yet, unlike market instruments where such attrition is visible (and actionable), ULIP truancy figures are hardly the most advertised. Hence the ecosystem of under-informed investors, malintentioned agents, and lazy insurance firms continues to flourish unashamedly.
At another level, ULIPs represent a large (if invisible) problem for private sector insurance companies. There is a highly credible school of thought that unravels what drives this disproportionate focus on the win-today-worry-tomorrow rat race for the investable rupee. The motivation seemingly comes from higher capital adequacy norms for guaranteed (term insurance) vs market-linked (investment) assets. This makes minimization of life cover (per rupee vested) a lucrative short-term strategy. Unfortunately, this evanescence creates not merely an economic but a potentially significant social issue that can wreck us in the long run. In an under-insured nation like India, with rising healthcare demand (and costs) yet inadequate social security structures, such mis-selling of investment in the garb of insurance can lead to consequences far more dramatic than most of us care to think. (Term cover, after all, is for those eventualities of life that leave us at our most frail and disturbed.)
All this has been known for a while. Yet, aside from individual decisions like mine (big picture-inconsequential, likely), not much was attempted to correct this systemically (or if something was in the works, it was certainly not PDQ pace!). To this extent, the very public spat between our hyperactive market regulator and their largely somnolent insurance cousin was most welcome. In characteristic Bhave fashion, SEBI initiated measures to clear the mess under an investor friendly bias. In the ensuing turf battle, however, the IRDA came up trumps (SEBI's knock on the Supreme Court’s doors was in vain: GoI nipped it in the bud with an IRDA-primacy ordinance before milords could weigh in — all while CBB was away on business in Canada!).
Cynics in our midst ought to be unsurprised - the venerable J Hari Narayan has impeccable credentials to win any back-room battle. Years spent in the government have admirably equipped the ex-IAS officer to work the Establishment. (Interestingly, despite similar pedigree, Bhave does not have the same reputation.) Equally, while missing the visible zeal of his no-nonsense SEBI counterpart, the charitable can point to JHN’s record of not shirking from a tough stand in the face of controversy. In any case, he has Pranab-da’s mandate.
Regardless, the verdict in the territorial fracas is hardly the key issue. Of essence is whether and how the Govt and its now unequivocally empowered regulator finally set the house in order. Even if one were to ignore my arguably over-pessimistic predilections on the social impact of messing with the small saver, there can be little doubt that Shri Hari Narayan presides over a window of opportunity — to serve the lay investor well, while providing an overdue lifeline to ULIPs. Else, the victory, so to speak, may remain Pyrrhic.
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