U(r)LIP or Mine?

A couple of smug rookies posturing as 'Relationship Managers' at my banks, an almost equally miniscule minority that seek me out for speculative advice, and hordes of DNC disdainful telemarketers peddling insurance - all can stand testimony to my ULIP agnostic investment strategy. My stance is hardly original: most financial experts of any standing shun from including ULIP in their shopping cart must-haves. Despite this rare unanimity and strong arguments against the product class, it has drawn investor interest consistently. The reasons behind this ostensible paradox, or indeed the product's long term survival, have assumed centrestage with recent developments in form of the SEBI-IRDA jurisdictional battle. At the heart of this is regulatory changes that, as one understands, shall address opacity and investor-unfriendly practices that ail ULIP sale and service delivery, if not inherent in their design itself.

To fully appreciate the context of the proposed changes, one must recognize that ULIPs have been sold in a manner completely antithetical to the basic nature of the family to which they allegedly 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 return' and hence afford '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 salesforce. A general expectation of market efficiency over public sector sloth thus plays to 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 to 5 years that qualify as lifetime to today’s average 25 year old). Look out 10 years, or 15, if not 20, and cyclical noise is factored out of markets and sensible, old-fashioned stockpicking yields full results. This is clearly market-oriented investment spiel (say equity, MF) but unfortunately not one that a lot of neophyte investors readily bite, obsessed 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 return, draws savings to ULIP schemes.

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 via heavily front loaded cost structures (upto 45% of Y1 premium goes thus!), a bevy of insurance salesmen have positioned ULIP as a best-of-both-worlds insurance product generating assured return 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) 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, mal-intentioned agents and lazy insurance firms continues to flourish.

At another level, ULIPs represent a large (if invisible) problem for the last mentioned of these: private sector insurance companies. There is a highly credible school of thought that makes a case for what drives this disproportionate focus on win-today-worry-tomorrow rat race for the investable rupee. The motivation, arguably, comes from higher capital adequacy norms for guaranteed (term insurance) vs market-linked (investment) assets. This makes minimization of life cover per rupee vested an attractive strategy for quick gain. 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) but inadequate social security structures, such missell of investment in 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 these have been known for a while. Yet, aside from (big picture inconsequential) individual purchase decisions like mine, not much had been 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 action to clear the mess under an investor friendly bias. In the ensuing turf battle, the IRDA has come up trumps. (SEBI's knock on Supreme Court’s doors was in vain: GoI stepped in with its IRDA-primacy ordinance before the courtroom drama was fully played out - and while CBB was away on business in Canada!)

The cynical 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 Pranabda’s mandate.

Regardless, the verdict of 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 over-pessimistic doomsday 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.