R Kannan, member-actuary, IRDA, sees a pick-up in ULIP sales this year, with the economy showing distinct signs of revival. In an interview with ET, he says fund managers can take investors for a ride while computing the net asset value on a portfolio. The solution is in auditing of NAVs, says Kannan, who is doubling up as member-investment.
What is your assessment of the health of Indian insurers?
Our actuarial analysis shows that the solvency of life companies is well above the prescribed minimum. We, therefore, do not see any problems in the main health parameters. But we are concerned about the expense overrun. If life companies do not contain expenses and position various measures to reduce lapse rates, it could have a serious impact on solvency. Non-life companies have to move towards risk-based pricing to contain underwriting losses. We have advised the appointed actuaries to prepare a financial status report for these insurers.
What are the disclosure norms being proposed for insurers who plan to list on bourses?
We plan to prescribe norms for the valuation of liabilities and assets to ensure there are enough disclosures that would help prospective investors take informed decisions. On assets, valuation norms are well established. On liabilities, the current practice of prudent valuation will continue. We are even examining whether the valuation of liabilities could be reviewed by an independent actuary, apart from the report given by the valuation actuary. Such a peer review will instil more confidence in the valuation process. Insurers will also have to highlight special problems faced by them like an expense overrun, lapse experience, abnormal mortality experience, etc.
Do you see ULIP sales picking up this year?
We expect a reasonable growth in ULIPs between January and March this year. Yet, we are persuading insurance companies to have a minimum threshold of traditional business. We cannot ignore the fact that once the proportion of ULIP business rises, the fortunes of an insurer are linked to the capital market. A combination of ULIPs and traditional products would ensure a balanced growth in business.
Do you plan to lower the cap on ULIP charges further, given that mutual funds are load free?
The existing cap on ULIP charges will improve the yield for customers by 100-250 basis points. We do not have any plans to alter the cap ULIP charges now. Today, insurers have to mandatorily disclose all charges on ULIPs and the customer signs the benefit illustration. The only portion that is left out is the net asset value (NAV) computed for a portfolio. A shrewd fund manager can add a small loading factor in the computation of the NAV that cannot be easily deciphered by an ordinary customer. What is disclosed is the final value. To bring enhanced transparency, we have to examine the adoption of NAV auditing that many regulators have adopted internationally.
Are insurers mis-selling unit-linked pension plans?
There is some confusion on pension products sold by insurers. All products sold by insurance companies are in accordance with the provisions of the Insurance Act. In pension products, there are two phases, namely the accumulation phase and benefit payment phase. One may buy a traditional or a unit-linked pension plan. Mortality risk is present in both during accumulation and benefit payment phases.
If someone buys additional life cover, this helps mainly during the accumulation phase. But during the benefit payment phase, the insurer has to address mortality or longevity risk. There is no escape. Hence, even if someone buys a pension product under a unit-linked platform without a life cover, this cannot be equated to a mutual fund product, because the insurer faces longevity risk during the benefit payment phase. No one can buy a pension product that covers the accumulation phase only, but one can buy an immediate pension product that covers only the benefit payment phase. The presence of longevity risk makes pension products eligible to be sold as insurance products.
What are the major changes in product approval procedure?
The product approval procedure is transparent and the average time taken to clear products has come down significantly over the last three years. After the cap on charges, we have received 230 File and Use applications, including riders. At the end of December 2009, 223 products, including riders were cleared. Only seven products are awaiting replies from the regulator.