Why all insurance companies promoted Unit Linked Insurance Plans (ULIP)?
Since the sector opened up, all the insurance companies started promoting Unit Linked Insurance Plans (ULIP). During that period the stock market was also booming.
Since the N AVs were going up, it was easy to convince clients of benefits of the Unit Linked Insurance Plans and handsome growth we reported by most of the insurance companies by marketing Unit Linked Insurance Plans.
It was said that these products were for the benefit of the customers, but they were basically designed to suit the insurers. Insurance Companies undertake three major risks viz.
The risk of death is passed on to the reinsurer to a great extent. In case of Unit Linked Plans, even the risk of return and the risk of investment is passed on to the customers. Thereby the insurance companies retain a very small portion of mortality risk with them.
The lesser the risk retained, the lesser is the requirement for solvency margin. Since solvency margin is to be provided by the owners, they always feel happy to do business at lower capital requirements.
As it is, capital is scarce and with every sale effected, insurance companies require additional capital to be pumped in. Although insurance sector has shown extraordinary growth in new business due to sale of Unit Linked Products, the stability of the company may get affected once the sensex starts moving southwards.
This is precisely what has happened since 18th Jan., 2008. The sensex which had crossed 21,000 marks was stated to cross 25,000 by 31/3/2008. However, the sensex started melting down and has reached a three year low of less than 8,000.
The consumers who have invested in Ulip products have lost heavily. The insurance companies are having a tough time in convincing the existing customers to continue their policies despite reduction in NAV. It is even more difficult to promote new customers to induce them to put their money in Unit Linked Products.
Every company has now started promoting conventional products which are not linked to equity market. In this type of non-unit linked products, surplus is valued at the end of the year and distributed to customers as ‘Bonus’. Private Insurance Companies may take a long period to declare bonus on par with LIC.
The insurance companies are thus caught between the grave and the great sea. On one hand they find it difficult to market Unit Linked Products due to slump in equity market and on the other, they are finding it difficult to market conventional products as the return on these products will be pretty low as compared to LIC.
With the global recession faced by financial sector all over the world, bringing more inflow of capital is going to be a big question mark.
Since more capital will be required for every increase in sale, whether to reduce operations in order to obviate the capital requirements is going to be a great challenge for the new insurance companies. Future scenario
In India only 10% of the market share has been tapped by LIC and the balance 90% remains to be tapped. This vast population can be tapped only by a large number of insurers to serve the population of more than 100 Crs.
Indian Insurance Market offers tremendous opportunities to the new insurance companies. Every financial company would like to be a financial conglomerate marketing banking, Mutual Fund, Credit Card and Insurance as well, through their sister companies, Mergers and acquisition seem to be inevitable.
AMP Sanmar, an Australian Insurance Company decided to close its operations in India due to lack of interest shown by the Indian partner.
The company was taken over by Reliance Capital and is now Reliance Life. Hostile takeovers can also not be ruled out. The insurance regulator has a great challenge to ensure ethical practices.
LIC will have to come out with new products and advancement of technology in insurance market will need to be tackled. LIC will have to ensure that the trust of the people is not jeopardized and that it continues to be the insurer of choice.
The Regulator has to play an important role and should be strong enough to check the wrong practices of the new insurance companies. If properly regulated, the future of insurance industry looks bright.