IRDA ULIP Guidelines

The Indian insurance industry regulator, the IRDA, has continued to issue ‘guidance’ with respect to unit linked insurance products (ULIP). India operates a file and use procedure for all life insurance products, so these have to be submitted to the IRDA before they can be sold to the general public. Those rules have been in place since 2001, shortly after the liberalisation of the Indian insurance market.

Life Insurers duly filed their products, including ULIPs, and started to sell these to the general public. The products were successful, which caused the IRDA to review the wordings. The IRDA has the obligation, inter alia, of protecting policyholder interests. On 21^st December 2005 the IRDA issued its ‘Guidelines for Unit Linked Life Insurance Products’, which were aimed at the closer regulation of ULIPs with a view to ensuring that they met certain minimum criteria:

1. Reasonable insurance cover linked to the premium paid over the policy term.
2. An investment strategy attuned to the long term nature of the cover.
3. Proper disclosure of the risks being assumed.
4. The availability of the greater part of a targeted sum at the end.
5. Simple, user friendly and transparent wordings.
6. A standardised method for calculating Net Asset Value (NAV).

The Guidelines required all existing products to be modified to meet these criteria as soon as possible, and in any event no later than 30^th June 2006. Products which were already filed but not cleared were required to be re-filed taking these criteria into account. Products were redesigned with the Guidelines in mind, and since 30^th June 2006 it is Guideline compliant ULIPs that have been on sale.

There have been other interventions as far as ULIPs are concerned. On 20^th February 2007, the IRDA issued directions asking Life Insurers to modify the manner in which disclosures concerning unit linked business were made in their annual accounts so as to improve the quality of disclosure. These changes became effective from March 2007 onwards.

On 4^th July 2007, the IRDA issued instructions for the File & Use Procedure for Riders attached to all life policies, including ULIPs. The IRDA directed that life insurers needed to seek specific approval to sell riders, whether attached to linked or non-linked products. Once cleared, a Rider cannot be attached to any product other than the one for which approval has been given, its substance cannot be altered without prior approval, and its name cannot be altered without prior approval.

In August 2007 the IRDA asked Insurers to cease the sale of ULIPS which involve actuarial funded units. Insurers were notified in advance and made representations to the IRDA, which subsequently issued certain clarifications: there was technically nothing wrong with actuarial funded products, all of which had been approved by the IRDA via the file and use procedure; there would be a phased removal of these products, and until then Insurers could continue to sell these products.

In the Indian market ULIPs appear to have attracted greater regulatory interest because of the general public’s interest in buying them, but what is noteworthy is the degree of regulatory intervention that has occurred. For example, the 2005 Guidelines, whereby life Insurers were expected to use standard wording for certain clauses, were introduced at the same time as the IRDA was in the midst of a debate about the de-tariffication of general insurance wordings. That de-tariffication is expected next year as far as wordings are concerned (rates having been de-tariffed as of January 2007). Will we see similar interventions on the general insurance side?

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