ULIPS have enjoyed their share of compliments and criticism in our country....
Unit-linked insurance plans which were offering the guarantee of returns basis highest NAV of the term on maturity have been banned by the Insurance Regulatory and Development Authority (IRDA).
Around 2009-10 insurance companies could see a lot of customers becoming refusing to buy unit-linked insurance plans due to the high risk involved in such products. To make the proposition attractive and assure a certain guaranteed benefit, the insurance companies designed ULIP with a guaranteed component. This gave rise to Highest NAV guaranteed unit-linked insurance plans where the insurance company would give a minimum guaranteed return on maturity basis the highest NAV recorded during the policy term. This caught the attention of buyers and most of the insurance companies rolled out at least one highest NAV guaranteed plan.
However, IRDA is of the opinion that the insurance companies will have to take a high-risk fund management approach to offer guaranteed returns to the customers. The premium in unit-linked plans is invested in the equity and debt markets and market performance is uncertain. Hence, insurance companies pass on this risk to the customers in case of ULIPs. In the initial days of ULIPs, many customers earned good returns and thus the popularity of unit-linked policies went up. However, one bad market cycle in 2007-08 eroded the capital of a lot of customers in such plans and customers lost confidence in unit-linked insurance plans. But sales of ULIPS shot up the profitability of many insurance companies because of which insurers were trying hard to keep up the sales of ULIPs. Life insurers found some respite in highest NAV guaranteed unit-linked policies.
But IRDA probably fears another disaster like the one caused by ULIPs and hence wants to stop such doubtful products at an early stage. IRDA follows F&U (file and use) approval approach which is why IRDA highlights most of its concerns after the product has been in the market for some time. The insurance regulator is taking every step possible to protect the long-term interest of the customers even though it is harmful to the growth of insurers.