Unit-linked insurance plans could come under a cloud as the Insurance Regulatory and Development Authority has threatened to put a cap on the investment portion of the sum invested.
"We would like to see a better linkage between the premium paid and the insurance cover being provided. We do not like to see a small portion going to pay for life cover and a major part going into investment," IRDA chairman CS Rao said in Mumbai on Friday.
Rao was speaking on the sidelines of a seminar on the growth of insurance industry in India, organised by the Indian Merchants' Chamber in Mumbai.
Unit-linked plans have been in demand over the last few years because the returns on such schemes have exceeded those on plain vanilla insurance products. This is so because a portion of the premium paid is invested in marketable securities that yield market returns.
The Life Insurance Corporation alone has raised over Rs 4,500 crore (Rs 45 billion) from the sale of ULIPs in 2004-05. In fact, the Future Plus plan mopped up Rs 2,200 crore (Rs 22 billion) within a month of its launch.
With the ULIPs becoming popular, the IRDA is concerned about the need for proper disclosure to the investing public.
"We are coming out with guidelines for the ULIPs that will also address the need for proper disclosure, since the investment risk is transferred to customers," said Rao.
With the markets witnessing a largely bullish trend, the net asset values of most ULIPs are rising. The regulator is worried whether investors have been adequately informed that their returns may take a hit if the market falls. The IRDA has promised to release the draft guidelines within a fortnight.
Talking of the impact of the Budget proposal to tax insurance payments on maturity under the EET (tax exempt on investment, exempt on earnings but taxed on redemption) scheme, Rao said the EET model was applicable to short-term savings and not to long-term ones like insurance plans. The Life Insurance Council had taken up the matter with the government, he added.
"Should the IRDA decide to increase the risk coverage under the ULIPs, this will call for underwriting of these plans," said the CEO of a leading private life insurance company.
At present, single premium plans offer a risk cover of about 2 per cent, which is in line with the global trend.