Unit Linked Products What does the future hold?

Transcription

1 Unit Linked Products What does the future hold? Presented by Richard Holloway Managing Director - South East Asia & India, Life

2 Agenda Background on ULIPs Issues: - Commissions: required / enough? - Importance of persistency Conclusion 2

3 Agenda Background on ULIPs Issues: - Commissions: required / enough? - Importance of persistency Conclusion 3

4 ULIPs: History Introduced in the early 2000 s Very popular with the consumers Contribute around 60% of the total weighted new premiums in FY High new business growth: CAGR of approximately 24% p.a. over the past eight years up to FY High commission levels in the past, lowered in recent years Initial Stages 30% 2-3 years ago 10%-20% Now 6%-10% High policy discontinuance / lapses on unit linked products With the high surrender penalties on products, the ULIPs have contributed high surrender profits 4

5 ULIPs: History 700 Split of life insurance business in India (by weighted premium in Rs. billion) % 38% 42% % % 42% 48% 78% 114% -26% 11% 62% 58% % - FY2006 FY2007 FY2008 FY2009 FY2010 Linked Non-linked 5

6 ULIPs are successful A popular product throughout the world that has stood the test of time: Meets the needs of the customers Gives direct exposure to financial markets, potentially higher returns Transparent Regular/single variants Investment or protection focus Links to many funds Many currencies Flexibility (eg stop/start) 6

7 ULIPs are successful Some offerings of companies in Asia Pacific region 7

8 ULIPs are successful Some offerings of companies in Asia Pacific region: Malaysia ULIP products Fund options Very flexible plans, including variable premiums and flexible withdrawal options Single premium plans with no allocation or admin charge and an incentive to top up with large amounts Single premium, child, whole Child and retirement life and retirement plans products Packaged for study, retirement, wealth accumulation, protection etc 27 funds and 11 trusts 22 funds 11 funds (one US$) Region and sector based funds Benchmarks based on global indices Local and international funds Capital guarantee funds 8

9 ULIPs are popular Proportion of weighted new business from unit linked products in the Asia Pacific region: 10,000 9,000 8,000 Split of business in Singapore by weighted new business premium 3,000 2,500 Split of business in Malaysia by weighted new business premium (in S$ million) 7,000 6,000 5,000 4,000 3,000 2,000 1,000-85% 15% 86% 84% 80% 83% 19% 29% -10% 17% 20% 16% -7% 14% FY2005 FY2006 FY2007 FY2008 FY2009 (in RM millions) 2,000 1,500 1, % 83% 80% 84% 86% 17% 20% 16% 14% 19% 29% -10% -7% 15% FY2005 FY2006 FY2007 FY2008 FY2009 Linked Non-Linked Linked Non-Linked 9

10 ULIPs in India 10

11 Changes to ULIPs in India Before Companies had between 5 to 10 ULIPs Most companies had pension ULIPs Lesser guarantees offered Now Companies have between 3 to 5 ULIPs Pension ULIPs have been discontinued Large number of guarantees offered especially highest NAV guarantee High allocation and administration charges (even up to 100% of 1st year premiums), which were reduced by some companies in January 2010 Low allocation and administration charge (6%-10% in 1st year) High surrender charges in 1st 3 years (30%- 40%), increased by some companies in January 2010 (80%-100%) Most companies charging maximum allowable surrender charges specified by IRDA 11

12 Key regulatory milestones relating to ULIPs Regulation Unit linked guidelines Cap on ULIP charges Further guidelines on ULIPs Contents Guidelines on product design, market conduct, disclosure requirements, sales illustrations and advertisements Difference between gross and net yield of policyholder at maturity capped; FMC also capped Cap on surrender charges before maturity introduced Minimum return guarantee on pensions Response Relatively small changes to ULIP product pricing Restructuring of charges: - High surrender charges - Loyalty additions Some reduction in commissions Significant reduction in charges, resulting into low upfront commission New products introduced, pensions withdrawn 12

13 Key regulatory milestones relating to ULIPs Unit Linked Guidelines, 2005 Purpose: To regulate the largely unregulated ULIP market To standardize: Calculation of NAVs Sales illustrations Product design, including nomenclature (especially charges), minimum sum assureds and limit minimum policy terms Treatment of discontinued policies with an introduction of a lock-in period of 3 years Disclosures and advertisement Reaction: Companies made large changes internal processes to get in line with the regulations Products had to be re-launched with changes to nomenclature and policy terms and conditions 13

14 Key regulatory milestones relating to ULIPs Unit Linked cap on charges, 2009 Purpose: To control the high charging structures adopted by companies, by capping the difference between net and gross yields to policyholder and fund management charges and limiting surrender charges to the 1 st five years. An indirect control on high commissions and expenses of companies Reaction: Companies re-launched products with lower charging structures Some companies included very high surrender charges (as they were not regulated) while others did not Companies introduced strict control on expenses Some companies brought down commission levels drastically 14

15 Summary of recent regulations in 2010 Design of ULIPs In addition to existing caps on yield differentials at maturity (3% if term < 10 years, 2.25% otherwise) and FMC (1.35%), additional caps were introduced from the 5 th year onwards which are listed below: Term Yield Differential 4.00% 3.75% 3.50% 3.30% 3.15% 3.00% 2.75% 2.50% 2.25% Lock-in period increased to five years from three years All ULIPs to provide minimum life or health cover as per the following table: Minimum Sum Assured for Age at Entry: Below and Above SP: 125% X SP SP: 110% X SP RP: Max(10 X RP, 0.5 X T RP: Max(7 X RP, 0.25 X T X RP) X RP) Should never be less than 105% of premiums paid Minimum annual health cover for age at entry: Below and Above RP: Max(5 X RP, Rs. RP: Max(5 X RP, Rs. 100,000) p.a. 75,000) p.a. Should never be less than 105% of premium paid Minimum premium paying term of 5 years, flexible premiums unacceptable Linked pension and annuity plans to offer guaranteed return of 4.5% 15

16 Summary of recent regulations in 2010 Treatment of Discontinued ULIP Regulation Caps introduced on surrender charges as follows: Year of discontinuance RP <= Rs.25,000 RP > Rs.25,000 1 Max(Rs.3000, 20% X Min(RP, Fund Value)) Max(Rs.6000, 6% X Min(RP, Fund Value)) 2 Max(Rs.2000, 15% X Min(RP, Fund Value)) Max(Rs.5000, 4% X Min(RP, Fund Value)) 3 Max(Rs.1500, 10% X Min(RP, Fund Value)) Max(Rs.4000, 3% X Min(RP, Fund Value)) 4 Max(Rs.1000, 5% X Min(RP, Fund Value)) Max(Rs.2000, 2% X Min(RP, Fund Value)) 5 onwards NIL NIL In case of discontinuance within the first 5 years, no other charges other than surrender charges can be applied and the fund has to be paid out at the end of the lock-in period with the addition of accrued interest at a minimum rate of 3.5%p.a. Grace period limited to a maximum of 15 days for monthly premium policies and 30 days for others 16

17 Impact of recent regulatory changes Most companies, especially large, agency based companies have initiated expense control measures, including reduction in agency / branch infrastructure Upfront commission levels have been reduced - Hindustan Times - Interview with Rajesh Sud, CEO, MNYL, The Hindu Business Line ULIP pension products have been discontinued, as the 4.5% return guarantee is believed to be onerous 17

18 Impact of recent regulatory changes New ULIPs with lower charging structures have been launched, some with guarantees with an explicit charge (e.g. the recent deluge of NAV guaranteed product launches) New business volumes have come down significantly Indian life insurance industry total weighted new business premium 1,600 1,400 1,200 1,

19 Impact of recent regulatory changes What the industry is saying... These changes will shape the industry towards selling more long-term and protection oriented products. - Sunil Kakar, Senior Director and CIO, MNYL The next six months are crucial. It seems that the industry growth this year would be marginal at 5 per cent or so - SB Mathur, Secretary General, Life Insurance Council Between April-September 2009, ULIP sales amounted to 90 per cent of our business. Now it is down to 50 per cent. - Malay Ghosh, Executive Director and President, Reliance Life Some of the private players might take some more time to get adjusted to the new regulatory framework. The overall scenario appears positive and I foresee growth for the industry to be sustained in the coming years. - SB Mathur, Secretary General, Life Insurance Council. The new ULIP guidelines have significant implications for the life insurance industry in India and we believe will help create a positive momentum in the market through an improved customer value proposition. - Sunil Kakar, Senior Director and CIO, MNYL What is really happening is that with the new regulation, the smaller ticket ULIP policies have gone out of the system. - TS Vijayan, Chairman, LIC 19

20 Key concerns Two main concerns raised by the industry: The new caps on charging structure provides limited scope to compensate distributors commissions have to be reduced The lower charges result in lower surrender penalties, and the earlier surrender profits are no longer possible: Change has been made with hope that it will result in an improvement in the quality of the business But really the focus should be on companies addressing mis-selling in general; as opposed to capping charges 20

21 Regulation of ULIPs in other countries Regulatory environment for ULIPs in various countries Country Key regulatory features India Discussed earlier. Stringent charge caps. Singapore Malaysia Indonesia Regulation around sales practices; benefit illustrations, fact find process. Product summary required at point of sale (detailed). MAS307 is comprehensive. No charge caps. No charge caps Regulation around sales practices; illustrations No charge caps 21

22 Agenda Background on ULIPs Issues: - Commissions: required / enough? - Importance of persistency Conclusion 22

23 Commissions are good! Due to the recent regulatory changes, commission levels will likely reduce drastically to around 6%-10% of 1 st year premiums However, it is widely believed that commissions per se is not a bad thing: Insurance is sold rather than bought. Commission is an effective way for agents to reach customers Alternative ways to remunerate distributors have not worked (e.g. asking customers for commissions in Mutual Funds, no commissions in NPS) There is a level of commission below which distribution channels of products can be destroyed (eg Stakeholder Pensions in the UK see next slide) However, that said, commissions can be detrimental if poor sales practices are encouraged that lead to mis-selling 23

24 Commission rates in other countries Sample commission levels for ULIPs in various countries: Country Typical commission levels (regular premium) India 6%-10% Singapore Malaysia Can be as high as 50%-80% of FYP for regular premium plans Costs fit into regulated OCC guidelines 24

25 Example: Stakeholder Pensions in the UK (1) Introduced in 1999 to simplify and reduce the cost of providing for retirement for the lower income consumers. Strict rules introduced and products complying with the same were allowed to use the brand stakeholder pensions. Key characteristics of a stakeholder pension product: 1% cap on the annual management charge (later increased to 1.5% p.a. for the first 10 years) Degree of transferability 25

26 Example: Stakeholder Pensions in the UK (2) Sales of stakeholder pension business have been disappointing Actuarial review recommended 5% initial charge and 1% AMC Concluded that raising the cap from 1% to 1.5% or 2% would: Be attractive to consumers Not prove a sufficient lure to providers and distributors Result in the number of providers and subsequently the amount of sales remaining low Government decided on a 1.5% for first 10 years and 1% thereafter: Introduced a further challenge for less efficient providers More expensive for consumers and not enough for providers! Many providers simply could not offer the product on a profitable basis 26

27 Example: Stakeholder Pensions in the UK (3) Lessons for India UK regulator tried to introduce a product that met a perceived need, and which was priced (regulated) to be value for money to the consumer Product failed as companies could not operate within the cost structures ie companies could not incentivise distribution channels Tiny business volumes are sold, with product having very limited profile. Perceived mass market players could not even sell the product. DISTRIBUTION HAS A CRUCIAL ROLE TO PLAY IN INSURANCE 27

28 Agenda Background on ULIPs Issues: - Commissions: required / enough? - Importance of persistency Conclusion 28

29 Persistency in India Persistency rates in India have deteriorated in recent years. This could be a combination of factors including higher sales of ULIPs, changes in stock market, inadequate training, mis-selling etc Reasons will vary across companies, distribution channels and product lines. Operating experience will still be emerging for many companies as volumes grow and portfolios mature. 29

30 Persistency in India Given below are the 1 st year persistency rates for all types of business for some life insurance companies: Company Birla Sun Life 84% 97% 79% 88% 70% HDFC SL 88% 91% 78% 58% 57% ICICI Pru 91% 89% 87% 80% 73% MNYL 78% 76% 79% 76% 68% Reliance 75% 73% 77% 61% 51% Source: IRDA Website Given below is the movement in the BSE Sensex over the past 5 years: 25, , BSE Sensex 15, , , Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Source: Yahoo! Finance 30

31 Lapse rates from other countries Persistency rates in India are low, relative to other markets. In Singapore and Malaysia, first year lapse rates are generally between 5% and 15%. The table below illustrates the 1 st year lapse rates for regular and single premium policies in the UK: Inception Year Regular Premium 13% 12% 12% 13% 16% Single Premium 2% 2% 3% 2% 3% Source: 2010 survey of the persistency of life and pensions policies, Financial Services Authority, UK 31

32 Persistency in the current environment Under the new ULIP guidelines, surrender charges will be much lower: Earlier, a company could maintain profitability even with low persistency, due to high surrender charges Now, with surrender charges capped, companies can no longer make profits with low persistency, and cannot afford to pay high up-front commissions. Higher persistency is now required to enhance the profitability of ULIPs. It may also allow companies to offer higher commissions. But enhancing persistency cannot happen overnight. Contribution to profitability Situation Charges Collected Previously Now Lapse Surrender Charge High Low Continuation Fund Management Charges, Allocation, Administration Fees High High 32

33 Agenda Background on ULIPs Issues: - Commissions: required / enough? - Importance of persistency Conclusion 33

34 Conclusions ULIPs are popular products that are sold throughout the world encourage long-term investment while being flexible enough to meet the varying needs of consumers Commission is good and is needed to sustain an agency force (and any distribution which needs to be paid for), particularly in an emerging market like India, where there is a social need to reach out to the mass market. Mis-selling practices should be discouraged, with regulatory encouragement, if required. The aim should be to enhance and improve persistency. ULIPS should have a future and a significant role to play in the insurance sector in India. The impact of the recent changes should therefore be reconsidered for the good of consumers, distributors and shareholders (many of whom have invested significant capital to build a sustainable business in India). 34