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Wednesday, January 16, 2013

How your lapsed ULIPs have fattened life insurance companies

Lapsed ULIP policies have significantly added to insurance companies’ profits. Toxic ULIPs trapped the policyholder between high charges on entry and well as exit while insurers made money. It was a case of damned if you stay with the policy and damned if you went out. Either way, the insurers laughed their way to the banks

In September 2010, the Insurance Regulatory and Development Authority (IRDA) implemented new ULIP (unit linked insurance plan) regulations. It acted ‘tough’ by banning existing ULIPs but did not bring relief to toxic old ULIP policies that are still in force. Either the insured are still paying exorbitant ‘charges’ for no real value given by an insurance company or they have surrendered the policy only to get peanuts. Old ULIPs levied high charges even after completion of three years and/or gave next to nothing for surrendered policies. No wonder the insurer’s profits zoomed with higher number of ULIP surrenders. Nearly 40% of the insurance company’s profits are solely on the loot from policy surrenders. With the bottomlines looking fabulous, it may be IPO (initial public offer) time.
The ULIP surrender charge as a percent of AUM (assets under management) has been steadily increasing for the insurance companies ranging from 2% in FY10 to nearly 17% in FY12. According to the Goldman Sachs report, “The high surrender charges associated with old ULIPs were one of the key drivers of the profit.”

ULIP surrender charges /AUM (%)
FY10
FY11
FY12
Bajaj Allianz Life
7.3
13.3
15.4
HDFC Life
6.1
10.5
8.9
ICICI Pru Life
13
16.9
13.2
Kotak Life
7
12.3
16.9
Max Life
3.6
8.6
10.9
Reliance Life
4.1
10
14.3
SBI Life
2
8.2
12
Source: Goldman Sachs report

Traditional surrender charges as a percent of AUM has been low even though traditional products also have steep surrender charges. According to the Goldman Sachs report, “There have been fewer policy surrenders in traditional products, which in our view are due to the way these products are sold.”

Traditional surrender charges /AUM (%)
FY10
FY11
FY12
Bajaj Allianz Life
1.5
1.6
3.5
HDFC Life
1.5
1.8
1.3
ICICI Pru Life
1.1
0.6
2.3
Kotak Life
7.6
3.1
5.2
Max Life
2.0
1.9
1.9
Reliance Life
0.5
0.3
0.2
SBI Life
0.6
0.7
1.2
Source: Goldman Sachs report

According to the report, “Lapsed profits have accounted for a wide range of 10%-190% of the total profit after tax for companies under coverage in FY12.” Moneylife had contacted the six insurance companies and got varying feedback, insurers with higher lapsed profits played different tune than the ones with least lapsed profits.

Insurance company
FY11 PAT
FY11 Lapsed Profits
FY12 PAT
FY12 Lapsed Profits
FY12 lapsed profits / PAT (%)
Bajaj Allianz Life
1,057
367
1,308
480
36.7
HDFC Life
-99
223
97
184
188.3
ICICI Pru Life
807
737
1,384
672
48.6
Kotak Life
102
104
146
117
80.3
Max Life
194
184
459
47
10.2
SBI Life
366
22
555
52
9.4
Source: Goldman Sachs report. PAT and Lapsed profits in Rs crore

Bajaj Allianz Life— “Cannot comment as we don’t know from where lapsed profits numbers in the report come from. Our financial statements can be accessed by the public.”

HDFC Life —“FY12 PAT is Rs271 crore instead of Rs97 crore as given in the report. It means that lapsed profits as percentage of PAT is 67.89% instead of 188%.”

ICICI Pru Life— “Cannot acknowledge or deny the numbers at this time. We take steps to prevent policies from getting lapsed.”

Kotak Life—“FY12 PAT is Rs203 crore instead of Rs146 crore as given in the report. It means that lapsed profits as percentage of PAT is 57.63% instead of 80.3%. Moreover, we are unsure of lapsed profit numbers in the report. It is not possible to calculate it for traditional policies. ULIP lapsed profits are also not available, but it is possible to be derived from fund-future-appreciation of the policies that are unlikely to be revived.”

Max Life—“Numbers confirmed. Lapsed profits are not in financial statements, but can be derived. While lapsed profits results in a short-term accounting profit at the time of surrender, this does not reveal the full financial impact of surrender. Due to surrenders, life insurers loose future profits. Max Life has the highest conservation ratio of 80% (Jan-Oct 2012) in the industry, even higher than the LIC.”

SBI Life—“Numbers confirmed.”

IRDA chairman J Hari Narayan realised the unhealthy trend and had given following comment at an industry seminar. “Insurance company profits should not be driven by lapsed policy profits.” If IRDA can have new regulations (September 2010), protecting the insured for getting back the funds of a discontinued policy after earning bank savings interest rate (4% p.a.) till the lock-in period of five years, why can’t it be made applicable to customers trapped in old ULIPs? Why can’t this be applied to policies sold before September 2010? Why does some old ULIPs levy surrender charge even after having the policy in force for 10 or more years?

One Moneylife reader had completed three years of premium payment for Bajaj Allianz New UnitGain ULIP and wanted to surrender. He was deterred by surrender charge formula. [1 - (1/1.06)^N ] * first years’ annualised premium (where N is 10 years, less the elapsed policy duration in years and a fraction thereof). The policyholder finally decided to keep the policy for 10 years as there is no surrender charge after 10 years.

In recent times there has been increased number of calls from dubious sources claiming to be insurance company or IRDA representatives. They pitch for the policyholder to surrender the old ULIP and buy new one by giving a fear overdose of the product being discontinued by IRDA. Obviously, someone wants to push the policyholders who are already sitting on an edge to give up on their old ULIP policy. Do not fall into this trap

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