By | 04/01/2013
Insurance policyholders entrapped in toxic Unit-linked Insurance Plans like that of Century Plus of Bajaj Allianz are still paying the price for products approved by IRDA and then banned in September 2010. Insurers openly dare the insured to go to the ombudsman, as they are emboldened by customer signatures on the dotted line
Suresh Nayak (name changed) is an ex-serviceman who served in 1971 Indo-Pak war. Even though he was victorious on the battleground over 40 years ago, he is today fighting a losing battle with Bajaj Allianz Life Insurance. His investment of Rs 1 lakh in January 2008 has been reduced to Rs 20,586 thanks to the toxic policy administration charge (PAC) of 1.75% of sum assured (SA) in Century Plus ULIP; the SA being Rs 5 lakh in this case. How can the PAC be linked to the insurance cover taken, when it should only affect the mortality charges calculation? Why did IRDA (Insurance Regulatory and Development Authority) approve such toxic fine print?
While the fine print of charges may seem innocuous, it has eaten up 44% of his investment over five years. Even if the investment was put in debt funds instead of equities, any increase in NAV would have been negated by the heavy deduction of units under the garb of PAC. The investment is a guaranteed loss-making proposition even on a long-term basis. If the customer remains invested in the policy, the fund value may possibly go down to zero in a couple of years.
What service has Bajaj Allianz really given to deserve getting 44% of the investment over five years to administer the policy? After all, the fund administration charge is separately levied to manage the fund. The risk is taken by the customer in ULIP. If equities perform badly, the fund value goes down. The insurer still gobbles a hefty PAC of 9% p.a. Not to mention about premium allocation charge of 2% for first two years. The insurer wins by taking the policyholders to the cleaners.
Even though IRDA has banned old ULIPs since September 2010, what is the recourse for the policyholders who have been already trapped? It is time IRDA takes stock of the situation and offer relief to policyholders who are trapped in products it approved only to be banned later. It is especially true for old ULIPs which continue with atrocious charges even after completion of three policy years.
Bajaj Allianz has openly dared Mr Nayak to go to the insurance ombudsman by giving all the contact details in the email. He claims that company’s grievance department personnel told him over the phone that it can consider paying Rs 65,542, but later backed out from the offer by giving email response detailing all the charges that reduced the investment to a paltry sum of Rs 20,586.
The insurance company knows that the ombudsman’s hands are tied as the customer has already signed on the dotted line irrespective of whether he understood the fine print of charges. In many cases, the agony of the policyholder does not end here. Many old ULIPs have horrendous surrender charges. It means the customer is trapped between the PAC and surrender charges. The customer cannot come out of it alive!
Here is how Bajaj Allianz Century Plus ULIP’s surrender charge formula can deter the policyholder from exiting the policy. The surrender charge formula is [1 - (1/1.10)^N ] * first years’ annualised premium (where N is 5 years, less the elapsed policy duration in years and a fraction thereof). In the case of Mr Nayak, the surrender charge will be Rs 9,090 in case he surrenders before completion of five years. It means if Mr Nayak wants to surrender today, he will get only Rs 11,496. There is no surrender charge after completing five years.
IRDA needs to wake up to the reality of what policyholders have got into with the creative products designed by insurance companies to make them rich at the cost of common man. The products have been wealth destroyers for hard working people lured into the tax savings trap. An insurance company will design innovative products to fulfil its bottom line and agents will sell to get their commission, but IRDA approved the products. Banning it in September 2010 did not solve the problems faced by existing policyholders.
The issue is not just about Bajaj Allianz ULIP. It is the same with many other toxic ULIPs from other insurance companies too. In the second part of the article we will talk about other such examples and cases where surrender of old ULIPs may not make sense, especially if the charges have been substantially reduced after three policy years.
Anuj Sharma (name changed) wrote to Moneylife last year. He says, “I have been mis-sold a ULIP (unit linked insurance plan) for which I am paying a premium of Rs 25 lakh a year to Metlife India Insurance through Axis bank. I was told I will get a 10% return on paying three premiums and withdrawing my Rs 75 lakhs after three years. However, just before I paid my third premium, when I checked the value of the policy, it was only Rs 21 lakh against Rs 50 lakh that I had paid. I could not believe that the first premium was totally taken away as cost by the insurance company. The plan is called Met Growth and the fund option is 100% in debt. All communication with insurance company is with me on email, but the company has simply refused to refund me the money. IRDA (Insurance Regulatory and Development Authority) got back saying I need to file with the insurance ombudsman first, but the ombudsman replied saying that it will not take up the case.”
While Anuj has to blame himself for buying a product without understanding it, how can IRDA approve a product wherein the first year premium just vanishes in thin air? Met Growth ULIP eats 100% of the first year premium. The money comes back in terms of guaranteed loyalty additions (50% of first year premium at end of 10 years, 70% of the first year premium at end of 15 years). It means that you will get 120% of the first year premium by end of 15 years, if you have paid all the premiums and the policy is in-force. Anuj will have to pay Rs 25 lakh every year for 15 years to ensure that his first year premium comes back to him!
IRDA came out with new ULIP regulations in September 2010. But, what about toxic old ULIP policies that are still in force and cleared by the regulator? Where do these people like Anuj Sharma go? Why are they paying for mistakes of the regulator approving such toxic products? If IRDA can have new regulations 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? Levying charges without proper justification is like a day-light robbery done by old ULIPs under the approval of IRDA.
Another Moneylife reader has written the following, “In January 2008, then bank manager of Centurian Bank of Punjab and a couple of Aviva reps deceitfully sold Aviva Life Saver Plus policy to one of my relative, who is a widow. She thought her money (Rs 15 lakh) is being invested in a scheme where she will get a steady income of about Rs 15k - 20k monthly to look after her two minor kids’ educational and other household expenses. She trusted the bank manager as she has been banking at the same location for a number of years. She was advised to sign the back page of the application and the rest formalities will be filled by them. She will start getting her investment return in a month or so.”
“Not aware of the application contents, the annual premiums and the administration charges for ULIP, she was shocked to know that her annual premiums are Rs15 lakh for the next 10 years (instead of only one year). In addition her investment is being depleted through various charges levied by Aviva as well as due to the market fluctuation. Needless to say that the bank manager and others are no longer with the bank and Aviva customer service is playing to its own tune.”
The problem is that in many old ULIPs, customers almost lost everything if they did not pay the three premiums. Aviva Life Saver Plus policy has surrender charge of 90% if only one premium was paid; 75% if only two premiums paid and 50% if only three premiums paid. The surrender charge goes to zero only when more than five premiums have been paid. Many old ULIPs had such customer unfriendly surrender charges.
What relief can IRDA bring to customers who lost almost their full investment due to toxic products and intermediaries fooling customers by trapping them with regular premium payment option to earn higher commission? Surely, some kind of negotiated settlement should be forced by IRDA onto insurance companies in these rare cases of extraordinary hardships faced by policyholders based on the quantum of money they lost just as “charges”.
In the third part of the article we will talk about how lapsed policies of Anuj Sharma and others significantly add to the insurance company’s profits.
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.
Goldman Sachs India’s life insurance report (26 October 2012) has tracked six leading private life insurance companies and states that they have lapsed policy profits of Rs1,553 crore (39%) out of the profit-after-tax (PAT) of Rs 3,952 crore for the fiscal ending March 2012. In the previous year, there was lapsed policy profits of Rs163 crore (68%) out of PAT of Rs242 crore for the same companies.
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 PruLife
|
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.
source : http://www.moneylife.in/article/are-you-trapped-in-toxic-ulips-blame-irda---i/30522.html?utm_source=PoweRelayEDM&utm_medium=Email&utm_content=Subscriber%23111138&utm_campaign=Today%27s%20Exclusives
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