The government has taken its stance in the turf war between Insurance Regulatory and Development Authority of India (IRDA) and Securities and Exchange board of India (Sebi) regarding unit-linked insurance products (ULIPs); ULIPs will be treated as insurance instruments and will be regulated by IRDA. This clears the air as regard to ULIPs and will aid in its growth. However, its fallout is far-reaching.
The most affected by this decision would be equity-oriented mutual funds. As they are regulated by Sebi, there is strict restriction on the commission payable to sales agents. However, ULIPs being insurance instruments, insurance companies can sell them aggressively by paying attractive commissions to insurance agents.
Sebi had earlier ruled that mutual fund companies cannot impose entry loads from investors. Hence, if they want to pay commission to their agents, they need to shell out the money from their profit. Sebi had issued this ruling to protect new investors from being lured into buying mutual funds without understanding the nitty-gritty. This ruling forced mutual fund companies to depend more on old investors rather than devise methods to trap new ones.
The new governmental ruling gives undue advantage to ULIPs over mutual funds. Some insurance companies pay commission up to 40% of the first year premium to agents to push up their sales. The second year commission too can go up to 10%, after which it comes down drastically.
Insurance companies fund the hefty commission paid to agents in the first two years from the premiums accruing from the next 5-10 years. Though the commission money comes from the premium paid by the insurer, this deduction is taken care of in the long run by the appreciation in stock market. However, for short-term players, ULIPs are not lucrative.
The vast difference in the commission amount to sales agents between the two is bound to increase ULIP sales in the coming months, while mutual funds lose its coveted status.
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
