IMPACT OF IRDA NEW ULIP GUIDELINES

ON

LIFE INSURANCE COMPANIES PERFORMANCE

The possible impact of new ULIP guidelines (W.E.F. September 2010) on life insurers performance can be analyzed as under:

1. Impact on New Business Premium Top-line: ULIP sales shall be affected adversely post September 2010 as agents may be unwilling to sell these limited new ULIP products at such low commission rates, thereby, reducing the New Business Premiums generated from ULIPs. Customer centricity is still not the main focus in Indian life insurance industry, where those products get sold which the agents want to sell, rather than what the customers need. Also new ULIP pension plans at a minimum guaranteed return of 4.5% p.a. have not been launched my most life insurers post September 2010 as both companies & policyholders have found them unattractive. ULIP pension plans have contributed around 25% of New Business Premium in the previous years; this shall not be the case post September 2010 and shall directly affect the New Business Premium Income. All life insurers including LIC are expected to have negative New Business Premium growth (in % terms) during September 2010 March 2011, as compared to the same period in the previous year (September 2009 March 2010), thereby affecting their bottom-lines adversely by way of lower Mortality Premium, Fund Management and Administration Charges (lower Linked Income).

2. Payment of at least 5 years of Premium & Lock-in period increased from 3 years to 5 years: This shall make ULIPs long term financial instruments providing risk protection, and shall positively impact insurers Persistency Ratio and AUM (Assets under Management), as policyholders shall need to compulsorily pay first 5 years premium before they can make any withdrawals under the ULIP policy.

3. Level Paying Uniform Premiums every year: This shall provide Consistency in reporting GWP (Gross Written Premium) every year in insurers Revenue Account for the same ULIP policy.

4. Even Distribution of Charges including Commissions over the lock-in period: This shall ensure that high front-end loading of expenses in the first year of ULIP policy is eliminated, thereby, allowing the insurers to absorb the charges including commissions evenly over a period of 5 years. This shall result in relatively lower Acquisition/Commission Expenses Ratio in Year I of the policy and also consistent reporting of Acquisition/Commission Expenses Ratio for all 5 years.

5.

Increase in Mortality Cover 10 times the Annual Premium: All unit linked insurance products, other than pension and annuity products, will provide an increased mortality cover, thereby increasing the Basic Sum Assured for each policy. This shall result in higher Mortality Gross Written Premiums for insurers, at the same time; it shall result in higher Actuarial Valuation Reserves for new ULIP products, and possibly higher Claims & Claims Ratio.

6. Minimum Guaranteed Returns on ULIP Pension Plans at 4.5% p.a.: Most life insurers have been very reluctant to come up with new ULIP pension plans providing a guaranteed annual return of 4.5% p.a. Even the policyholders have found this unattractive. This

prevents the insurance companies to invest in equity markets for the ULIP pension plans. This shall directly affect the New Business Premium Income adversely, as ULIP pension plans were contributing around 25% to the total New Business Premium in the life insurance industry.

7.

Capping the Difference between Gross Yield & Net Yield due to ULIP fund Charges: Setting an upper limit on the difference between Gross Yield & Net Yield on ULIPs by IRDA shall result in relatively lower Fund Management & Administration Charges on AUM (lower Linked Income) for life insurers, as the difference in the Yield has been capped at 3% & 2.25% for a ULIP policy up to 10 years and more than 10 years respectively.

8. Cap on Policy Discontinuance or Surrender Charges: IRDA has addressed the issue of policy discontinuance charges for surrender of ULIPs. The IRDA (Treatment of Discontinued Linked Insurance Policies) Regulations in this regard ensure that policyholders do not get overcharged when they wish to discontinue their policies for any emergency cash requirement. The Regulations stipulate that an insurer shall recover only the incurred acquisition costs in the event of discontinuance of policy and that these charges should not be excessive. The discontinuance charges have been capped both as a percentage of fund value and premium and also in absolute value terms. Upon discontinuance of a ULIP policy, the policyholder shall be entitled to exercise an option of either reviving the policy or completely withdrawing from the policy without any risk cover. These regulations are for the protection of interests of policyholders, thereby, being detrimental to the life insurers in their efforts to de-motivate policyholders to surrender their ULIP policies.

It may be noted that audited financial results of all life insurers with full ULIP disclosures, incorporating the effects of new ULIP guidelines post September 2010, shall only be available by May 2011 in order to assess and quantify the actual impact on financial performance and KPIs, as compared to the previous financial year.