Everyone is talking about the ULIP controversy/tangle/fight, whatever name you choose to call it; ULIPs has become a cause for dispute between the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) regarding the jurisdictional power to regulate the market-linked insurance plans.
This article will shed light on why this mess is taking so long to sort out and where it status. Under usual circumstance, in the absence of a super regulator, the government, probably the finance ministry or the law ministry should have mediated and modificate the respective Acts. But this issue is very technical in nature so, the government should have appointed experts to demarcate the jurisdiction in clear-cut terms, and then amended the statutes.
Thus the government’s decision to direct the two regulators to approach a court to sort the matter is not right. The courts give decision on the basis of an existing statute only.
Perusal of Section 11 of the Sebi Act, 1992, & Section 14 of the Irda Act, 1999 shows:
- There is no overlapping of jurisdictions of the two regulators and,
- There is no explicit statutory reference to Ulips.
So there is need to see how the jurisdictions of the two regulators become applicable to Ulips.
Ulips are insurance contracts between an insurer and a policy holder, whereby the insurer agrees to transfer the risk (of death of the life assured) from the policy holder to itself in return for the payment of a specified premium”.
Components of premium paid:
A risk premium which is the price of risk transfer and an investment component which the insurer invests in specified securities on behalf of the policy holder.
The investment component of the premium and the corpus that it accumulates into are intrinsic parts of the insurance contract and cannot be treated as a separate investment, for two reasons:
- One, the insurer has claim over the corpus in terms of actuarial valuation of the corpus and,
- The insurer may protect the payment of premium itself against the death of the life assured, in case the policy holder has opted for a “waiver of premium” rider.
Thus the investment component in a Ulip is an integral part of the insurance contract, and its existence does not change the nature of the contract.
But the investment component helps the insurer transact in the security market for which the insurer needs to abide by all the norms that govern the securities market.
Presently all insurers abide by these norms for the front end of the transactions but for the back end of the transactions, that is fund management, remains outside the purview of the securities market regulator – the area which should have come under the purview of Sebi, but is not at present.
The other option according to experts/analysts is to transfer fund management to professional portfolio managers like mutual funds, as done in the case of the New Pension Scheme.
But as every coin has two sides – there are two reasoning:
- The core competency of insurers is personal risk management, not portfolio management and,
- Such an arrangement will remove any conflict between Irda and Sebi.
Irda will regulate the Ulips as insurance contracts and Sebi will regulate the fund management done by the portfolio managers for insurers. This solution will workout best for the policyholder as they would get the best of both the worlds—Irda will protect their interests as a policyholder and Sebi will protect their interests as an investor.
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