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Consultant Corner /Click 2 Lead 1st Edition PD J 09

Simplifying Regulations
Cap on ULIP Charges

IRDA through its circular No: 20/IRDA/Actl/ULIP/09-10 dated 22nd Jul ‘09 had set limits on
overall reduction in yield (RIY) for all ULIP w.e.f. 1st Jan 2010. It had included mortality charges
in overall charge cap limit which was criticized by industry as it would have discouraged life
cover to aged customers.
Hence IRDA issued a revised circular No.29/IRDA/Actl./ULIP/09-10 dated 20th Aug 2009 that
states,
9 Mortality charges are excluded from overall charge cap limit – this will not adversely
impact RIY irrespective of age & death benefit
9 FMC is capped to 135 basis points irrespective of tenor of the policy – avoids
complexities in policy administration
9 No surrender charge from 5th policy year & thereafter -

Revised reduction in yield (RIY) for an insurance contract is as follow:


Policy Term <= 10 year > 10 years
Prescribed RIY Limit 300 basis points 225 basis points
FMC RIY Limit 135 basis points 135 basis points
*Other Charges Limit 165 basis points 90 basis points

*other charges limit is subject to FMC RIY limit being exhausted.

This guideline will adversely impact ULIP plans with:

9 Shorter premium paying term


9 Shorter policy term
9 Long term surrender charges

We foresee following impact of the guideline across Private Insurers:

Short term impacts

1. Spurt in Guarantee Options: as guarantee charges are excluded from prescribed


RIY - In short term contracts explicit guaranteed charge may replace existing
Premium Allocation Charge & in long term contracts existing high FMC may be
replaced by guaranteed FMC without changing the pricing of the plan. This will
also help insurer to project better illustrative value on maturity.

2. High charges in initial years: as there are no surrender charges from 5th policy year
onwards, insurers might charge higher charges in early years & may compensate
by lower charges in later years to maintain RIY within prescribed limit.

3. Reduced partial withdrawal flexibility: Partial withdrawals may be restricted for


longer period to enable insurer to issue certificate on maturity within prescribed
RIY.

This internal communication is meant only for Employees & Financial Consultant of HDFCSL for training
purpose and is not for external circulation. Insurance is the subject matter of the solicitation.
Consultant Corner /Click 2 Lead 1st Edition PD J 09

Long term impacts

1. Reduce cost - Insurers may try reducing commission & operating expenses.

Following could be some of the key impact on major competitors:

ICICI Prudential Life will benefit as they can discontinue their top-selling plan LifeTime Gold
which has a FMC of 2.25% but very low initial charges. Their recently launched series of
LifeStage Assure & LifeStage Assure Pension will also benefit as they can now exclude RIY
caused by first year’s charge of unallocated unit as explicit guarantee charge.

Bajaj Allianz Life has a mix of plans. From 1st Oct 09 while some of their plans need to be
repriced they can push already existing low charge plans such as New Unit Gain Plus & New
Unit Gain Easy Pension Plus plans which has lower commissions.

Birla Sun Life's currently top selling guaranteed NAV plan Platinum plus may lower the current
fund's FMC and come up with additional FMC towards explicit guarantee which is excluded
from the prescribed limit.

Reliance Life's top-selling Super Golden Years plan whose illustration is deliberately
understating the charges & not illustrating the IRR at all will get affected by this guideline as
they have to disclose the RIY now.

Insurers such as LIC & SBI will not be much affected by this guideline as their plans are very
much within the prescribed limits.

This internal communication is meant only for Employees & Financial Consultant of HDFCSL for training
purpose and is not for external circulation. Insurance is the subject matter of the solicitation.

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