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We
have toyed with the idea for a long time.
Should we rank the unit-linked insurance
plans (Ulips) in the market? The idea
is exciting simply because it has never
been done in India before. The idea is
good because it allows an investor a handle
with which to hold the product. Also,
the idea is very daunting because comparing
insurance policies is like trying to unravel
a noodle soup. The more you stir, the
more complicated it looks
After discussing with the regulator, some
industry leaders and those close to the
insurance sector, Outlook Money decided
to bite the bullet and get on with the
ranking. This is where we realised what
an overwhelming task we had taken on.
Just comparing the return figure, as given
by net asset value data, would be incorrect
since a financial product is a function
of cost and return. The minute we bring
in costs, comparisons became almost impossible
to carry out.
Unlike the mutual fund product that has
a very simple cost structure, Ulips carry
a greater number of costs (administration
and mortality), in addition to the others.
The problem begins because all these costs
are levied in ways that do not lend themselves
to standardisation. If one company calculates
administration cost by a formula, another
levies a flat rate. If one company allows
a range of the sum assured (SA), another
allows only a multiple of the premium.
There was also the problem of a varying
cost structure (as it should be due to
the mortality cost part of the insurance
premium) with age.
To cut through the confusion and yet be
relevant to you, we took illustrations
from all 14 life insurance companies for
their Ulips for ages 30 and 45. We assumed
that a 30-year-old was taking a 20-year
policy for an SA of Rs 12.5 lakh, paying
an annual premium of Rs 50,000. And a
45-year-old was taking a 10-year policy
for an SA of Rs 7.5 lakh with the same
premium (see How We Did It). Premiums
are paid throughout the term. We also
assumed that only the growth, or the fund
with up to 100 per cent equity allocation,
is chosen.
We have been forced to remove Life Insurance
Corporation of India (LIC), Aviva Life
Insurance, Max New York Life, SBI Life
and Birla Sun Life from our ranking since
LIC does not have a policy currently alive
that allows for a long premium-paying
term to fit in with our sample. Neither
Max New York life, nor Birla Sun Life
have fund options with 100 per cent equity
exposure that have been running for more
than one year.
The unit-linked plans of Aviva Life are
currently being phased out and the insurer
is in the process of developing new products.
We found a major discrepency in SBI Life’s
illustrations.
Left with only nine companies, we looked
at Type-I and Type-II policies. A Type-I
policy just gives the higher of the sum
assured or the fund value, making the
policy buyer extremely vulnerable to a
small corpus in case of an untimely death
in the early part of the plan. A Type-II
policy gives both the sum assured and
the fund value, and sure, it costs more
too.
We then looked at the actual return and
the internal rate of return to see which
policy would give the best post-cost return.
And, since the privatised insurance industry
in India is so young, we have been forced
to do a comparison of fund performance
over a one-year period. Ideally, a return
history of three years should have been
considered. But just five schemes would
have qualified that way. We bring you
rankings on a one-year return now, but
will be able to give you a better handle
with each passing year as the industry
builds track record and experience.
The Result
The winner in the Type-I category is Tata
AIG Life’s InvestAssure II, which
has scored primarily because its one-year
return, at 72 per cent, was way above
the benchmark return of 53 per cent of
the BSE Sensex.
This despite the fact that it has a fund
management charge (FMC) of 1.75 per cent,
more than double the 0.8 per cent that
HDFC Standard Life charges. In fact, HDFC
Standard Life has done very well on the
cost parameter.
The insurer is clearly the lowest cost
one in our examples, but has lost out
due to underperformance over the time
period. At returns of 42.7 per cent, HDFC
Standard Life has underperformed the benchmark
by about 10 percentage points. In fact,
Tata and Bharti have outperformed the
index by 10 percentage points or more.
Four companies were unable to beat the
benchmark over a one-year period. In Type-II
policies, there is much less competition,
with just six companies in the
fray. Kotak Life’s Platinum Advantage
is the winner and has a nice mix of lower
costs and decent returns. It has consistently
outperfomed the benchmark.
The Insights
As we got our hands full of the innards
of the insurance industry, we also got
some insights that are worth sharing.
Outlook Money believes that the insurance
industry has some way to go in terms of
transparency, disclosure and standardisation.
The following are the gaps we found between
the ad-speak and the reality in unit-linked
products.
Lack of flexibility in life cover. Ulips
are known to be more flexible in nature
than the traditional plans and, on most
counts, they are. However, some insurance
companies do not allow the individual
to fix the life cover that he needs. These
rely on a multiplier that is fixed by
the insurer. For example, a 30-year-old
will be forced to take an SA of Rs 11.25
lakh in Tata’s InvestAssure II policy
since the SA is 22.5 times the premium.
Overstating the yield. Insurance companies
work on illustrations. They are allowed
to show you how much your annual premium
will be worth if it grew at 10 per cent
per annum. But there are costs, so each
company also gives a post-cost return
at the 10 per cent illustration, calling
it the yield. For us, the most startling
discovery was that some companies were
not including the mortality cost while
calculating the yield. This amounts to
overstating the yield. We have done the
calculations ourselves and then calculated
the yield for this ranking.
Internally made sales illustration. During
the process of collecting information,
it was found that the sales benefit illustration
shown was not conforming to the Insurance
Regulatory and Development Authority (Irda)
format.
The practice, it seems, is still prevalent
in many locations—30 per cent return
illustrations are still rampant. During
the process of collecting information,
we found out that future return projections
in the illustrations were not sticking
to the 6 and 10 per cent stipulated by
Irda.
Not all show the benchmark return. To
talk about returns without pegging them
to a benchmark is misleading the customer.
Though most companies we found were using
the Sensex, BSE 100 or the Nifty as the
benchmark, or the measuring rod of performance,
at least four companies are not using
any benchmark at all.
Type-II plans still few. Outlook Money
believes that an insurance policy’s
chief aim is to protect the financial
future of the family of the insured, starting
from the day of the policy, and not from
year 10 or 15. This makes a policy that
gives the SA plus the fund value as death
benefit superior to the one that just
gives the fund value.
The fund value will be small in the first
seven to 10 years of the policy term and
will not serve as a good insurance product.
We found that just six of the 14 companies
offer such a plan. Few more exist, but
are in the nature of whole-life plans.
Early exit options. The Ulip product works
over the long term. The earlier the exit,
the worse off is the investor since he
ends up redeeming a high-front-load product
and is then encouraged to move into another
higher cost product at that stage. An
early exit also takes away the benefit
of compounding from him.
An early exit option in a unit-linked
plan shows how the product is structured.
We found many products that clearly encouraged
product churn by giving too many zero
cost options to get out of the policy
after the mandatory holding period was
over. There are others, like the plans
from MetLife, which encourage a longer
holding term.
Creeping costs. Since the investors are
now more aware than before and have begun
to ask for costs, some companies have
found a way to answer that without disclosing
too much.
People are now asking how much of the
premium will go to work. There are plans
that are able to say 92 per cent will
be invested, that is, will have a front
load of just 8 per cent. What they do
not say is the much higher policy administration
cost that is tucked away inside (adjusted
from the fund value). While most insurance
companies charge an annual fee of about
Rs 600 as administration costs, that stay
fixed over time, there are plans that
charge this amount, but it grows by as
much as 5 per cent a year over time. There
are others that charge a multiple of this
amount and that too grows.
Incorrect
FMC. Another startling revelation was
that illustration benefits of certain
insurers did not have the provision of
taking the relevant percentage value of
FMC for the fund option chosen. The illustration
will use the debt fund FMC, which is lower,
even in an equity fund calculation, overstating
the final corpus. This leads to a big
difference in the maturity value causing
misleading results.
Non-standard illustrations. At the last
minute, we had to drop SBI Life from our
rankings since their illustrations data
differs across various sources. The data
taken from the company itself, taken from
the website and that from the agent show
varying allocation for the FMC.
The FMC is important because over the
long term a difference of even 0.5 per
cent each year charged to the growing
investment will make a huge difference
in the final corpus.
The difference in the corpus in this case
was Rs 3,53,299 lakh. ING Vysya Life,
too, uses its fund management charge in
the illustrations in a peculiar way. The
illustration is made on the basis of 1.15
per cent FMC a year, although the applicable
FMC on the equity fund is 1.5 per cent.
This causes the final corpus to be overstated.
We have taken the first step in bringing
a handle to hold the Ulip product. We
invite you the investor, the industry
and the regulator to add to this process
with suggestions and comments.
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How we did it: The
framework. From the universe of unit-linked
insurance plans (Ulips), excepting the
limited premium payment plans, whole-life
plans, children’s plans or pension
plans, all the other limited-term plans
were considered. Such plans are generic
and do not cater to any specific need.
Even
the limited-term plans are of two types
and are distinguished in terms of death
benefit. Some Ulips provide the higher
of sum assured and the fund value upon
the death of the policyholder. Outlook
Money calls them Type-I Ulips. Some Ulips
provide the nominees both the sum assured
and the fund value on the death of the
policyholder. We call them Type-II Ulips.
Both
Type-I and Type-II Ulips were considered
for this exercise. Moreover, only the
plans with a fixed term period were considered.
That leaves all whole-life Ulips out of
the rating process. Even plans catering
to specific needs, such as children’s
plans, were not rated. Also, plans that
have an in-built feature of 'waiver of
premium' were not considered.
Only
the fund options with exposure up to 100
per cent in equities have been considered.
The
design
Net yield. For the Type-I plan, in order
to calculate the net yield, two different
sets of illustration benefits were considered
for different ages and sums assured. One
set of illustration was for a male aged
30 years, for a policy term of 20 years
and a sum assured of Rs 12.5 lakh. The
second set of illustration was for a male
aged 45 years, for a policy term of 10
years and a sum assured of Rs 7.5 lakh.
The objective was to remove any skew towards
a younger age group. Similarly, for the
Type-II plans, two sets were created on
the above-mentioned parameters.
Performance.
The cut-off date for our analysis on the
performance figures was 31 October 2007.
The compounded annualised growth rate
of the equity funds were considered for
one-, two- and three-year periods. However,
because of the absence of data for most
plans over these time periods, the ranking
was done only on a one-year basis. The
net asset values (NAVs) of these dates
were obtained from the websites of the
companies and the returns calculated thereon.
Fund
management charge. The fund management
charge (FMC) is directly captured from
the broc-hures of the plans that were
finally considered in the ranking process.
Disclosures.
The actual returns generated and that
of the benchmark of various fund options
in any Ulip are shown in the monthly or
the quarterly disclosures by insurers.
These disclosures have been used.
Exit
options. Plans were studied to find which
plan offered exit options at no cost or
whether they charged a penalty and after
what period.
Contact
points. Information on various contact
points were gathered from the websites
with regard to premium payments or any
future correspondence that a policyholder
would need to do with the concerned insurer.
Note:
Operational practices and organisational
strength of life insurers could not be
taken into account as the insurer and
regulator are expected to meet them for
the benefit of the policyholder.
The
exceptions. Since all insurers did not
have plans that conformed exactly to the
parameters used, exceptions were made
in two cases. The sum assured in case
of Tata AIG’s Invest Assure-II is
Rs 11.25 lakh instead of the standard
Rs 12.5 lakh. The age of the individual
for Bharti AXA’s policy has been
considered as 46 instead of 45.
Weightage.
Each parameter had been assigned weights
according to the table below:
Assignment
of weights
Performance along with net yield occupies
the major chunk of the ranking methodology.
Performance carries the highest weight
of 40 points because better market returns
play an important role in defining wealth
over longer terms. Similarly, the net
yield, which is a mirror of all the charges
that eat into returns from any Ulip, is
assigned a weight of 30 points. Even though
the fund management charge is taken care
of in the net yield, it has also been
separately dealt with to take care of
the long-term impact of this change.
Disclosures,
exit options and contact points have been
assigned a total of 20 points to take
care of issues like transparency, ethical
selling and serviceability of the policy.
Rankings
The values for the six parameters were
clubbed to arrive at the total weight
figure in each of the Type-I and Type-II
Ulips.
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