Why should Ulips be mandated to invest in GSecs?
Given how financial savings of households have collapsed—while overall savings fell from 25.2% of GDP in FY10 to 21.9% in FY13, the financial component of this fell to 32% in FY13 from around 48% in the 2000s—you would think the government’s top priority would be fixing this. While financial savings are also related to the returns from physical ones including gold—gold prices have collapsed from $1,826 per troy ounce in 2011 to $1,168 currently—government policies also make a big difference. Which is why the Budget said that subscribers to EPFO would be freed up and allowed to join the NPS where investors get more freedom to manage their investment portfolios—indeed, the GN Bajpai committee wants this to be freed up further by not restricting investments to just index funds and to also include IPOs. As a result of the budget announcement, the EPFO has also decided to begin investing a portion of new inflows into index funds.
At a time when Indian markets are delivering returns of 19% annually over the past 10 years as compared to 11% on gold, 8.6% on fixed deposits—over the past 5 years, it was 13.8%, 4.4% and 9%, respectively—any move that keeps investors away from fuller participation in stock markets is a bad one, amounts to financial repression and will hit financial savings. In the last 12 months, thanks partly to the 24% rise in the Sensex, there has been a surge in mutual fund inflows. At R91,800 crore from May 2014 to May 2015, the net inflows into equity mutual funds is around 0.6% of the year’s GDP. Put another way, as Deutsche Bank points out, inflows into equity mutual funds in the last 13 months has been equal to what mutual funds received in the last 12 years!
Which is why it is decidedly odd that the draft investment regulations of the Insurance Regulatory and Development Authority of India (IRDAI) should seek to mandate that unit-linked-insurance-plans (ULIPs) have to invest at least a fourth of their portfolio in GSecs. ULIPs were, in FY08, the biggest component of insurance but were phased out due to Sebi’s insistence since the high commissions also resulted in rampant mis-selling. But new rules have now been put in place—the lock-in period has been increased from 3 to 5 years, commissions have been reduced to a maximum of 15% in the first year, the minimum investment in ULIPS has been hiked to 10 times the sum assured from 5 earlier. Insurers had to re-file all their products and take fresh approval in 2013. Thanks to the rise in the equity markets and transparency in the products, private insurers are seeing some traction in linked products now—LIC plans to introduce ULIPs soon—as new business premium in this segment rose to R13,250 crore in FY15 from R8,609 crore the year before. India has very low insurance penetration—in FY15, life insurance penetration, measured as a percentage of premiums to GDP, was at a 10-year low of 3.3%, according to global reinsurer Swiss Re. Also, data from Life Insurance Council show that first-year premium, which is the lifeline of insurers, contracted 6% in FY15, on the back of 14% contraction in LIC’s first-year premium collection. Restrictions of the sort being planned will only hit insurance penetration and, with it, financial savings of households.