A Comparative Study of Traditional Policies and ULIP Policies with reference to Life Insurance Companies in India

A Comparative Study of Traditional Policies and ULIP Policies with reference to Life Insurance Companies in India ABSTRACT Debabrata Mitra* & Piyali Chandra Khan** Unit Linked Insurance Plan (ULIP) is one single solution for insurance as well as for investment. It is considered to be a hybrid instrument comprising the features of a life insurance policy and a mutual fund. A unit linked insurance plan (ULIP) is a type of life insurance where the cash value of a policy varies. The cash value depends on the current net asset value (nav) of the underlying investment assets. It allows protection and flexibility in investment, which are not present in other types of life insurance such as whole life policies. ULIP came into picture around 1960s and became very popular in the world due to it s lucrative features. In 1971 the Unit Trust of India offered the first ULIP policy in which a small part of premium was utilized for providing life cover and balance was invested in units. With new developments in the insurance policy, finally the plans which provided the dual benefit of sum assured plus the fund value, in the event of an unforeseen occurrence became popular. The Unit Linked Insurance Plans involves risks of investors money because the investments are channelised in capital market and that is why the return is not guaranteed. As we are aware that insurance is a way to manage risk whereas ULIP are not risk free investments, so a dilemma arises whether to avoid risk or to accept risk. In this perspective, the study compares the Traditional policies with Ulip policies catered by the Life Insurance Companies in India in this era of globalization. Key Words: ULIP, NAV, IRDA, AMC * Dr. Debabrata Mitra, Professor, Department of Commerce, University of North Bengal, India, email :,M : +91(0)9474877362. **Piyali Chandra Khan, Lecturer, Department of Management, University of North Bengal, India, email :,M : +91(0)9476158709. 1 Mitra & Khan

1. Introduction The insurance sector is a Nursing Home which aids to recover the ailments of financial sector. Life Insurance is the fastest growing sector in India since 2000 as Government allowed Private players and FDI up to 26% (which is likely to go up to 49% shortly). Life Insurance in India was nationalised by incorporating Life Insurance Corporation (LIC) in 1956.. LIC got the sole monopoly for transacting the life insurance business in our country. In 1993 the Government of India appointed RN Malhotra Committee to lay down a road map for privatization of the life insurance sector. While the committee submitted its report in 1994, it took another six years before the enabling legislation was passed in the year 2000 This legislation amended the Insurance Act of 1938 and also legislating the Insurance Regulatory and Development Authority Act of 2000. In the same year the newly appointed insurance regulator, Insurance Regulatory and Development Authority (IRDA), started issuing licenses to private life insurers. With the opening up of the market, foreign and private Indian players were keen to convert untapped market potential into opportunities by providing tailor-made products. The insurance market started to fill up with new players which had led to the introduction of several innovative insurance based products, value add-ons, and services. Many foreign companies have also entered the arena such as Tokio Marine, Aviva, Allianz, Lombard General, AMP, New York Life, Standard Life, AIG, and Sun Life. The competition among the companies has led to aggressive marketing, and distribution techniques. The active part of the Insurance Regulatory and Development Authority (IRDA) as a regulatory body has provided to the development of the sector. The insurance industry is the latest which was thrown open to competition from the private sector including foreign players. Foreign companies can only enter joint ventures with Indian companies, with participation restricted to 26 per cent of equity. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players, but it can be expected that the customer will gain from improved service. The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution, in order to improve the low per capita insurance coverage. The last ten years have seen major improvements in the working of various financial market participants. The government and the regulatory authorities have followed a step-by-step approach, not a big bang one. 2 Mitra & Khan

The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. On the whole, the cumulative effect of the developments since 1991 has been quite encouraging. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis. However, financial liberalization alone will not ensure stable economic growth. Some tough decisions still need to be taken. Without fiscal control, financial stability cannot be ensured. The fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. In the case of financial institutions, the political and legal structures have to ensure that borrowers repay on time the loans which they have taken. The phenomenon of rich industrialists and bankrupt companies continues. Further, frauds cannot be totally prevented, even with the best of regulation. However, punishment has to follow crime, which is often not the case in India. India's ranking in the world insurance market has dropped four places from number 11 in 2010 to number 15 in 2011 because of a sharp drop in life insurance business in 2011-12., India's share of the world insurance market has declined to 1.58% in 2011 from 1.8% in 2010 as a result of a drop in life insurance premium. India has been displaced by countries like Brazil, Spain and Taiwan which now rank higher than India. India's best performance was in 2009 when a surge in premium generated by life insurance companies through unit-linked insurance plans resulted in India's ranking rising to number 9 position, displacing Taiwan. When life insurance industry was opened for competition in 2000, India ranked number 20 among life insurance markets and accounted for a mere 0.5% of the world premium. By 2009, the share has improved to 2.45%, overtaking developed markets in the West such as Spain, the Netherlands, Switzerland, Sweden Belgium, Ireland and Finland, South Africa, Australia and Canada. However, now some industry persons say that the surge in premium in 2009 cannot be taken as an increase in life insurance penetration as it was investment driven with ULIPs being marketed as a channel to invest in stock markets. In the last two years the Insurance Regulatory and Development Authority ( IRDA) came out with guidelines that required life companies to reduce charges and provide a minimum level of insurance cover with every policy. This has resulted in a sharp drop in premium collections even though sum insured has jumped because of the change in focus to term insurance. The 3 Mitra & Khan

drop in life insurance business in 2011-12 in India has been partly responsible for dragging down growth According to a report by Swiss Re, in 2011 total insurance premiums in emerging markets grew only 1.3% in 2011 to $700bn largely due to the poor performance of the two biggest emerging markets - China and India. Premiums in China and India, which account for over 42% of total emerging market premium volume, declined 6.4% and 5.5% respectively. However, in the other two BRIC countries (Brazil and Russia), growth remained solid, keeping the share of emerging markets' share of global premium at 15%.Together the BRIC countries continue to dominate insurance growth in the emerging markets accounting for about 60% of total emerging market premium, up from 37% in 2000. In India the shrinkage in premium was because of tighter regulation on distribution of unit linked insurance plans while in China life premiums fell after the authorities set in stringent rules regarding bancassurance. This resulted in life insurance premium falling 15% in China and 8.5% in India. Global insurance premiums contracted 0.8% in 2011. However, because the US dollar depreciated against other major currencies in 2011, premiums increased 6% in nominal terms to $4597bn. Life insurance accounted for 57% of total premiums. 2. Literature Review Akula, R. and Kanchu, T.,(2011), conducted a study on growth of ULIP Policies in life insurance sector of India by comparing traditional (Life Fund + Pension & General Annuity + Group Fund) and ULIP Policies. The objective of the study was to observe the evolution of ULIPs in India, the growth of ULIPs over traditional Policies, risk factors involved in ULIPs over traditional policies and to suggest various measures to develop and stabilize the growth of ULIPs. The period from 2007 to 2009 was covered in the study. The study considered 5 companies to compare growth, namely, LICI, HDFC Standard Life, ICICI Prudential Life, SBI Life and Bazaz Allianz Life. It was revealed from the study that there was remarkable growth in ULIP compared to traditional policies as the new private entrants targeted ULIPs for market penetration. Venugopalan, K.,V.(2011), conducted a study on global financial crisis and Life insurance sector in India by undertaking a comparative study of LIC with Private Sector. The impact of the Global Financial Crisis of 2007 to the Indian Life Insurance Sector is measured by using the following variables insurance penetration, insurance density, number of insurance policies issued, number of insurance premiums collected, total premium collected, profit obtained.the period covered in the study was from 2004-05 to 2010-11. The study suggested insurance sector to be an emerging and untapped sector in our country 4 Mitra & Khan

with good growth potentials. A mixture of traditional and ULIP Policies was also suggested in the study. Sinha, R.P.(2009) compared the public and private sector life insurance companies on the basis of investment funds. The period covered in the study was from 2002-03 to 2006-07. The study revealed that the private sector insurance companies collected more funds from unit-linked plans that LICI and therefore, were more exposed to stock market. During the years 2005-06 and 2006-07 the return on investment was found to be higher for the private players compared to LICI owing to buoyant stock market conditions. The study also suggested that the private players might not repeat this in later years due to stock market meltdown. Nair, K.K.(2009), conducted a study on Unit Linked insurance plans (ULIP) based on secondary data available on its emergence, concepts, parameters, benefit, current position and future outlook. The study suggested that India has a plethora of opportunities for insurance companies because three-fourth of the population was uninsured also majority of the investing population were small and medium investors and majority of the investors lacked the expertise to directly enter the stock market and earn good returns. The Study emphasized the about facts to be the reasons for increased importance of ULIP. The study observed that ULIP will continue to be a good investment option for the investors as it combines the multi aspects of insurance, investment and tax benefit. Rao,T. and Samuel, S.(2009), studied the reforms in the insurance industry and suggested that the reforms would create the potential for further growth in the industry, it might totally transform the industry and also that the future of insurance industry according to them was a blend of opportunities and challenges. Ramana, B.V.(2009), studied the impact of global financial crisis on insurance and reinsurance industry using a meta-analytical analysis. The study suggested that the insurance industry (barring AIG, the insurance giant) escaped largely unscathed from the first round effects of the subprime disaster but the prolonged credit and liquidity crisis, as well as, the consequent regression in the financial services sector had its direct and indirect impact on both primary and reinsurance markets the world over which was quite evident from the increase in the number of claims, decline in investment return and reduced access to finding. 5 Mitra & Khan

James J. Schiro(2006) suggested that insurance industry must be proactive to deal with changes in external forces and technological developments. Regulations can play a key role here. The regulators have to be in pace with the world. The regulations should be principle based rather than rule based. Stefan Engelander and Joachim Kolschbach(2006) opined that in insurance sector the risk is retransferred to the policy holder by a refund of premiums not required. The performance linked feature has a significant role in the insurance business. They stressed upon reducing the liquidity risk by speeding up the settlement process. Traditionally, the relationship between a policy holder and insurer depends on mutual trust. 3. Objectives of the Study The main objective of the study is to find the growth of ULIP as compared to the Traditional objective. So, the study has the following underlying objectives: i. To study the features of ULIP policies. ii. iii. iv. To find out the growth in the fund of ULIP and Traditional policies of the life insurance companies in India. To enumerate the business in force of ULIP and Traditional policies of the life insurance companies in India. To study the growth of ULIP through the premium collected by the life insurance companies in India. 4. Period of Study The study compares the ULIP policies with the Traditional policies. For purpose of analysis, the period from year ending 31 st March 2009 to 31 st March 2011 has been considered for the study. 5. Methodology The study is based on secondary sources of data collected from published sources such as IRDA Annual reports, Company Annual reports, Books, Magazines, Journals and Newspaper. The figures so collected have been expressed in absolute or percentage as required for the purpose of the analysis. 6. Unit Linked Insurance Plan versus Traditional Plan 6 Mitra & Khan

I. Theoretical Overview Insurance is an arrangement to transfer the risk from oneself to an insurance company. Life of everyone is full of uncertainties and future unseen so we tend to trust the company and try to get peace of mind. The primary function of insurance is to provide protection. There are many secondary functions as well viz. prevention of loss, tool for savings and investment etc. Life Insurance plans are beneficial as a long term avenue for investment which also offers protection through life cover. Life Insurance policies are broadly categorized into : i. Traditional Policies ii. Unit Linked Insurance Plan i. Traditional Policies The traditional policies offer in-built guarantees and define maturity benefits through variety of products such as guaranteed maturity values. The investment risk is borne by the life insurance company. The traditional policies consist of following types: a. Whole Life Plans b. Term Insurance Plans c. Endowment Plans d. Protection Plans e. Child Plans f. Health Plans g. Pension Plans ii. Unit Linked Insurance Plan(ULIP) Unit linked insurance plan is a type of life insurance where the cash value of a policy varies according to the current net asset value (nav) of the underlying investment assets. It allows protection and flexibility in investment. The premium paid is used to purchase units in investment assets chosen by the policyholder. The investment risk is borne by the policyholders. ULIP provides a flexibility to decide about the risk taking profile. Evolution of ULIP: 7 Mitra & Khan

ULIP came into play in 1960s and has been adopted in all countries throught the Globe. In 1971 the Unit Trust of India offered ULIP where one small part of the premium was used as life cover and the balance was invested in units. Unit linked guidelines was notified in India on 21 st December 2005 by IRDA.The guideline ensured transparency and understanding of these products amongst the insured. Risk factor in ULIP: The investment risk is related to the stock market. The NAVs of the units go up and down depending on the funds performance and the factors affecting the Capital market. The ULIP are subject to following charges: a. Premium allocation charge b. Mortality Charges c. Fund Management Charges d. Policy Administration Charges e. Surrender Charges f. Fund Switching Charges II. Fund wise growth (Assets under Management) The entry of the private players in the life insurance market triggered competition in the market. The private players primarily used ULIP products to penetrate the insurance market. During 2007 to 2009 a huge growth in ULIP was found in the market. The growth of ULIP and Traditional plan from 2009 to 2011 is shown in the Table below: Table 1: Overall growth in Assets Under Management Fund 2009 2009 2010 2010 2011 2011 Total increase Total increase Total increase (Rs.in Crore) over previous year ( %) (Rs.in Crore) over previous year ( %) (Rs.in Crore) over previous year ( %) Life Fund(a) 629650.4 16.25 731290.86 16.14 841074.55 15.01 8 Mitra & Khan

Pension and 113951.6 24.86 143626.93 26.04 189927.26 32.24 General annuity & Group Fund(b) Traditional(a+b) 743602.02 17.49 874917.79 17.66 1031001.81 17.84 Unit Linked 172762.8 29.82 337540.1 95.38 399115.67 18.24 Fund Source: IRDA Annual Reports Analysis: From the above table, it is evident that in the year 2009, the life funds increased by 16.25% only. The Pension and General annuity fund increased better at 24.86%.So, the total growth in Traditional Fund is 17.49% which is lower than the ULIP Fund (29.82%). In the Year 2010, we see that the Traditional fund has again a similar type of growth whereas the ULIP fund grew remarkably by 95.38%. But the year 2011 depicts a different picture. It reflects that Life fund has a decrease in the growth rate, pension and general annuity and group fund shows an increase in the growth rate. The traditional fund thereby could again maintain a growth rate of 17.84%. But the growth in ULIP fund was as low as 18.24% which is due to the capital market conditions and IRDA regulations. So, in all these three years we find that Life funds has been slightly decreasing in terms of growth rate. The pension and general annuity and group fund has shown a gradual increasing trend and the ULIP funds were quite volatile. III. Assets under Management of Life Insurance Companies (Growth from 2009 to 2011) Name of Company Growth in Life Fund (in %) Growth in Pension and Annuity Fund (in% ) Growth in ULIP fund (in %) LICI 31.63 61.74 105.90 TATA AIG 67.14 28.46 253.08 9 Mitra & Khan

Star Union Dai-chi 223.3 421550 5310.04 Sriram 32.67 295766.67* 201.71 SBI Life 29.35 149.66 280.65 Sahara 64.69 223.68 185.50 Reliance 73.69 100 196.92 Met Life 72.94 215.20 203.29 Max New york 96.71 78.024 192.25 Kotak Mahindra 75.47 40.33 130.51 ING Vyasya 75.04 220 134.72 India first 6.24* 100 350.44* IDBI Federal 76.36 63566.67 404.24 ICICI pru 111.03 140.30 14.29 HDFC Standard 111.33 41.62 182.89 Future Generelli 156.94 280.25 662.72 DLF Pramerica 80.76 0 1108.24 Canara HSBC -10.17 2020.50* 987.75 Birla Sunlife 150.73 19.39 121.32 Bharti Axa 74.85 0 572.97 Bajaj Allianz 93.54 392.80 133.80 Aviva 51.17 2020.50* 102.41 Aegon Religare 293.09 100 2387.33 Private Companies Total 84.71 144.17 103.88 Total 33.58 66.67 131.01 *in comparison to 2010 as there was no fund in 2009. Analysis From the above table it is quite distinct that the ULIP fund has grown significantly during these years in comparison to the traditional funds. Both Public (LICI) and Private sector reflects a higher growth in the ULIP. The private sector has also shown remarkable growth in pension and annuity fund but most of this companies have just started this fund and therefore have a very small amount of fund. Canara HSBC has shown a negative growth rate for Life funds and for pension and annuity funds it has just started these policies from 2010.Undoubtedly ULIP fund has again reflected a superior growth rate here also like other companies. IV. Company wise comparative analysis of Traditional and Unit Linked Insurance Plan (Number of Policies) Table 3: Business in Force (Number of Policies): in 000 10 Mitra & Khan

2011 2010 2009 Company Traditional ULIP Total Traditional ULIP Traditional ULIP LIC 243131 42462 285593 228838 49434 212942 44682 TATA AIG 839 1000 1839 760 933 730 781 Star Union Dai-chi 37.1 150.93 188.03 12.24 106.11 0.62 13 Sriram 72.43 248.43 320.86 39.81 258.22 38.36 227 SBI Life 928.24 3548.98 4477.22 711.96 3167.14 611.47 2030 Sahara 150.16 167.49 317.65 116.58 166.06 101.41 136 Reliance 1953.16 3261.82 5214.98 600.21 3980.9 234.1 3015 Met Life 271.21 578.26 849.47 230.89 563.02 176.26 469 Max New york 1721.59 1613.53 3335.12 1348.8 1586.93 1142.27 1359 Kotak Mahindra 271.7 878.33 1150.03 168.62 912.64 162.79 788 ING Vyasya 683.27 631.16 1314.43 521.27 663.67 433.4 581 India first 0.7 168.66 169.36 0 70.47 0 0 IDBI Federal 119.97 129.07 249.04 47.45 114.7 10.47 71 ICICI pru 1148.57 4944.66 6093.23 1028.84 5089.19 1368.65 4826 HDFC Standard 1678.71 1893.61 3572.32 1577.24 1666.98 1323.45 1404 Future Generelli 372.01 178.75 550.76 182.42 196.95 58.53 40 DLF Pramerica 20.83 33.11 53.94 1.4 19.84 0.63 2 Canara HSBC 15.31 200.02 215.33 0.81 129.34 0.17 36 Birla Sunlife 852.98 2130.42 2983.4 993.32 2304.84 675.93 1737 Bharti Axa 118.39 266.35 384.74 44.79 257.47 38.83 188 Bajaj Allianz 1828.1 6689.62 8517.72 947.6 7247.94 727.74 6721 Aviva 152.88 711.01 863.89 61.92 921.54 61.9 824 Aegon Religare 54.55 72.21 126.76 14.83 44.34 5.51 17 Private Total 13290.39 29496.11 42786.5 9410.81 30427.87 7902.49 25265 Total 256420.88 71958.02 328378.9 238248.54 79862.15 220845.3 69946 Analysis: From the above table it can be interpreted that the public sector company (LICI) is doing more business on traditional policies whereas the private sector companies are counting on the ULIP policies. The 11 Mitra & Khan

difference was more prominent in 2009 and 2010.In 2011, however there is slight difference. However, we can well understand the growth in the sale of ULIP policies has been quite more than the traditional policies in these years. V. Company wise comparative analysis of Traditional and Unit Linked Insurance Plan (Premium Collected): Table 4: Premium collected(first year + Renewal) (in % of total) 2011 2010 2009 Company Traditional ULIP Traditional ULIP Traditional ULIP LIC 80.74 19.26 74.60 25.40 77.94 22.06 TATA AIG 28.21 71.79 23.95 76.05 31.34 68.66 Star Union Dai-chi 24.64 75.36 9.31 90.69 10.84 89.16 Sriram 19.72 80.28 11.25 88.75 6.37 93.67 SBI Life 29.91 70.09 32.69 67.31 37.35 62.65 Sahara 37.56 62.44 35.50 64.50 29.52 70.48 Reliance 23.02 76.98 6.79 93.21 3.49 96.51 Met Life 23.21 76.79 18.34 81.66 13.38 86.62 Max New york 39.43 60.57 30.10 69.90 30.61 69.39 Kotak Mahindra 16.46 83.54 8.72 91.28 9.52 90.48 ING Vyasya 50.41 49.59 36.03 63.97 72.88 27.12 India first 4.74 95.26 0 100 0 0 IDBI Federal 29.69 70.31 18.69 81.31 9.52 90.48 ICICI pru 12.49 87.51 4.29 95.71 5.55 94.45 HDFC Standard 17.90 82.10 17.58 82.42 15.01 84.99 Future Generelli 48.92 51.08 35.21 64.79 29.48 70.52 DLF Pramerica 24.21 75.79 1.04 98.96 96.14 3.86 Canara HSBC 10.99 89.01 0.95 99.05 0.09 99.91 Birla Sunlife 6.64 93.36 1.13 98.87 3.26 96.74 Bharti Axa 12.46 87.54 5.76 94.24 19.19 80.81 Bajaj Allianz 83.04 16.96 90.06 9.94 6.01 93.99 Aviva 11.01 88.99 2.32 97.68 2.01 97.99 Aegon Religare 21.93 78.06 6.25 93.75 87.15 12.85 Private Total 20.79 79.21 14.00 86.00 13.25 86.75 Total 37.38 62.62 56.48 43.52 59.13 40.87 Analysis 12 Mitra & Khan

From the above table we can well understand that the insurance companies has collected more premium for the ULIP policies as compared to the traditional policies in the year 2011. The private players collect most of their premium income from ULIP policies which has been reflected in all these years. In case of Bajaj Allianz we find that there has been a drastic change in their pemium from ULIP policies to Traditional policies from 2009 to 2010.The same has been continued in 2011 also. The public sector company (LIC) collects more of its premium from traditional policies. It had reduced slightly in 2010.But in 2011 they again returned to the basic by collecting only 19.26% of their premium from ULIP policies. Whereas in case of all private sector life insurance companies (except Bajaj Allianz) we find that in 2009, almost 87% of the premium used to collected from ULIP policies which has come down to 80% in 2011. From the above analysis it can be interpreted that though the regulations in the life insurance sector has affected the ULIP policies to an extent but its growth rate is still quite high as compared to the traditional policies. 7. Conclusion The ULIP products are more risky as compared to the traditional policies. There has been a growth in ULIP in a limited period of time. The private life insurance companies are showing higher growth in ULIP policies as compared to traditional policies. In 2011 however the scenario is bit different in certain cases, which might be a warning for the growth in ULIP policies in near future. In ULIP policies the investment risk is borne by the investor and not the insurer. At the same time the investor also has the advantage of selecting the appropriate fund depending on their risk appetite. However the investors should keep in mind the following factors while investing in ULIP policies: 1. It should be known to the investor that these investments are for long run. 2. There are some charges applicable so knowing the charges in advance will help in return assessment. 3. The risk profile of the fund and the investor should match with each other. The regulatory authority, IRDA, have set up stringent regulations for insurers regarding ULIP policies. In the last two years the market has seen few ULIP policies with guaranteed return marketed by the insurance companies (such as Highest NAV guaranteed return).so, the insurers are working on their part.2011 was not a very good year for the ULIP policies. So, the insurers and IRDA should try to work out on this. To sum up, ULIP policies are the best option available to investors when they are looking for transferring their risk(life insurance) and also maximizing their return (investment). 13 Mitra & Khan

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Venugopalan, K.,V., SIT Journal of Management (2011), Global Financial Crisis and Life Insurance Sector in India A Comparative Study of LIC with Private Sector, Indian Journal of Commerce and Management Studies, Vol-II (06), pp-56-61. Akula, R. and T. Kanchu, (2011), Growth of ULIP Policies in Life Insurance Sector A Comparative Study of Traditional and ULIP Policies, Indian Journal of Commerce and Management Studies, Vol-II, Issue-02, pp-190-200. III. Reports Swiss Re, sigma 2/2011 Swiss Re, sigma 3/2012 IV. Webliography http://wikipedia.org retrieved on 12.08.2012 http://irdaindia.org retrieved on 27.08.2012 http://lifeinsurancecouncil.org retrieved on 27.08.2012 http:// licindia.com retrieved on 11.08.2012 http://bimadeals.com retrieved on 13.08.2012 http://www.insurancetimes.in retrieved on 12.07.2012 15 Mitra & Khan