With some time having elapsed since the Insurance Regulatory and Development Authority (IRDA) came out with its directive on capping the charges that insurance companies can levy on Ulips, the ramifications of its move are beginning to become apparent. Here are some of the consequences we are likely to witness:

Many existing policies to be revamped. According to estimates done by Edelweiss Capital, the difference between gross and net yield on a typical low-charge, back-loaded policy ranges from 2.1 to 4 per cent. The corresponding numbers for high-charge, front-loaded policies ranges from 4 to 4.5 per cent. Many of these policies will now have to be withdrawn and then re-launched in order to conform to the new norms.

substantial reduction. The charges that have been capped are likely to come down significantly from their present levels. According to research done by Edelweiss Capital, premium allocation charge is likely to drop to 14-16 per cent in the first year from its current level of 25-80 per cent. It is likely to drop to 3-5 per cent in the second and third year and to 2-4 per cent thereafter.

With fund management charge having been capped (see box), expect policy administration charge to rise towards the upper end of its current range, which is Rs 300 to Rs 750 per year.

With margins on Ulips set to come down, insurers will try to maintain their profitability by focusing more on agent productivity and persistency (lower premature termination) of policies.

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