Parameters for buying ULIPs

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Planning to buy a Ulip? First assess the policy on the five Ps—People, Process, Price, Parent and Performance. These key elements of marketing are very relevant parameters for judging a policy. However, a little introspection and customer insight reveals that there are actually only two Ps—Performance and Parent. I'm not suggesting that we discount the other Ps. I believe when the foundation is strong (that is, Parent), it ensures that the other building blocks—People, Processes and Price—fall in place, which in turn reflects on the Ulip's Performance.

For Ulip investors, one key aspect to look at is the pedigree of the brand they are investing in. The first P—Parent, and its financial health. In insurance, this is best measured by a metric called solvency ratio. It indicates whether the company has enough buffer to meet its liabilities in case of an extreme situation. The insurance regulator stipulates that the solvency ratio should be at least 150%, but several insurance companies have a significantly higher ratio—thereby indicating their superior financial health. Also, a good and quick claims settlement process, which can be measured to some extent by the claim settlement ratio, is a must. A simple Google search will throw up these numbers on a year-on-year basis.

When companies dedicate themselves to providing long-term investment solutions for customers, they invest significantly in their people, who are oriented to think long-term. For Ulips, this would especially stand good for the investment team. An experienced investment team would have witnessed several market cycles, and therefore, would be able to minimise the downside risk during a down-cycle, while delivering the desired returns in a market up-cycle. The tenure and stability of the team are crucial in helping customers achieve their life goals.

Process is an important parameter in a Ulip. A customer may not be aware of the investment philosophy and or strategy, portfolio construction and stock selection process being followed by the Ulip's fund manager. Nevertheless, these will reflect in the company's orientation and investment history. When a company is focused on short-term performance, it tends to take on additional risks in the portfolio, especially in a momentum market. A long-term investment orientation ensures the team manages portfolios and investments keeping in mind the customer's life goals, and is not directed by market movements.

Price is another important pillar. Ulips have various charges, such as premium allocation, mortality costs, fund management and policy administration. The common perception is that Ulips are cost-heavy. However, regulations and market dynamics have reduced the expenses of Ulips, making them a value packed investment option.

Next is the performance pillar. Apart from providing protection, Ulips are also designed as investments to meet long-term life goals. Hence, checking the long term performance will provide the true attributes of a Ulip. Track records of the different funds of insurance companies are listed on several websites or rating agencies. Check the fund's performance for a period of 5-10 years and over a market cycle (both up market and down market).

Next, customers can look at the downside risk protection metrics like maximum drawdown, and downside capture ratio to judge whether the fund has been able to protect downside risk. Remember, to make up for a 60% loss in investment one needs to make a 150% return. The other metric to evaluate is the rolling returns of the funds offered. This helps cut out the point-to-point bias in performance and is a better measure of a fund's consistency of performance. Again, look at long-term periods. You could also look at the Sharpe ratio and Treynor ratio for long term periods, which measure the risk-adjusted performance of the fund.

These five aspects will help the buyer identify the best Ulip. However, as the parent and the performance pillars brings out the clearest picture, customers must focus on them when investing in Ulips for their long-term goals.

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