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Fixed guarantee on surrender value will hurt insurers’ investment freedom

Nov 27 2012, 12:56 IST
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SummaryThe insurance industry doesn't seem to be very keen on the proposed guaranteed surrendered value.

The insurance industry doesn't seem to be very keen on the proposed guaranteed surrendered value. To provide a fixed guarantee at the outset on the surrender value, an insurance company will need to constrain its investment freedom, which will limit the potential long-term gains for policyholders, says Jayant Dua, managing director and chief executive officer, Birla Sun Life Insurance, in an interview with Saikat Neogi. Excerpts:

The life insurance industry is still awaiting the final guidelines on the 18 standard products. How much of a game-changer would these be?

The 18 standard products aim to provide basic cover at affordable prices, and strive to meet the needs of a number of customers in a simple and straightforward manner. The comparability between providers will also allow customers to make informed choices.

However, any individual’s insurance requirements are not always simple and straightforward, and may differ markedly from another individual’s needs. Understanding each customer’s requirements in detail is very important so that they can be provided with the best solution possible. To this end, the need for more evolved products, alongside the standard set of products, will remain. Insurance companies will need to provide a combination of products as per a customer’s individual needs.

Would the new norms allowing insurers to invest in non-AAA corporate debt paper increase the risk for a policyholder?

The draft exposure norms suggest that both Ulip and non-Ulip can have an exposure of up to 25% in debt instruments that are non-AAA/sovereign rated. However, these investments have to be investment grade debt. Further, the norms also suggest that not more than 5% of the portfolio can be invested in debt having a rating of A or below. The portfolio credit risk, thus, does not increase to any significant extent. At Birla Sun Life Insurance, we have a very strong credit appraisal and credit approval process that ensures that the policyholder funds are not exposed to high credit risk.

The industry doesn’t seem to be keen on the proposed guaranteed surrendered value...

Providing customers superior return for their investment from their insurance policy, at the point of death, maturity or surrender, is the top priority when designing insurance products. A fair surrender value is integral to this philosophy.

We believe that on surrender, a client should get a fair reflection of what is owed to him at that point, recognising the premiums paid to date, expenses incurred, investment returns, the cost of insurance

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