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 cover provided, etc. However, to provide a fixed guarantee at the outset on the amount of a surrender value, the insurance company will certainly need to constrain its investment freedom and this will limit the potential long-term gains for all policyholders.

How do you think the bancassurance guidelines proposed by Irda will help penetration of life insurance products?

This is a step in the right direction and will help insurance companies make further inroads. This will help companies pursue newer relationships with banks to widen their presence and achieve an optimal channel mix. Further, the proposed Bancassurance architecture guidelines will provide more options for the customers and will also help increase the reach of insurance products through the wide network of banks.

All pension products will have to have annuity component and the products will have to be non-zero positive rate of return. How will insurance companies work out the annuity payout? Have you filed any new pension plan?

It is important to note that it is not stipulated that insurers guarantee the amount of annuity payout at the commencement of a customer’s pension policy. Hence, the need to hedge the investment risk inherent in such an arrangement does not exist.

We work out our annuity rates at all points in time by taking into account likely investment returns over the annuitant’s lifetime, the expected longevity of the annuitant and the expenses of administering the annuity.

We share with clients our existing annuity rates, and help them understand that these could change over time as and when investment conditions change. In terms of providing the long-term investment guarantee on the underlying pension product, we ensure that the quality and amount of assets that we hold are more than sufficient to provide for the guarantees we promise. Yes, we have filed a number of innovative pension and annuity products, which will provide customers with excellent returns over time.

How should distributors and agents be sensitised about selling insurance products to retail investors, especially after the spate of regulatory changes?

There is a continuous focus within the industry to promote a culture for need-based selling. This is being done with help of appropriate training and segmentation process. There is a thrust towards maintaining superior persistency.

There is a clear focus on right selling. If the product is sold right, a bulk of the job is done since the policyholder is fully aware of what he has bought. With a continued focus on empowering customers and further the cause of need-based selling, most companies have launched a host of pre-sales and post-sales initiatives.

Among the pre-sales initiatives taken up by BSLI, easy to understand product literature and welcome calling ensure that customers accurately understand the details of their purchase. In addition, there are several post-sales initiatives that have been put in place ,which include dedicated persistency cell, segmented focus on orphan and HNI clients, life cycle-based communication, etc.

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