How do you think the Irda's proposal of index-linked insurance products (Ilips), which would give policyholders a guaranteed value, will work in the long run
In group insurance products like superannuation and annuity which are basically B-to-B business insurers were guaranteeing a particular rate. There is no rule that one can guarantee a rate, but the treasury of companies wanted it that way. So, the idea was to link some investments to some benchmark like the repo rate, Wholesale Price Index or five-year company deposit rate. But I feel that indexing a product is very difficult as the regulator has sub-caps for investments in various sectors. Moreover, after the regulatory changes, the rules of unit-linked insurance products (Ulips) are far more transparent than any other product.
So, instead of a new category of products, is it better to streamline Ulips, where the charges have come down significantly
Both categories serve different risk appetites. In the case of Ilip, the returns are guaranteed once credited to the policyholders account, whereas in Ulips, the fund value can fluctuate depending on market performance and the risk is with the policyholder. However, in the case of Ulips, the basic principle is possibility of higher returns depending on risk appetite. The policyholder also has various fund options to invest/switch, depending on market conditions and with changing risk appetite, which is not possible with an Ilip.
Moreover, Ilip could be useful for a group business as the CFO of the company will want some amount of certainty in the investments. But for an individual customer, it is not that beneficial. As of now, the index is not defined and once the final guidelines comes, it will be clear. I believe we can form our own index, which, of course, has to pass some measure, and subject to some prudence. But the index has to be linked to something that the customer understands.
For a customer, what would be the issues with Ilips and what does he need to understand
The problem with Ilips would be at a macro level as the customer will not understand what the index is and where his investment is linked to. The customer will look for returns on his investments. The product has to be custom-made to suit the target market. That way, the Ulip was far ahead of its time, but the problem is that financial literacy in India is still at a nascent stage. Simplicity of products is important and customers want some kind of guarantees and certainty on their investment. And to do that, the insurance company must have a robust risk management framework.
Would the guaranteed surrender value proposed in the draft guidelines on the design of life insurance products lead to asset-liability mismatch for insurers
There is always an asset-liability mismatch issue in the industry as no one can put 100% of the asset matching a 25-year or a 30-year tenure. Invariably, many people will leave before the policy matures and one has to keep that in mind. That is, an actuary issue which has to be factored in.
One of the issues with the new guidelines is that if the insurer has to give a guaranteed surrendered value after 7-8 years, it will be very difficult to do the calculations. The more benefits you give at the surrender stage, an equivalent amount of money has to be deducted from the benefited measures. If a customer is buying long-term products, he should get the benefits of long-term products.
I would rather give higher benefit to a customer at the maturity stage and traditional products are designed to be long-term products. There has to be penalties for premature withdrawals like any other long-term government products such as PPF. There are short-term and long-term products and we cannot have a one-size-fits-all approach. The guaranteed surrendered value at 100% is not a good idea and it will affect the industry the way it did when pension products were taken out from the market.
How are you looking at the annuity market
Pension is a very important requirement in India and there is a need for pension products in the market. After term policies, pension is the most important category of products in India.
But designing an annuity product is the mirror opposite of term plans. If longevity goes up, it is good for the term business, but bad for the annuity business. India needs longer-term financial instruments to manage the risk of over a period of, say, 50 years. We need tool kits like derivatives, credit default swaps, interest rate hedges. And for many of these changes, the insurance Bill, which is stuck because of the 49% FDI logjam, needs to be passed. So unless these tool kits are available, it will be difficult to come out with annuity products.
Do you see the industry getting back to growth this year
The long-term requirement for insurance in India is intact, both for protection and long-term savings either for childrens education, marriage or retirement.
And the key requirement is financial savings. For the growth rate to come back, the pace of regulatory changes needs to be calibrated and the new guidelines on traditional plans need some editing as it does not serve the requirements of the policyholders or the companies. The gamut of changes that are required in a traditional product is so large that it will take at least a year to implement the changes after the final guidelines are made public. Moreover, household savings into insurance is important as long-term investment is very much required for the markets and incentives must be given to garner long-term investments.