Life insurance companies reported strong growth in non-participating or non-par products as companies launched a host of guaranteed products when the interest rates were falling.
Policyholders, too, preferred the guaranteed products for savings, protection, pension and annuity as many saw their savings and earnings getting eroded because of job losses due to the pandemic. Moreover, they did not want to compromise on non-negotiable life goals such as building a corpus for retirement or children’s education, especially during the uncertain times.
Non-participating life insurance policies do not offer any bonus payout, but provide guaranteed benefits such as the sum assured payable on the policyholder’s demise, or the maturity benefits payable when the plan matures. On the other hand, a participating life insurance policy pays both guaranteed benefits and non-guaranteed bonuses based on the company’s profits to the policy holder after the maturity of the policy or to the nominee in case of death before the end of the policy tenure.
The share of non-par products (savings and protection) in individual annualised premium equivalent (APE) rose to 23% in FY22 from 18% in FY20, data from Insurance Regulatory and Development Authority of India (Irdai) show. Experts say the rise in demand for non-par products was because of the low interest rates offered by banks on fixed deposits and innovative guaranteed products offered by insurers because of various hedging options.
Rakesh Goyal, director, Probus Insurance Broker, says though participating insurance products have always remained in demand, in the last two years with interest rates hitting rock bottom, companies offered guaranteed products which led to an increase in sales of non-participating products.
In fact, non-par savings was up 25-50% year-on-year for SBI Life, HDFC Life and Bajaj Allianz Life. On a three-year CAGR basis, growth in non-par savings was high at 45% for HDFC Life, 66% for Max Life, and 85% for Bajaj Allianz Life, a Kotak Institutional Equities analysis shows. “The share of non-par savings to the overall annualised premium equivalent has increased almost 10-20% over the past three years for most players,” the Kotak research note underlines.
How does non-par products work?
The non-par guaranteed plans are preferred by those who want fixed and assured returns on their savings even if the returns are low and the premium is lower than participating policies.Policyholders get the option to choose the guaranteed payout structure as per their evolving life goals to ensure cash flows for non-negotiable life goals. However, before opting for a guaranteed return plan, customers must analyse the internal rate of return (IRR) which is only 5- 6% per annum.
Participating policies, an alternative
Participating policy provides protection as well as returns in the form of bonuses/dividends. The bonuses or dividends earned are paid on a yearly basis and the quantum of the bonus depends on the performance of the insurer. Participating insurance plans such as unit-linked insurance plans can ensure a policyholder not only insurance cover but also earn higher returns in the long run due to the equity exposure.
What should policyholders do now?
Non-participating products are always beneficial in the lower interest rate regime. Typically, insurance companies offer guaranteed products and returns are higher than the prevailing interest rates. Goel says now with interest rates likely to increase, one can look at participating policies too. “If someone is looking at non-par products they should wait for the rates to peak out as they might get higher returns,” he says.
Nayan Ananda Goswami, head, Group Business and Retail Sales & Service, SANA Insurance Brokers, says fluctuating interest rates, volatile equity markets, increasing inflation and delayed reinstatement of purchasing power would influence the spending capacity of the mid-income consumer segment.
“The right combination of guaranteed products and equity-linked products should be determined keeping in mind these crucial factors, especially at a time when protection of savings supersedes contingent earnings,” he says.
LOOK BEYOND GUARANTEES
* Participating plans such as Ulips offer insurance cover plus higher returns in the long run due to equity exposure
* Internal rate of return (IRR) on a guaranteed plan (non-participating product) is only 5-6% per annum
* Share of non-par products (savings and protection) in individual APE rose to 23% in FY22 from 18% in FY 20