The Insurance Regulatory and Development Authority of India (Irdai) on Tuesday published a circular stating the formation of a working group to examine various aspects of index-linked insurance products (ILIPs) that may be offered by life insurers. This is not the first time life insurers are looking at offering such products. Before 2013—the year in which the regulator banned insurers from selling ILIPs—insurers went aggressive on these policies and the category gained traction between the mid to late 2000s.
Considering requests made by life insurers to reintroduce these products, the regulator has now asked the committee to examine the need for index-linked products with respect to the availability of various indices and how it will serve the needs and interests of customers in relation to traditional savings products.
The committee will also examine the index-linked products, which were available in the past in terms of product structure, ease of customer understanding, administrative processes and sales, among other issues.
“Before 2013, index-linked non-participatory plans were prevalent with most of the insurers. Most plans were linked to 10-year G-Sec as benchmark rate and each year premium was linked to this index to arrive at a return for that particular year,” said Rushabh Gandhi, deputy CEO, IndiaFirst Life Insurance Co Ltd.
Back then, the regulator perceived these plans to have a pseudo unit-linked structure with investment risk being borne by customers while insurers positioning these plans as a traditional savings insurance plan.
“Surrender penalty too was in line with traditional plans resulting in limited risk retained at the insurers’ end. The biggest objection was the limited understanding of such products among customers, which led to these products being totally withdrawn,” added Gandhi.
This time around, Irdai has asked the committee for specific recommendations such as product structure, pricing along with suggestions on possible amendments to current product and investment regulations.
Rakesh Goyal, director at Probus Insurance brokers, said insurers may want to offer these products again due to the availability of various benchmark indices and the interest towards traditional savings products. However, whether these products will be of any use to policyholders depends on the cost structure associated with it.
“Why these plans may not work is because they are linked to an index but could still have a high-cost structure. Exchange-traded funds (ETFs) are low-cost compared to regular mutual funds and that’s one reason why people go for them. If the same is practiced for index-linked products where costs are not as high as an endowment plan, then it could work well,” said Abhishek Bondia, MD and principal officer, SecureNow.in.
Gandhi said there are multiple indices that can be offered other than reverse repo or 10-year G-sec paper. “Some of the other indices include Nifty Long duration G-Sec Index, Nifty Long duration Bond Index, Nifty 10 years SDL Index, and Nifty Bharat Bond Index.”
Insurers believe that the multiple regulations brought by Irdai in the last eight years may ensure that higher benefits are passed on to the customer, even in case of policy surrender by way of increasing surrender values and lowering surrender charges.
“Limiting of expense loading in the product by linking it with premium paying term, improving investment regulations for better risk management at insurer’s end along with the strict implementation of expenses of management regulations to reduce cost overruns are some of the regulatory modifications that can ensure better customer proposition in the long run,” said Gandhi.
The committee is set to take two months to come out with its recommendations. However, it’s advisable to not mix your insurance and investment needs and financial planners said unless insurers work on cost reduction in a big way, product innovation will not benefit policyholders.
“There needs to be a check on marketing and distribution costs. Any new product allows the agents to approach the market again and hard sell the policy to a new set of prospects who feel it is an attractive proposition. Except for term and immediate annuity, no other life insurance product is worth considering as of now,” said Melvin Joseph, founder, Finvin Financial Planners.