Look at costs when index-linked insurance products are revived

Published in Livemint

The Insurance Regulatory and Development Authority of India (Irdai) stated in a circular last week the formation of a working group to examine various aspects of index-linked insurance products (Ilips) that may be offered by life insurers. Ilips are not new in life insurance companies’ arsenal. Before 2013—when the regulator banned the sale of Ilips—insurers went aggressive on these policies and the category gained traction in 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 and how they will serve the needs and interests of customers as compared with traditional savings insurance products.

What are Ilips?

In their earlier avatar: We’ve all heard of unit-linked insurance plans (Ulips) that invest policyholders’ money into the market. Index-linked plans or Ilips, when they were around, invested policyholders’ money mostly into indices related to government securities or bonds. In the past, these plans came with minimum guarantees and were considered low-risk. Like most traditional plans, they came with high costs.

The committee will examine index-linked products, which were available in the past in terms of product structure, ease of customer understanding, administrative processes and sales, among other features.

“Before 2013, index-linked non-participatory plans were prevalent. Most plans were linked to 10-year G-secs (government securities) as the benchmark rate and each year the premium was linked to this index to arrive at a return for that year,” said Rushabh Gandhi, deputy chief executive officer, IndiaFirst Life Insurance Co. Ltd.

Back then, Irdai saw these plans as having a pseudo unit-linked structure with investment risk being borne by customers, while insurers positioned them as traditional savings plans.

“Surrender penalty too was in line with traditional plans resulting in limited risk 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objection was the limited understanding of such products among customers, which led to these products being totally withdrawn,” added Gandhi.

The plan ahead: This time around, Irdai has asked the committee for specific recommendations on features such as product structure and pricing along with suggestions on possible amendments to current regulations on investment-linked products.

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 growing interest towards traditional savings products.

The committee is set to take two months to come out with its recommendations.

Are they for you?

Whether these products will be of any use to policyholders depends on their cost structure.

“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 practised for index-linked products where costs are not as high as an endowment plan, then it could work well,” said Abhishek Bondia, managing director and principal officer, SecureNow.in.

Gandhi said there are multiple indices that can be offered other than reverse repo or 10-year G-secs. “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 the surrender value from these plans may also go up compared to what it was before 2013.

“Limiting of expense loading in the product by linking it with premium paying term, improving investment regulations for better risk management at the 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.

What you should do?

It’s advisable to not mix your insurance and investment needs. Regarding Ilips, in particular, financial planners said unless insurers work on cost reduction in a big way, product innovation in itself will not benefit you.

“There needs to be a check on marketing and distribution costs. Any new product allows 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.

Wait and watch how this product develops.

No votes yet.
Please wait...