Index-linked insurance products may entirely go

New norms a big hurdle; life insurers petition Irda

Index-linked insurance products (Ilips) are expected to be absent from the product portfolio of life insurers from October, when the new norms for traditional products will be enforced.

In line with the new product guidelines, Ilips will not be considered as a separate category.

Life insurers have approached the Insurance Regulatory and Development Authority (Irda) to allow the sale of these products after the October deadline.

If Irda doesn’t consider the plea, life insurers will either have to completely modify the product or discontinue it.

Ilips are insurance products whose returns are linked to benchmark indices. These products are linked to the 10-year government bonds or equity indices such as Sensex or Nifty. While those linked to government bonds are less risky, those linked to equity-based indices would have fluctuations in returns, based on stock market performance.

At present, some life insurers offer this product to their retail customers. Since most of these are linked to the 10-year benchmark yield, they are a safer mode of investment than equity. Life insurers also said they’d seen good consumer interest for Ilips, due to the link with government securities.

“This product is easy to understand and transparent in terms of the return. Hence, it has been one of our top-selling products. Taking this into consideration, we have approached Irda to allow us to sell the product post October, too,” said the head of a private life insurance company. The process of product refiling has begun for all insurers.

Life insurers have requested Irda to allow them to sell the product on the premise that these products are linked to government bond yields and, hence, not very risky.

In the initial draft guidelines for traditional products, Irda had talked about Ilips as a new category of life insurance.

Insurers will have to provide a benefit illustration for the insurance products, linked to benchmark indices, Irda had said.

Irda had said it would have benefits clearly reflecting the possible movements of the index to be linked and the value of the benefit to be guaranteed in such a scenario. For example, if there is a change of less than two per cent per annum on interest rates, the value of benefits assigned would be 0.25 per cent per annum of the policy account. Similarly, if there is a change of more than five per cent per annum on interest rates, the value of benefits assigned would be four per cent per annum of the policy account.

Death benefits, lock-in period and surrender norms were similar to Ulips, according to the draft. But, this product category was excluded in the final traditional product guideline, as the industry was apprehensive on the calculation of the charges for the product.

Market players said there were limited transactions in this segment. Ajay Manglunia, senior vice-president, Edelweiss Securities, explained, “We have not seen many index-linked products. From the wholesale investors segment, I have not seen many transactions happening. There might have been transactions from the retail investors’ side.”

GOING OUT?

• Life insurers have approached Irda to allow the sale of these products after the October deadline
• If Irda doesn’t consider insurers’ plea, the latter will either have to completely modify the product or discontinue it
• Index-linked insurance products are insurance products whose returns are linked to benchmark indices. These are linked to the 10-year government bonds or equity indices such as Sensex or Nifty