Insurance companies might push more of non-participating products

Insurance companies are likely to push non-participating (without profit) products, as compared to participating (with profit) ones after implementation of the new product guidelines from October. With a guaranteed surrender value of 90 per cent and maturity corpus' assured returns of four per cent and eight per cent, insurers said there were few design options under the new structure for participating products.

Gopesh Modi, manager-actuary at Edelweiss Tokio Life Insurance, said it was difficult to design long-term products on a participatory platform. "This would lead companies to the non-par platform, which has inherent guarantees. It will create long-term systemic risk in the industry," he said.

Participating policies are those where the policyholder participates in the profits of the company, paid out as bonus to the policyholder. Money-back plans are an example. In non-participating policies, policyholders are not so entitled. Pure term products are usually non-par products. In its new product guidelines, the Insurance Regulatory and Development Authority (Irda) said par products would have to declare a regular bonus on an annual basis and further terminal bonus, if any, declared shall become payable on the specified events agreed in the policy or at the end of the term of the policy. Non-par products, on the other hand, would have to explicitly state all benefits at the outset. Additional benefits, if any, accrued at regular intervals during the policy term have to be stated.

A senior official from Star Union Dai-ichi Life Insurance said, "While marketing participating products is easier, there are chances that more of non-participating products will hit the market now. Here, insurers are not subject to sharing their profits with policy holders, unlike the case with participating products. Hence, there can be temptation within insurers to launch more of non-par products. If these products are better packaged, with higher guaranteed benefits, it will definitely be more attractive for customers as well."

Par products, under the new norms, will have to offer assured returns of four and eight per cent. Insurers said this would be difficult to achieve, given the mortality costs.

A senior official of a private life insurance company said keeping the cost structure and bonus payouts in mind, it would be a challenge to develop products which were not only compliant with the new norms but also cater to customers' savings and financial needs. "The scope for innovation, in this segment, would hence be limited," the official said. From a long-term perspective, experts said too much exposure to non-par products would be detrimental to insurance firms.

The chief actuary of a private life insurance company felt long-term products needed to be invested into for giving appropriate returns to policyholders. However, in the absence of products in the 30-year tenure category, some portion of the risks might go unhedged. It will lead to a hit on the liability of the companies," the executive said.

For non-par products with a policy term between five to 10 years for ages below 45 years, the minimum death benefit has been fixed at either five times the annualised premium or 105 per cent of all premiums paid on the date of death or the least guaranteed sum assured on maturity or any absolute amount assured to be paid on death, whichever was the highest. For par products with a policy term between five to 10 years for ages below 45 years, it would either be five times the annualised premium or any absolute amount assured to be paid on death or the least guaranteed sum assured on maturity, whichever is the highest. Bonuses, which haven't been paid earlier for par products, will also be paid at the time of death.