Insurers shift to non-guaranteed products

Change in customer preference and increased risk appetite are reasons for shift

Insurance companies are now pitching non-guaranteed insurance products to customers, on the back of an increased risk appetite for pure equity and pure debt products and better commissions in unit-linked insurance products (Ulips).

“We are seeing a shift from guaranteed products to pure debt and pure equity as markets are doing well. Investors are shifting from guaranteed products because they believe that returns will be better in pure debt and pure equity schemes,” said the head of fixed income at a life insurance company.

Guaranteed products are products including traditional life insurance policies like endowment policies that offer 4 per cent or 8 per cent returns. As per the insurance regulations for non-linked products, target purchase price shall mean an absolute amount guaranteed at the outset of the contract or the accumulated value of the premiums/contributions accumulating at an illustrative rate of 4 per cent per annum and 8 per annum, which is expected to meet the policyholder's pension needs after allowing for commutation.

Similarly, the targeted pension rate shall mean the pension that a policyholder expects to receive at the date of vesting at an illustrative assumed rate of interest of four per cent per annum and eight per annum allowed in pricing the annuity.

The head of products and strategy at a large life insurance company explained that apart from the fact that the equity markets have been performing well, pure equity is now being pitched by agents, especially since the commission structures have been revised. He added the linked product regulations that were implemented have linked commission structures to the tenure of the product.

 

“The advantage of these regulations is that Ulips can be sold for a longer tenure, since the commissions are higher. This presents a win-win for both policyholders who would get better returns if policy is held for a longer period and for the agent who was until now shying away from pitching these products,” he said.

In 2010, with the rise in misselling complaints in market-linked products, Insurance Regulatory and Development Authority (Irda) had a re-look at the Ulip products which had a lot of hidden costs. Hence, it came up with the September 2010 regulations for Ulips. These norms reduced the charges of the product, increased disclosures about the returns and also capped commissions while increasing minimum lock-in to five years. Sales immediately took a big plunge since distributors did not have any incentive to sell

With the change in product structures in all segments, guidelines for linked products was again modified in 2013. This revised the net reduction in yields apart from linking commissions to tenure of the product, with higher tenure products giving ability to agent to earn higher commissions.

The chief investment officer for debt segment at a bank-promoted life insurance company said that there has been a shift in preferences and people are moving away from guaranteed products. “There are extra charges for guaranteed products. Since markets are doing well, distributors are able to push for pure debt and pure equity products without any guarantee embedded. When markets are good people are willing to take risks. We are seeing this trend picking up particularly after the elections and this trend is seen continuing. The demand is more for pure equity products than pure debt. We are seeing traction in Ulips,” he said.