No need to ban high-NAV products: Insurers

The Insurance Regulatory and Development Authority (Irda), under former chairman J Hari Narayan, had decided to ban highest net asset value (NAV)-guaranteed products. Life insurers, however, feel Irda should have curbed mis-selling in this segment, rather than ban such products.

Industry sources said the final norms related to these were unlikely to be passed soon. Highest NAV-guaranteed products are a type of unit-linked plans (Ulips) that promise to pay the highest value the fund records during a certain period of the term (five to seven years). For this, insurers have to invest aggressively in stocks, something that may lead to undue risks. The controversy surrounding these products surfaced in September 2010, when Irda indicated its discomfort on the grounds of "systemic risks" associated with the way such funds were managed. It felt such products emphasised on debt instruments and had a risk of heavy sell-off in equities, in case of a fall in the stock market.

The products, per se, do not have any fundamental problem. The problem is it these have a tendency to be mis-sold, since the customer does not understand market fluctuations could be risky. Hence, disclosures should be made clearer, rather than banning the product, said the chief executive of a private life insurer.

Industry sources said with a new chairman at Irda, some revisions might be expected. A lot of administrative procedures are yet to be completed before this product is banned. We do not expect the regulations soon, said the managing director of a large life insurer. He added the companys customers had an appetite for highest-NAV products and it continued to sell these.

Of the complaints registered with the Ombudsman office, most pertain to the life insurance sector. Sources in the office said till last year, about 62 per cent of the complaints were from the non-life sector. In the life insurance sector, Ulips accounted for most complaints, with issues related to high-NAV products topping the list. Industry sources said this was because the returns promised might not be achieved, owing to adverse stock market performance.

Some insurers have a traditional view. V Viswanand, director and head (product and persistency management), Max Life Insurance, said, Max Life Insurance does not have any highest-NAV product in its portfolio. We have always believed these products are neither good for the customer, as there is a significant possibility of mis-buying this product, nor for the economy, as these may expose the stock market to systemic challenges in the form of markets spiralling down when all fund managers start dumping equities in favour of bonds to prevent their losses.

Earlier, Hari Narayan had told Business Standard such products weren't helpful for customers and, therefore, all approvals for these products had been stopped. He added Irda was bringing out regulations for curbing the sale of high-NAV products and these norms would soon be published in a gazette.