Capital guarantee plans in vogue

Private life insurers are witnessing an increasing number of sales accruing from their capital guarantee plans (CGPs). 85 per cent of the new business premium for Kotak Life Insurance comes from capital guarantee plans, while for Birla Sun Life Insurance it is 45 per cent.

Rahul Sinha, senior vice president of marketing at Kotak Life Insurance said, "In the last six months, all insurance companies have launched at least one capital guarantee product. Currently, ULIPs constitute close to 90 per cent of the new business premium for the private players of which 3 to 4 per cent are capital guarantee products. In the next five years, I expect that CGPs would constitute 5-7 per cent of the total market and this would be made of consumers sampling the capital markets for the first time. We are contemplating the launch of one or more capital guarantee products."

CGP is a market-linked policy providing the policy holder with the benefit of capital appreciation while assuring a premium guarantee. This means that if the market returns were negative, the sum of all premiums paid would be returned to the policyholder on maturity of the plan. In other words, CGP is a downside-protected plan. However, insurers opine that the returns on CGP are lower vis-a-vis ULIPs. This is because the guarantee fund is managed conservatively, compared with non-guarantee funds such as ULIPs which are in high-risk high-returns category.

Anjana Grewal, senior vice president marketing at Birla Sun Life said, "We offer guaranteed 3 per cent return on the premium net of charges on our range of Flexi plans (ULIP plans) which cover endowment, money back and whole-life plans. These plans constitute 40 per cent of our portfolio and 45 per cent of our new business premium comes from here. There are a higher proportion of people who are risk-averse at the retail end and are happy about the guarantee as it gives them a sense of comfort."

Vivek Khanna, director, marketing at Aviva Life insurance said, "We offer capital guarantee on the products with Secure Fund option where exposure to equities is upto 20%. As on Dec 31, 2006, the CAGR on Secure Fund was 8.5% since inception (January 27, 2004), while our Growth Fund, with high equity exposure, has a CAGR of 39.35% since inception (January 27, 2004)."

So, how do life insurers manage to provide guarantee of capital when the markets are down?

Sinha of Kotak Life Insurance explains, "The insurance company will put a capital guarantee charge which is either collected separately or as part of the fund management charges. The charge varies from 0.25 per cent to 0.5 per cent of the fund you opt to invest in equity, debt, equity and debt and so on. If you have chosen an equity fund, you would have to pay more capital guarantee charges."

Life Insurance Corporation of India, on the other hand, does not have any capital guarantee plans. Says an LIC official, "We do not have any CGP. We are not looking at launching any capital guarantee plans as they add to the cost."

Other private life insurers such as HDFC Standard Life do not offer any capital guarantee plans either. Says an HDFC Standard Life official, "CGPs pass the cost to the investors either as higher charges or as lower risk investments. These plans are unnecessary because of the long-term nature of the business. Such plans erode too much of the future investment potential."