Irda to allow variable annuity items

In an attempt to increase the flexibility and transparency of annuity products, the Insurance Regulatory and Development Authority, or Irda, is likely to allow variable annuity products, with exposure to equity.

The insurance regulator has set up a committee to address various risks attached with the product and the ways to mitigate it. The committee will submit its report by January 31, 2010.

“Given the population growth and the need for a proper pension system, variable annuity business has tremendous potential in India,” Irda said.

A variable annuity is an annuity with exposure to investments in equity. While a fixed annuity product pays a fixed rate of return, a variable annuity pays a variable rate of return.

 

Variable annuity products are similar to fixed annuities except the investment inside the annuity where one has the choice of stock and bond.

At present, premium accumulated from annuity products are invested only in debt. Like unit-linked insurance plans, the fund value will be known.

Other features like tax benefit, guarantees, and potential for lifetime payouts are similar in both fixed and variable annuity products.

An annuity product offers a pre-fixed increase in the rate of interest. But with longevity improving, people are living more than expected and pricing has become a challenge for insurers. There are different kinds of annuity products offering annuity for at least 15 years or pay annuity till death.

Insurers, on the other hand, are concerned over investing in market instruments without any hedging instruments.

“There are risks involved in allowing variable annuity products like giving flexibility without any hedging instruments,” said Aegon Religare-appointed actuary K S Gopalakrishnan.

He added that this might lead to some changes in the investment norms and Irda might consider investment in derivatives.

The committee will include Munich Re Chairperson Peter Akers, appointed actuaries of life insurers Life Insurance Corporation of India -Bhargava, Aegon Religare-K S Gopalakrishnan, ICICI Prudential-Avijit Chatterjee, Max New York Life-John Poole and Irda member secretary S P Chakraborty.