No need to ban highest NAV products, say insurers

Final guidelines for banning these products may not be issued soon

Insurance Regulatory and Development Authority (Irda), under the erswhile chairmanship of J Hari Narayan had decided to ban highest net asset value (NAV)-guaranteed products. Life insurers are of the view that the Irda should have curbed misselling in this segment, rather than banning the product. Industry players also added that the final norms are unlikely to be passed.

 

Highest NAV-guaranteed products are a category of unit-linked plans that promise to pay the highest value the fund achieves during a certain period of the term of five to seven years. For this, insurers have invest aggressively  in stocks, that may lead to undue risks. The controversy surrounding these products surfaced in September 2010, when Irda informally sounded out its discomfort on the grounds of perceived 'systemic risk' associated with the way such funds are managed. The discomfort is such products give more emphasis on debt instruments and run the risk of heavy sell-off in equities in case of a stock market fall. 

 

 

"The products, per se, do not have any fundamental problem. The problem is that they have a tendency to be mis-sold, since the customer does not understand that 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 also said that with a new chairman taking charge at Irda, some revisions may be expected. "A lot of administrative procedures are yet to be completed, before this product is banned. We do not expect the regulations soon," explained the managing director of a large life insurer. He added, that their customers, still had an appetite for highest NAV products and they continued to sell them.

 

Among the complaints lying with the Ombudsman office, maximum pertain to life insurance sector. Sources in the Ombudsman's office pointed that till last year, about 62% complaints were from non-life sector, and 38% were from life segment.Among life, unit-linked plans (Ulips) accounted for highest number of complaints, with issues related to high NAV products topping the list. Highest NAV products, according to industry players, account for maximum complaints, as the returns promised may not be achieved, due 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 that these products are neither good for the customer as there is a significant possibility of mis-buying this product nor good for the economy as it may expose the stock market to systemic challenges in the form of markets spiralling down when all fund managers start to dump equities in favour of  bonds to prevent their losses."

 

Hari Narayan had earlier told Business Standard that such products were bad for the customers and hence all approvals for these products had been stopped. He further said that Irda was in the process of bringing out regulations for curbing sale of high NAV products and these norms would soon be published in the gazette.