A working group of the Insurance Regulatory and Development Authority of India (IRDAI) has called for the need to reintroduce index-linked insurance products. This comes at a time when the investment markets are volatile, resulting in customers preferring guaranteed returns. This, in turn, has increased the balance sheet risk of insurers.
Hence, the working group is of the opinion that the index-linked insurance products can be an appropriate alternative or complimentary option to the current conventional guaranteed products and unit-linked policies.
The regulator had prevented insurance firms from selling these products in 2013. Prior to that, insurers were aggressively selling such products.
It was perceived that these products had a unit-linked structure. While the risk was being borne by the policyholders, the insurers kept selling them as traditional savings plan. Most of these plans were linked to G-Secs as a benchmark.
In the current context, the group has suggested different variants of a product structure wherever possible, starting from the ones which are simple – linked to Gsecs or fixed income indices – to more complicated structures.
In each product type, variant 1 will have the simplest structure and benefits will be linked to a single index while other variants can be of a complicated structure. Here, the benefits can be linked to multiple indices, including equities.
And, index-linked products will be broadly under traditional participating (par) and non-participating (non-par) designs.
Bond indices such as 10-year GSec benchmark, MIBOR, one-year Treasury bill, SBI fixed deposit rate, and others can be used as index. Even equity indices such as NIFTY 50, NIFTY 100, NIFTY Midcap 50, and others can also be used.
“However, if equity indices are included, a suitable investment strategy, which may involve hedging, could be put in place to manage the minimum return guarantee on the policy account,” the working group said.
Under the non-par index-linked product category, the benefit accumulation rate linked to the index has to be a fixed rate, acccording to the formula approved by the regulator.
But, in the par-product category, as policy expenses and margins have to be recovered from the return on investment, benefit accumulation rate could be flexible.
Furthermore, the working group discussed the need for indexing annuity products to inflation. However, there are challenges to this proposal, like finding matching assets for these liabilities, primarily due to the lack of index-linked bonds in the Indian market.
Therefore, for annuity products, which offer return of purchase price, the group has suggested an additional option of resetting the rates after a specified time period.
“These designs will not only enhance customer value and facilitate more options but are also expected to reduce the risk to the insurer,” the group said.