At a time when investors are preferring guaranteed products, a working group of the insurance regulator has recommended the introduction of index-linked insurance policies (ILIPs). It could be a category which fits in between traditional products where features can appear less transparent and the unit-linked insurance pland (Ulips) where the investment risks are completely borne by the policyholders.
The Insurance Regulatory and Development Authority of India (Irdai) has said that ILIPs could be an alternative or complementary option to the conventional guaranteed products (including annuities and savings products) and Ulips, particularly in the context of volatile investment markets and stressed interest rates.
The working group has recommended different variants of the products starting from the ones which are simple (linked to fixed/G-Sec income linked indices) to more complicated structures. It has also recommended that ILIPs should have non-zero positive minimum benefit addition in reference to the premiums or to the sum assured as applicable, the level of which can be left to the insurers to decide. Further, unlike in Ulip, the actual investments can be different from the composition of the specified index, depending on the risk appetite of the individual insurer.
Simple and transparent
The panel has suggested that the guaranteed benefits and the benefits linked to the index must be clearly stated at the outset. The policyholders should be able to understand ILIPs easily and the benefits and returns to the policyholders and the shareholders should be reasonable and fair. Moreover, the index must be widely known and understood by the policyholders and should have high liquidity.
The design of ILIP should fit into one of the existing categories of products such as participating, non-participating, unit-linked, annuities or pure protection plans. Within any given product category, the design of ILIP could be different but part of the benefits would be guaranteed at the outset and the rest of the benefits will be linked to the performance of an underlying Index in a pre-defined way.
The panel has suggested that the indexed benefits under a policy could be determined with reference to performance of an index such as reference to the value or yields of the index itself or it could be benchmarked to the change in the value of the index over given intervals or any other derived numbers like yield of bonds.
As 20% of India’s population will be senior citizens by 2050, the panel has recommended various options especially related to annuities and the need for inflation linked annuity payments because of the challenges in finding matching assets for these liabilities, primarily the lack of index linked bonds in the Indian market. It has recommended that for annuities with return of purchase price, an additional option of resetting of annuity rates after a specified frequency ensuring a minimum stipulated guarantee throughout the term of the annuity should be done.
The panel has suggested that ILIP can be offered as an alternative to fully guaranteed non-par products. This could allow the insurers to price these products more realistically and offer better value to the policyholders. “A design of an ILIP can be developed to match it with traditional par products where equivalent to bonuses, a regular additions or final addition to the policy or cash pay outs could be determined under ILIP products by linking it to some external pre-disclosed index. This would be more transparent and easier to understand for the policyholders,” the panel recommends.
For term insurance and annuities, where traditionally benefits and premiums remain fixed for the entire term of the policy, the panel has said that the benefits and premiums could be linked to some suitable index to offer benefits which reflect the prevailing market conditions.