"Persistency is a concern in the Indian market"
Trevor Bull, CEO & MD, Aviva Life Insurance Co. India, talks to Teena Jain Kaushal and Priyadarshini Maji about the impact of Budget 2016 on pension plans and how the Indian annuity market differs from the rest of the world.
How was the Budget for the insurance sector?
There wasn't anything hugely negative or anything that would make us go 'wow'. There was some movement on the single premium annuity, which is nice. But it is not going to make a huge difference. It will not suddenly grow pensions in the industry.
So it will not have much of an impact on pension incomes...
My personal view is no. There will be some. Even before, it was some 3.09 per cent tax; so if you gave me a crore, it's 3 lakh, which is a lot of money to give away straightaway. Reducing it takes away some of the constraint, but it's not going to ignite the whole industry saying it is so much cheaper now, because there is still a tax going in.
Most countries in the world have been able to build a large corpus of privately-funded, individually-funded insurance pension for the future where there is a tax incentive going in for the premiums, and on the way out there is a tax. There aren't taxes at both ends. For annuity, the income is taxed as well. Normally, there is no tax at all for your contribution into an arrangement.
The most successful models around the world, such as Chile, UK or Hong Kong, have grown private provision through a tax incentive or encouragement to save in approved pension arrangements. There is a tax on the way out, but no double tax. And if you compare insurance pension plans to other pension plans, there are many other constraints.
In insurance, you can take only 33 per cent or one-third; the rest has to be in the form of annuity. In other plans, I can choose my annuity, whereas in insurance, there is no choice; I must take the annuity from the person I gave it to. I don't get a tax benefit in insurance; in other arrangements, I do. So there are a lot of differences that seem complicated to people. As an industry, we would like to ask for an equal playing field, from the point of view of tax and other benefits, and give the customer true choice.
How is the annuity market in India different from the rest of the world?
In more developed countries like Japan, Korea, UK and, perhaps, Singapore, there is wider choice for planning for your retirement. For instance, Single Premium Deferred Annuities is a degree of investment plan. At the end of the period, you have a choice to roll it over or you can buy annuity or you buy annuity with a part of it, and roll over the rest.
In many countries, there are annuities where you pay a certain amount in pension defined contribution schemes every month or year, and you can move between providers - where you take your existing corpus and future premiums to another company. So I see more choice, flexibility and tax advantage to contribute for your pension. You cannot take out the money early; you have to take it to your retirement. There is a corpus and you keep paying into it. You can stop if you want, but you cannot take it out. And when you retire, the money is there.
That's where the tax advantage still works. You can't quickly take the money out; you have to keep it for 20-25 years, however long your working life is. So, there is a combination of pure pension plans money, tax advantage going in and flexibility to move a provider.
What about the annuity rates abroad?
Annuity rates are influenced by interest rates. You get much better pricing in high interest rate markets. Annuity is the opposite of life insurance. In life insurance, we make money when people live longer. In annuity, if they live longer, we are in trouble. This is from a pure math point of view. So, specialist pension products are the big thing in the western world. There are different prices in annuity for a smoker and non-smoker. Even for diabetes or high blood pressure, you can get a better price for annuity.
In India, annuity hasn't gone down that road. In the West, when the interest rates were low and the prices kept going up, insurance companies decided to change this and give people a better deal. So, people who had a serious health problem that could impact their life expectancy were given a lower price. That's not the case here in India; won't be till the markets grow and insurance gets an equal playing field.
Why is persistency so low for the life insurance sector? Do you see the situation improving in the future?
It's partly down due to the maturity and quality of distribution. The advice given at the point of sale is obviously not engaging enough for the customer. As insurance companies, we are trying to sell a product more than give advice on what fits a customer's needs. It wasn't an investment plan in the first place, it was insurance. But it was not fit into any need; it was sold as greed investment.
The second reason is that we don't engage with the customers much. We sell the policy, and one year later, we remind you that the premium is due. We might send you a newsletter. But we are not like a bank. Every time you go to a bank, you touch a bank. With life insurance, it's quite a cold relationship. In online, the persistency today is 90 per cent-plus.
At the end of last year, our persistency was 62 per cent. By the end of February, we jumped up to 68 per cent. It varies during the year. We focused on improving it a lot last year. We didn't just look at the 13th month (persistency); we looked at 25th, 37th and 49th, because persistency is a long-term plan. So, in terms of persistency, we are in the top of the industry since the end of last year. We are not the worst, we are better than the average.
What are your concerns about the Indian market that you want the regulator to address?
We have touched on persistency already. It is a concern. The industry has to truly win the trust of customers. It has to improve itself so that customers value what the industry is doing. Second would be regulatory change; it's not in any way a criticism of the IRDA of India or any other regulator.
The trouble with such high volume of regulation change or new regulations is that it is all reactive, and therefore you are not able to plan a roadmap for long-term sustainability. When one-off regulations keep coming up, five a month, 10 a month, you have to change. So you are reacting and changing your model to fall in line with the new regulation. That I find a bit of a challenge for the industry, personally. You need some stability in the regulatory environment. ~