Trevor Bull, CEO & MD, Aviva LifeInsurance Co. India, talks to Teena Jain Kaushal and Priyadarshini Maji aboutthe impact of Budget 2016 on pension plans and how the Indian annuity marketdiffers from the rest of the world.
How was the Budget for the insurancesector?
There wasn't anything hugely negative or anything thatwould 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 notsuddenly grow pensions in the industry.
So it will nothave 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 isa lot of money to give away straightaway. Reducing it takes away some of theconstraint, but it's not going to ignite the whole industry saying it is somuch cheaper now, because there is still a tax going in.
Most countries in the world have been able to build alarge corpus of privately-funded, individually-funded insurance pension for thefuture where there is a tax incentive going in for the premiums, and on the wayout there is a tax. There aren't taxes at both ends. For annuity, the income istaxed as well. Normally, there is no tax at all for your contribution into an arrangement.
The most successful models around the world, such asChile, UK or Hong Kong, have grown private provision through a tax incentive orencouragement to save in approved pension arrangements. There is a tax on theway out, but no double tax. And if you compare insurance pension plans to otherpension 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 myannuity, whereas in insurance, there is no choice; I must take the annuity fromthe person I gave it to. I don't get a tax benefit in insurance; in otherarrangements, I do. So there are a lot of differences that seem complicated topeople. As an industry, we would like to ask for an equal playing field, fromthe point of view of tax and other benefits, and give the customer true choice.
How is theannuity 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. Forinstance, Single Premium Deferred Annuities is a degree of investment plan. Atthe end of the period, you have a choice to roll it over or you can buy annuityor you buy annuity with a part of it, and roll over the rest.
In many countries, there are annuities where you pay acertain amount in pension defined contribution schemes every month or year, andyou can move between providers - where you take your existing corpus and futurepremiums to another company. So I see more choice, flexibility and taxadvantage 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 payinginto it. You can stop if you want, but you cannot take it out. And when youretire, the money is there.
That's where the tax advantage still works. You can'tquickly take the money out; you have to keep it for 20-25 years, however longyour 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 theannuity rates abroad?
Annuity rates are influenced by interest rates. You getmuch better pricing in high interest rate markets. Annuity is the opposite oflife insurance. In life insurance, we make money when people live longer. Inannuity, if they live longer, we are in trouble. This is from a pure math pointof view. So, specialist pension products are the big thing in the westernworld. There are different prices in annuity for a smoker and non-smoker. Evenfor diabetes or high blood pressure, you can get a better price for annuity.
In India, annuity hasn't gone down that road. In theWest, when the interest rates were low and the prices kept going up, insurancecompanies decided to change this and give people a better deal. So, people whohad a serious health problem that could impact their life expectancy were givena lower price. That's not the case here in India; won't be till the marketsgrow and insurance gets an equal playing field.
Why ispersistency so low for the life insurance sector? Do you see the situationimproving in the future?
It's partly down due to the maturity and quality ofdistribution. The advice given at the point of sale is obviously not engagingenough for the customer. As insurance companies, we are trying to sell aproduct more than give advice on what fits a customer's needs. It wasn't aninvestment plan in the first place, it was insurance. But it was not fit intoany need; it was sold as greed investment.
The second reason is that we don't engage with thecustomers much. We sell the policy, and one year later, we remind you that thepremium 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 quitea cold relationship. In online, the persistency today is 90 percent-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 13thmonth (persistency); we looked at 25th, 37th and 49th, because persistency is along-term plan. So, in terms of persistency, we are in the top of the industrysince the end of last year. We are not the worst, we are better than theaverage.
What are yourconcerns 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 itselfso that customers value what the industry is doing. Second would be regulatorychange; it's not in any way a criticism of the IRDA of India or any otherregulator.
The trouble with such high volume of regulation change ornew regulations is that it is all reactive, and therefore you are not able toplan a roadmap for long-term sustainability. When one-off regulations keepcoming up, five a month, 10 a month, you have to change. So you are reactingand changing your model to fall in line with the new regulation. That I find abit of a challenge for the industry, personally. You need some stability in theregulatory environment. ~
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