Index-linked insurance products (ILIPs), which were discontinued in 2013, are back in discussion. The IRDA-appointed working group led by Dinesh Pant, Appointed Actuary of LIC of India was supposed to submit a preliminary report by October-end. As the discussion goes on around its utility, we speak to industry stakeholders to understand how the product was structured before and in what form it should come back.
How were old ILIPs structured
The idea behind index-linked insurance products was to give a guaranteed base benefit to the policyholders in addition to extra returns being generated as part of investment in index funds such as Sensex, Nifty50 or government securities. "This format was somewhere in between of a non-linked non participating product where all benefits are fully guaranteed and a non-linked participating product whereby the base benefit would be guaranteed and additions would be made during the policy tenure in the form of bonuses being declared by the company. Given the hybrid nature of these products, these were barred from sales as part of the 2013 product regulations," says Akshay Dhand, Appointed Actuary, Canara HSBC Oriental Bank Of Commerce Life Insurance.
ILIPs were quite popular among customers as it promised guaranteed benefit (which lacked in ULIPs) and opportunity to earn market-linked returns (which lacked in traditional participating and non-participating plans). Risk-return wise, it was perceived better than traditional non-participating and participating plans too. "The uncertainty with regards to level of future bonuses that can exist in case of a participating product was removed from the structure of index-linked products. Finally, given the nature of these products, they would typically provide better overall returns in the long term versus the returns being offered by pure fully guaranteed non-linked non-participating products," adds Dhand of Canara HSBC Oriental Bank Of Commerce Life Insurance.
So, although it did have best of all existing insurance products, the very structure of the product added complexity to it. "The key reason the product was taken away from the market was that it was perceived complex and customers were not able to understand it fully before investing in it," says Puja Parekh, Vice President - Health & Benefits, GLOBAL Insurance Brokers.
How were ILIPs different from ULIPs
In unit-linked insurance policies, the investment part of premium goes into various debt, equity, money market or hybrid mutual funds. The fund manager has a big role to play here in terms of returns being generated. However, ILIPs were much more transparent as they invested in stocks of underlying indexes as approved by the IRDA. Hence, the stock composition was well-known.
Why the relaunch
Post-pandemic, the demand for guaranteed products (especially guaranteed non-participating plans) has seen a strong jump. However, due to interest rates on government securities at record lows, the insurers are bound to lower the return offered on guaranteed participating and non-participating. "ILIPs will fulfil the dual purpose of allowing insurers to keep guarantees lower and at the same time allow customers to gain access to better returns should the markets bounce back. Hence especially in this environment, they are much more of a win-win propositions both from customers as well as insurers perspective. I believe these are the reasons why IRDAI is potentially considering allowing them again," says Dhand of Canara HSBC Oriental Bank Of Commerce Life Insurance.
Industry experts say the insurers themselves have approached IRDA to consider its relaunch. "Currently, the IRDA is considering the launch of index-linked products due to demand from insurers. It is at a discussion stage for now," says Naval Goel, founder & CEO, PolicyX.com.
What is expected in new ILIPs
The stakeholders expect the regulator to launch it in the current form with minor changes to improvise the old ILIPs. "The changes could be around ensuring that the indices to which these products will be linked are standardised, providing minimum floors on the additional benefits (linked to the index) which should be accrued under these products and removing any element of discretion which may have existed in the earlier form of these products," says Dhand .
Goel says ILIPs could be offered as pension products also, but it has to give non-negative positive returns. "There are very few instruments that can guarantee non-negative returns. This could be a challenge as ILIPs are launched again," he says.
Parekh of GLOBAL Insurance Brokers lists five points that she expects the working group to consider in its report on ILIPs. "Simplification of the product for ease of understanding of customers , product pricing and structure, market for such product, customer protection, investment protocol for insurance companies with review and easy exit without much loadings."
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