Updated: February 9, 2021 2:31:46 pm
An IRDAI’s Working Group has proposed a category of index-linked insurance products (ILIP) as an alternative for traditional plans and unit linked products, or ULIPs.
The Insurance Regulatory and Development Authority of India (Irdai) group has said there is relevance for ILIPs, which could be seen as a category which fits in between traditional products where features can appear less transparent and the ULIP where transparency is higher but the investment risks are completely borne by the policyholders. The life insurance sector recorded a new business premium income of Rs 1.91 lakh crore in 2020.
The insurance regulator’s group has proposed that equity indices like NSE Nifty and Sensex, or 10-year government bonds, SBI fixed rate or MIBOR (Mumbai Inter Bank Offered Rate) can be used as reference rate for ILIPs.
The considered view of the Irdai committee was that ILIP could be seen as a suite of products wherein greater transparency can be facilitated to the customers with respect to product structure and benefits and where risks are in line with the choice made by the customers. ULIPs are considered as risky instruments where charges and commissions are high.
According to the Irdai group, the relevance of ILIP is further enhanced, in the current context of volatile investment markets leading to the customer preference for guarantees and which has therefore possibly resulted in the current industry practice of selling significant amount of guaranteed products (including annuities and savings products) with plausible increased balance sheet risk for the insurers.
“ILIPs could be an apt alternative or complimentary option to the current conventional guaranteed products (including annuities and savings products) and ULIPs, particularly in the context of volatile investment markets/stressed interest rates,” it said.
While recommending the ILIP, the Irdai group said it followed the key principles of transparency, simplicity, fairness, awareness and liquidity of indices. It also acknowledged that ILIP in certain forms and shapes can bring about more complexity at the back end and, hence, decided to recommend different variants of a product structure wherever possible, starting from the ones which are simple (linked to fixed or G-Sec income linked indices) to more complicated structures.
It has sub-divided the recommendations from Variant 1 to Variant 3 for each product types, where Variant 1 product structures are the simplest and benefits are linked to a single simple, well-understood and liquid index, while the other variants are more complex and benefits could be linked to multiple indices including equities.
Though five life insurers launched a total of 20 ILIPs at different points of time, the category is yet to take off. All these products were individual products and were mainly on traditional non-linked non-participating platform. Insurers generally used government securities yield for index-linked products.
However, the Irdai group also shared the concerns of the regulator that such products are launched only after giving due consideration to issues around transparency and appropriate disclosures. Also, there has to be an appropriate level of disclosures in proportion to the nature of the designs. The recommended approach is to have an efficient and effective transmission of information and details in a transparent manner appropriate to the degree of complexity in the product design, it said.
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