Don’t expect ULPPs with equity exposure

Deepti Bhaskaran, Mint

The drought of equity-linked pension policies offered by insurance companies may well continue, given the new guidelines on pension products. Early this month, the Insurance Regulatory and Development Authority (Irda) clarified that insurers will now have to give a guaranteed return on investment not only on maturity of the pension policy but also on death of the policyholder or in case of a surrender.

The regulator’s clarification has caused the insurance industry to hit the panic button. Unless reviewed, the move may stifle unit-linked pension policies (ULPPs). Says Amitabh Chaudhry, managing director and CEO, HDFC Standard Life Insurance Co. Ltd: “It is very difficult to offer an interim guarantee which is in the case of a surrender. We would have to primarily invest in liquid funds, which beat the purpose of long-term investing for one’s retirement. Internationally, pension providers who have offered guaranteed products have found these kinds of structures onerous. Some of them have gone under in trying to meet these kinds of commitment.”

Irda had issued fresh pension guidelines in November to address the reluctance of insurers who refused to offer regular premium ULPPs after the regulator had asked for a minimum guarantee of 4.5% on these plans. The regulator did away with putting a figure on the guarantee but asked the insurers to offer either a minimum return that’s a non-zero positive return on all the premiums paid or an absolute sum amounting to a non-zero return on maturity. This month, Irda clarified that the insurers will also have to pay this return on death of the policyholder or on surrender.

According to the circular, in the event of the death of the policyholder, the survivors will be entitled to receive the sum of all premiums paid at the guaranteed rate of return. Sample this: If a pension policy offers a guaranteed rate of 4% per annum and a person who bought this plan for 20 years but dies in the 10th year after paying an annual premium of Rs.1 lakh each year, his survivors will be entitled to a total of around Rs.12 lakh, which is a 4% return on corpus.

In case of a ULPP, if the policyholder decides to surrender his policy, he will get the higher of the fund value and the sum of premiums at the guaranteed rate of return. However, insurance industry body Life Insurance Council is seeking further clarification on this rate of return—whether the same guaranteed positive rate of return will be applicable on surrender too. Says S.B. Mathur, secretary general of the council: “We are not happy with the guidelines. It is unfair to offer a guarantee on surrender. By offering a guarantee it will become very difficult for the insurance company to recover its charges. We have sought clarification and are awaiting further response.”

Adds V. Viswanand, director and head, products and persistency management, Max New York Life Insurance Co Ltd: “It is unfair to offer the same guaranteed return to a lapsing customer and to a persistent customer. However, we are waiting for further clarification.”

In a ULPP, the surrender charges are capped at Rs.6,000 and can be levied only in the first four years of the policy. But in the case of traditional policies, surrender charges may be levied throughout the policy tenor.

While the insurers have welcomed the guarantee benefit on death or on maturity, it is the guaranteed benefit in case of surrender that they are protesting against. Says Gaurav Rajput, director (marketing), Aviva Life Insurance India Co. Ltd: “Take the example of a fixed deposit. When you break your fixed deposit midway, you pay a penalty. This is because the banks can’t honour the guarantee midway. Likewise, if you break the insurance contract midway, it becomes difficult for the insurer to honour his commitment of giving you the guarantee. The insurer will also need to recover his costs.”

With the current set of guidelines, it will be difficult for the insurers to come out with pure equity-linked products. Says Vishwanand: “ULPPs that launch in the market will see conservative funds with little or no equity exposure.”