New Delhi: Choppy markets are prompting consumers to shift towards safe haven financial products, judging from the response to a new guaranteed-return policy launched by the country’s biggest insurer, Life Insurance Corp. of India (LIC).
Jeevan Aastha, a single premium policy that offers tax-free annual returns of 9% over a five-year maturity period and 10% over 10 years, garnered Rs2,000 crore in premiums in just three weeks, said a senior LIC official. The policy, launched at a time when people plan their tax savings, closes on 21 January.
The last time LIC launched a similar policy, Bima Nivesh in 1999, it collected Rs5,360 crore. But unlike Jeevan Aastha, which is open for just 45 days, Bima Nivesh was open for close to three years.
The shift towards guaranteed-return products from unit-linked insurance policies, or Ulips, which offer returns based on stock market performance, reflects the risk aversion of investors hurt by last year’s steep decline in share values. The Bombay Stock Exchange’s benchmark index, the Sensex, lost about half of its value in 2008, its biggest decline on record.
“We expect the collection from Jeevan Aastha (to be) much higher than Bima Nivesh,” said the LIC official, who did not want to be identified because he is not allowed to speak with the media. “With slowdown in the stock markets, not many people want to invest in Ulips.”
LIC is targeting as much as Rs25,000 crore in premium collection from Jeevan Aastha, and is confident of achieving the target before the plan closes, said the same official. The highest premium paid on a single life policy was Rs60 crore, the official said. Sales of insurance policies in the last quarter of the fiscal account for half of annual sales.
Under the guidelines of the Insurance Regulatory and Development Authority, or Irda, the money collected by traditional insurance plans is mostly invested in government securities and corporate debt paper. In November, the sales of LIC, the largest insurer by premium collection, rose by 20% to Rs3,346 crore, compared with the previous month. LIC’s sales fell by 4% in the month compared with a year earlier.
Bank customers are withdrawing money from fixed deposits to invest in the policy, said Bharat Parekh, a Nagpur-based life insurance agent. “Last year’s flavour was Market Plus (LIC’s unit-linked plan), but since now markets are down people prefer to have guaranteed products,” he said.
The 9% annual tax-free return offered by Jeevan Aastha compares with a return of as much as 11.5% on some bank fixed deposits. Interest returns on fixed deposits are, however, fully taxed.
Mutual funds are prohibited by the Securities and Exchange Board of India, the market regulator, from offering guaranteed returns. “World over, a shift has (been) seen from (market) linked to guaranteed products,” said R. Krishnamurthy, managing director of Watson Wyatt Worldwide, a financial consultant. “Last (fiscal) year the growth drivers were unit-linked plans, but this time the preference in response to the market conditions is towards guaranteed products which have tax-free returns, too.”
Guaranteed-return products have a flip side. Insurers with an excessive portfolio of such products require large reserves to back them up and could be especially vulnerable to an economic slowdown. At a recent seminar organized by the Federation of Indian Chambers of Commerce and Industry, Irda chairman J. Hari Narayan pointed to the possibility of insurance companies risking an asset-liability mismatch on account of a scarcity of long-term debt paper to invest in.
Still, LIC may be safe. “With guaranteed products we always look at what level are the guarantees and will the company be able to maintain that guarantee throughout the process with minimum reinvestment risks,” said R. Kannan, a member-actuary at Irda. “LIC cannot use the premium collected under the scheme to meet other liabilities. We, therefore, do not see any issue with high rate of interest.”