New Delhi: Many Indian firms, which had shifted to market-linked insurance cover to provide for gratuity to employees, are returning to guaranteed plans following volatility in the stock markets.
“Many companies shifted to unit-linked plans when the markets were rising,” said an executive of Life Insurance Corp. of India (LIC). “Now they want to invest in traditional products to get stable returns.”
Unit-linked insurance policies (Ulips) provide life cover and invest part of the premium in stocks and bonds.
In most cases, the sum assured in the policy varies according to the value of its underlying assets.
The LIC official, who did not want to be named because he is not authorized to speak to the media, declined to name any company. LIC manages around Rs70,000 crore in retirement benefits funds.
India’s accounting standards require companies to make good any fall in retirement funds. The rise in the stock markets made firms shift their funds to the equity market through Ulips in order to reduce liabilities.
A company has an obligation towards gratuity—a defined retirement benefit plan—to cover its employees. It makes annual contributions to a gratuity fund, which is typically established as a trust. These trusts can direct the money to insurers for management, either through Ulips or traditional plans. On retirement, death or termination of service, the company pays a predefined amount to its employees.
Currently, only LIC and SBI Life Insurance Co. Ltd offer traditional products in gratuity plans. “There is a preference for traditional funds in view of the volatility but with the markets rising again, there can be a few takers for Ulips, too,” said U.S. Roy, chief executive of SBI Life Insurance.
“Currently, there has been some improvement in returns (in traditional policies) from 7% to 9.5%, which in the case of Ulips come along with high risks.” The company manages around Rs2,500 crore of retirement funds.
After posting its worst decline on record in 2008 of 52%, the Bombay Stock Exchange’s benchmark Sensex index ended at 14,521 points on Friday, up 256 points, or 1.8%. Since 9 March, when the markets started rising, the Sensex has gained around 78%.
This has led to some companies again looking at Ulips.
“In Ulips, wherever there was an exposure to equity, till about a year back, the returns were not good and they may be moving to traditional business,” said Sandip Shrikhande, head of group sales, Kotak Life Insurance Co. Ltd. “But again there is bullishness about the markets and equity funds tend to give better returns than debt funds over a long period of time. Intent in Ulip is again rising.” The company manages around Rs4,000 crore of retirement funds.
Kalpana Verma, chief executive of Sushil Jeetpuria and Co., a New-Delhi based firm involved in accounting of trusts, said: “Companies have gone for traditional products though they were considering Ulips, too.” She said that none of her clients have invested in market-linked plans because of volatility in the stock markets.
The group insurance business of life insurers registered a 22% rise in new business in the fiscal year ended 31 March compared with the preceding fiscal. New premium income of LIC, which controls 72% of the group insurance market, rose 20% from the previous year to Rs12,724 crore.