Stock market-linked insurance cover that guarantees returns based on the highest recorded net asset value (NAV) of its units is finding favour with customers, company executives said.
These policies are unlike the regular unit-linked insurance policies (Ulips) that calculate payouts on the basis of NAV at the time of maturity. NAV is the current market value of a fund’s net assets divided by the number of outstanding shares.
“The response to the product is extremely good and is one of our best-sellers,” said Fabien Jeudy, chief actuarial officer, Birla Sun Life Insurance Co. Ltd. “The product accounts for 20% of total premium collected. It caters to those who want to invest in equities but don’t have the guts.”
Besides Birla Sun Life, SBI Life Insurance Co. Ltd and Tata AIG Life Insurance Co. Ltd are offering such guarantees in some of their Ulips.
Birla Sun Life has launched a product called Platinum Plus III that has highest NAV guaranteed on a daily basis. SBI Life’s Smart Ulip pays the highest NAV recorded during the first seven years or prevailing NAV, whichever is higher. After seven years, the money is kept for another three years with the company to adjust its guarantees.
“We collected around Rs300 crore in a month from Smart Ulip,” said SBI Life’s chief executive U.S. Roy. “The product has got excellent response because it guarantees NAV in relation to the markets and not in absolute terms.”
Tata AIG Life’s InvestAssure Apex provides returns based on the highest NAV declared over 100 months. It means that on a pre-decided date in each month, the NAV will be recorded for 100 calendar months and the highest NAV among the 100 will be guaranteed to the investor.
To be sure, a financial planner said he is still a little wary about recommending these products to clients due to lack of clarity and track record of these policies.
“Though these products are gaining popularity, the companies are not very forthcoming in disclosing how they are going to guarantee the highest NAV,” said Surya Bhatia, a New Delhi-based financial planner.
India’s insurance regulator has said the assets and liabilities of these products would have to be matched weekly to ensure proper valuation of these products.
“Every week, an insurance company is required to calculate its total liabilities, which is equivalent to total outstanding units multiplied by maximum NAV recorded till date,” said R. Kannan, member actuary, Insurance Regulatory and Development Authority. “Accordingly, on the asset side it is matched.”
“For instance, if the liability in a week has risen by 5%, the company will invest in securities giving interest more than 5% to match their assets and liabilities,” he clarified.
“In these products, every week valuation is done and liabilities are met. In case of any deficit, the shortfall will be supplemented by the company,” Kannan added. “It’s the question of asset-liability match.”
“Because risks are high with such products, we are required to keep extra capital, unlike other Ulips. For every Rs100 crore collected in premium, we keep aside Rs4 crore in reserves,” said Birla Sun Life’s Fabian Jeudy. “We guard guarantees through investing in bonds, fixed income investments and according to market conditions in equities,” he added.