New Delhi: As investors duck for cover from a plunging stock market, Indian insurers are plugging unit-linked insurance plans, or Ulips, that promise to protect capital and pay fixed interest rates and assured top-ups to entice customers.
Ulips provide life insurance by investing a part of the premium paid by buyers in stocks, with the policy value depending on the value of their underlying assets. But in a slumping market, investors face the risk of their capital being eroded on the equity portion of their assets, a deterrent to get them to put money in Ulips.
Reaping profits: Gaurang Shah, managing director of Kotak Mahindra Old Mutual Life Insurance, says the company’s sales of capital guarantee products have moved up 20-25% in the last three-four months
“This is the time of capital guarantee products. It’s a good concept and we aggressively want to market it,” said Gaurang Shah, managing director of Kotak Mahindra Old Mutual Life Insurance Ltd. Kotak’s Safe Investment Plan offers a guaranteed maturity value to policyholders.
“When markets were up nobody looked at these products. But when markets are down it is attracting customers. Our capital guarantee product sales have moved up by 20-25% in the last three-four months,” Shah added.
The Bombay Stock Exchange’s benchmark index, the Sensex, has lost about a third of its value this year in the face of a surge in inflation driven by soaring crude oil and food prices and turmoil on global financial markets. On Monday, it fell 340.62 points, or 2.4%, to close at 13,462.60.
Mutual funds are, however, explicitly prohibited by the Securities and Exchange Board of India (Sebi) from offering capital guarantees, giving Ulips an advantage in turbulent times.
Birla Sun Life Insurance Ltd recently launched its Platinum Plus policy with a guaranteed maturity unit price. It pays the maximum unit price recorded on the 15th of each calendar month until 15 June 2015. Reliance Life Insurance Co. Ltd launched a Ulip that guarantees contribution by the company from 50% in the 10th year to 250% by the 30th year of the paid annualized premiums. “Gradually we want to increase the share of capital protection plans to 40% from the current size of 20% of the portfolio,” said P. Nandagopal, chief executive officer in Reliance Life Insurance.
However, not all insurance companies see it as a prudent strategy given the absence of hedging tools. Insurers with an excessive portfolio of guaranteed Ulips would be especially vulnerable to an economic slowdown or a stock market crash and would require large reserves to back them up.
“Insurers should consider limiting such products to a percentage of portfolio to avoid getting into considerable risk. Non-availability of appropriate hedging tools for these guarantees in the market exposes the insurance companies to significant downside risk,” said Sunil Kakar, chief financial officer of Max New York Life Insurance Co. Ltd.
“We are planning to come out with such products in near future but one needs to consider terms of guarantee in the absence of appropriate hedges,” Kakar added.
Guaranteed Ulips are long-term products with a lower surrender value and higher fees than non-guaranteed plans. They guarantee premiums (minus front-end charges), but assured benefits are available only on the completion of the tenure of the policy.
The insurance regulator said guaranteed Ulips are good investment tools for policyholders. At the same time, insurance companies need to have sound asset-liability mechanisms in place.
“Capital protection policy is a very good idea for policyholders,” said said R. Kannan, member actuary of the Insurance Regulatory and Development Authority. “In guaranteed Ulips the issue is to decide on the guaranteed interest rates that need proper risk mitigation tools.”
“The regulator has looked into all the parameters and as a regulator we are satisfied with all the risk mitigation techniques offered by the companies,” Kannan added.
While some insurance firms look at capital guarantee products as a potential new growth driver, others still swear by traditional plans. “We never push our customers for any product. We give them products according to their requirement,” said Joydeep K. Roy, chief distribution officer of Tata AIG Life Insurance Co. Ltd. “We have a slew of traditional products with strong guarantees that promise capital protection along with returns just like guaranteed Ulips,” Roy added.