Non-participating products state what customer pays and what she receives during the policy, including on maturity, along with the life cover benefit. It can be argued that it is simpler for a layman to understand real numbers than net return and adjusted rate of returns.
How disclosures of returns should be made should be decided on the basis of the objective of disclosure. If it is to ensure transparency, then the evaluation needs to be against the returns generated by the insurer versus the returns guaranteed to the customer, also referred to as Reduction in Yield. This cannot be achieved by disclosing the net return. If it is about enabling customers to make an informed decision, effective comparisons between non-par products can be made on absolute amount basis. There are no other comparable upfront guaranteed return products with insurance coverage in a similar structure to a non-par product that have considerations of cost of capital, cost of guarantee, cost of mortality and cost of risk for market volatility and dynamic interest rate scenarios. If it is about uniformity of disclosures amongst all financial products, it should definitely be evaluated. But it needs to ensured that the disclosure factors in the unique features of a non-par product and provides comparable risk-adjusted returns to provide relevant information to customers.
Kshitij Jain, MD and CEO, Exide Life Insurance Co. Ltd
Life insurance products are distinct from other retail financial products due to the risk cover and the inherent long-term benefit proposition.
Non-participating life insurance products with guaranteed returns provide both life and financial protection to the family of the policybuyer in the long term. These products encourage a disciplined and long-term savings approach and help in building a corpus over a period of time for specific life stage needs.
Non–participating products are not comparable with other savings and investment products as they offer life cover with guaranteed returns over the long term, along with a life insurance cover.
Viewing them through the lens of net returns, which is used for shorter-term investment options such as bank deposits, and mutual funds, would be incorrect.
We believe that non-par products are ideal for the risk-averse investor who wishes to have the peace of mind that protection and guarantees offer.
The product design also encourages the customer to be disciplined about saving for the long term, which is crucial in a country with a large middle class lacking the safety net of a pension system.
There is always scope to further demystify the product and the benefits that it offers, so that the customers can make an informed choice.
Shyam Sekhar, founder, ithought, an investment advisory firm
Over time life insurance has sought to address multiple, secondary needs. Broadly, policies can be classified into participating and non-participating policies. Participating policies may receive discretionary bonuses declared by the insurer while non-participating policies only deliver guaranteed returns.
A money back plan is a classic example of guaranteed returns. You know in advance how much money you will receive. The deal often seems sweet because when you add up the premiums and subtract it from the benefits, it seems like you’ve got a good return. But this may not be the case. Remember that the value of money changes with time—the ₹ ,000 you may invest as premium today may be worth more than the ₹ 1,500 you receive ten years later. Therefore, it is critical to measure returns. This makes it even more important for insurers to disclose returns on these policies.
Guaranteed returns are meant to work in favour of transparency. Yet, most insurers don’t disclose the rate of return. Investors have a right to know exactly what these products offer, allowing them to make informed financial decisions. Transparency demands that every insurance policy promising guaranteed returns clearly indicates the actual annual rate of return. This should be indicated in a way that simplifies comparison with the inflation rate.
Rajiv Jamkhedkar, founder and MD, Serengeti Ventures
Yes, the net return on non-par policies should be mentioned on the policy quotation, sales literature and company website. More than 5 crore policies are sold every year. A product that touches so many lives must have some built-in transparency to protect customers.
Insurance companies and agents are guilty of mis-selling many products in the past, for example ULIPs in 2003-2009. The regulator and insurance companies have taken many steps to reduce mis-selling since then. However, traditional policies can also be mis-sold. The buyer is typically a common man. The financial literacy of this person can safely be assumed to be low. It is in the industry’s interest to self-regulate as much as possible so that products sold don’t lapse and customer goodwill is not eroded. That will have huge long-term gains for everyone in the industry.
Many years ago, we did not have food labels on packaged food showing calories and dietary information. We never knew how much calories, sugar or salt is present in commonly eaten snacks like chocolates and chips. Once the regulation came in, to display these values on the packaged foods, millions of Indians benefitted from making better choices in eating habits. Same goes for insurance or any other retail products: more transparency is better and will lead to better choices and overall well-being of customers.