Life insurers set to cut return on guaranteed plans post demonetisation

Following a decline in interest rates, life insurers are set to lower returns on their guaranteed traditional plans.  Sensing the business opportunity, life insurance agents have also been aggressively pushing guaranteed plans, before insurers announce the revised rates. To give you an idea, in November new business premium of life insurers jumped by 112 per cent to Rs 16,061 crore. Non-single plans saw a 500 per cent jump to Rs 6691 crore.

Jeevan Akshay, an annuity plan of Life Insurance Corporation (LIC), collected a premium of Rs 8,000 crore, recording a growth of 104 per cent in the month of November. On the last day of the scheme, November 30, the scheme collected Rs2,300 crore before the yield was reduced to 7% from 7.5%.
 
Similarly, several private insurers plan to discontinue their guaranteed plans by the end of December as many insurers have already filed revised plans with lower interest rate with the Insurance Regulator and Development Authority of India (IRDA). Manik Nangia, Director and Chief Digital Officer,  Max Life Insurance, says, "Old products were launched on certain assumptions. But those assumptions have changed now as interest rates have declined by 1 per cent within a period of one year. Therefore, revised calculations need to be submitted to IRDA."

The return that any insurer gives depend on risk-free instruments available in the market. With the yield on a 10-year-government bond coming down by 1 per cent from 8 to 7 per cent within a year, experts say all products which are benchmarked to government bonds will gradually be adjusted. The RBI has cut repo rates by 175 basis points since January 2015. Experts say that rates may further reduce given the ample liquidity in the system post demonetisation.

"If the existing products have unreasonably higher assurances and guarantees, they will find it hard to continue with those products," says AK Sridhar, Chief Investment Officer (CIO) at IndiaFirst Life. " Where ever needed, I am sure, the industry will recalibrate their products to suit the lower interest regime that we are witnessing today.  This is natural product evolution process which every country has undergone and are undergoing. Indian insurers will also be able to face those challenges and manage it successfully, " he adds.

What does it mean for existing products? Existing policyholders will not be impacted as insurers enter into forward hedging transactions to make sure returns are not impacted in case of falling interest rates. Moreover, every insurance company gets a regular annual review of all their products to ensure viability and risk containment. " It may not have any large implications on the existing policyholders or their funds , as there is a strict ALM Guidelines that ensures the portfolio is immunized reasonably well, to withstand the reduction in interest rates," adds Sridhar.  

Not only guaranteed plans, even term plans might see a slight increase in premium rates. Experts say the jump will not be significant as calculation for term plans depend more on mortality rates. Moreover, the impact will be limited towards insurance companies that are tilted towards Unit Linked Insurance Plans (ULIPs) portfolio and do not have large money under guaranteed products. Jyoti Vaswani, chief investment officer, Future Generali Life Insurance, says, "Revision of guarantees depends on product pricing adopted by insurers and may vary from organisation to organisation. At some point, if interest rates continue to fall, we will have to come out with new products."

Guaranteed products became popular after the stock market crashed in 2008 as people lost a big chunk of their investments in ULIPs. While unit linked plans invest primarily in equities, traditional plans invest your money in fixed income instruments. But the structure of guaranteed traditional plan is not similar across insurers. Some insurers may offer you guarantee on premium while others on sum insured.