Insurance: ‘More investors are swinging towards traditional endowment products' ::Business Line

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The type of product depends on the risk appetite and need of the investor. There is a high degree of volatility in the equity markets and that has meant a movement towards less riskier asset classes.

Mr T. R. Ramachandran, CEO & MD, Aviva India, in an interview with Business Line,discusses the various trends in insurance industry and hopes for favourable amendments to the final Direct Tax Code for the insurance industry.

Excerpts from the interview:

It is has been widely believed that mis-selling is taking place in the insurance industry. But the number of policies returned during free look period are currently low. Does this imply poor awareness and understanding of the policy bought or of the terms and conditions therein?

Given the relative lack of maturity of Indian customers in managing their personal finances, a free look period is one of the most customer-friendly features in insurance policies. Aside from offering this, however, it is equally important to ensure the client has taken the policy in full knowledge of all its features.

At the time of purchase, we call each of our customers to ensure that the customer is clear on the product features, premium paying term, charges applicable, lock-in period, among others. Also, the first page of our policy document has the ‘Most Important Terms', wherein all key elements of the policy are listed in simple, jargon-free language.

The free look period is also publicised and the customer is given this option during the proposal stage to call if he is not agreeable with the product.

Traditional endowment products are back with the volatile equity market. Why are insurers not promoting debt option within the ULIPs?

Insurance is a need-based protection and savings product. The type of product that one chooses depends on the risk appetite, need and life stage; hence, we see more investors swinging towards traditional endowment products with guaranteed returns in this volatile period. ULIPs also offer the option of debt fund, but it does not offer a guarantee or fixed return on maturity and, hence, the customers prefer to buy traditional products. You also have to consider the market dynamics.

As you have rightly mentioned, there is a high degree of volatility in the equity markets and that has meant a movement towards less riskier asset classes. Both traditional and ULIP products have guidelines to ensure customer centricity.

Is it not the duty of a fund manager to generate better returns in ULIPs than traditional plans, because of lower charges and more investible money in these products?

Let me give you an example from Aviva. Our Bond Fund (with 100 per cent exposure to government securities and money market) has generated a return of 7.9 per cent since inception which is more than the benchmark return of 4.6 per cent and our Secure Fund (with less than 20 per cent exposure to equity and rest in debt funds) has generated a return of 7.6 per cent against the benchmark of 5.8 per cent.

I don't think the issue is with the fund manager's performance or returns; the key word here is guarantee which cannot be offered in ULIPs with any exposure to equity markets.

The choice of product and fund is completely dependent on the customer's risk appetite and financial need.

With life insurers becoming active in the health segment, what per cent of the business is likely to be generated by this segment in future?

Health is a key segment for the future of the life insurance industry. We believe that players in General Insurance (GI), standalone heath and life companies have a distinct role to play, and given the relative nascence of the market, there is room for everyone. For example, life companies tend to focus on fixed benefit products while reimbursement is the forte of GI companies.

With the right enablers, it is reasonable to expect 10-15 per cent of business for life companies to come from this segment in the not-too-distant future.

Do you anticipate tax benefits for the pension plans sold by the insurers in the final DTC?

Under the draft DTC guidelines, the annuity products from life insurers and pure term products come under Exempt-Exempt-Exempt (EEE) criteria. Some experts have defined pure term products as ‘simple death benefit' products with no savings attached.

However, the retirement benefits from gratuity, VRS, pension-linked gratuity and encashment of leave at the time of superannuation may be exempted, subject to specified limits.

The concern is that the life insurance and pension policies bought from life insurance companies with a five-year lock-in period and a 15-year or more horizon will not be treated as EEE, but products such as Employee Provident Fund, Pension Provident Fund, which have lower lock-ins or no lock-ins, are given higher limits.

This is rather unfair and will impact the long-term savings business in India. We are hoping that this will be changed in the final DTC.

There was news that insurance and pension funds might be allowed to invest in long-term infrastructure funds. How will it help insurers?

One of the key requirements for our economy today is the need for long tenor funds, especially given that infrastructure is a huge bottleneck and a big opportunity area.

Also, infrastructure projects have a long gestation period, similar to insurance and pension which are long-term investment and protection products.

Keeping in mind the synergies, insurance investments can provide a major thrust towards infrastructure development and as the deployment is over long term, the returns ratio profile of the funds in which it is invested is likely to be on the higher side. Hence, a win-win situation for both