A working group appointed by the IRDAI has recommended the re-introduction of Index-Linked Insurance Products (ILIPs), saying in its report that such an alternative category of products is relevant as fits in between traditional products where features can appear less transparent and the unit-linked products (ULIPs) where transparency is higher but the investment risks are completely borne by the policyholders.
An ILIP is an insurance product where the returns are linked to benchmark indices. The view of the working group is that ILIPs could be a suite of products with greater transparency with respect to product structure and benefits and where risks are in line with the choice made by the customers.
In its report released earlier this week, the working group said, “The relevance of ILIPs is further enhanced, in the current context of volatile investment markets leading to the customer preference for guarantees and which has therefore possibly resulted in the current industry practice of selling a significant amount of guaranteed products (including annuities and savings products) with plausible increased balance sheet risk for the insurers.”
The six-member panel, which was formed last August, was tasked to consider practices that exist abroad, practices that existed in India and also other aspects including the availability of indices in India, issues around reserving, administration and market conduct.
In 2013, the insurance regulator barred insurers from selling ILIPs. One reason for the curb was that insurers had been aggressive in selling such products, with some sales personnel touting them as traditional savings plans.
The working group says that it follows the key principles of transparency, simplicity, fairness, awareness and liquidity of indices. It acknowledges that ILIPs in certain forms and shapes can bring about more complexity at the back end and hence decided to recommend different variants of a product structure wherever possible, starting from the ones which are simple (linked to fixed/G-Sec income linked indices) to more complicated structures.
Hence, recommendations are sub-divided from Variant 1 to Variant 3 for each product types, where Variant 1 product structures are the simplest and benefits are linked to a single simple/well understood/liquid index while the other variants are more complex and benefits could be linked to multiple indices including equities.
The working group believes disclosure is extremely important for ILIPs and has to be proportional to the complexity of the product designs. However, a balance has to be ensured between the amount of information and its utility.
Some of the disclosures could be website displays like the past performance of suggested indices and also its current returns accessible to the customers. Also, calculators can be made available to the policyholders which would indicate the projected future returns to the customers with a caveat that past performance is not necessarily an indication of future returns and also that returns may not exactly match the returns on the index to which it is linked. In the customised benefit illustrations, the benefits accumulation under a certain rate of return based on a certain period of past performance of, say, three to five years of the index may be shown
The IRDAI is seeking feedback on the various recommendations made by the working group, with submissions to be sent in by 8 March.