IRDAI working group okays launch of index linked insurance policies; details here

The Insurance Regulatory Authority of India (IRDAI) has recently constituted a Working Group (WG) committee consisting of six members for the purpose of examining the need for index linked insurance policies (ILIPs).

ILIPs, as the name suggests, are insurance products whose returns are linked to benchmark indices. They can be linked to the 10-year government bonds or equity indices such as Sensex or Nifty. According to the committee report, ILIPs can be an alternative or complementary option to the current conventional guaranteed products (including annuities and savings products) and unit-linked insurance plans (Ulips), particularly in the context of volatile investment markets and stressed interest rates.

The considered view of the WG is that ILIP could be seen as a suite of products wherein greater transparency can be facilitated to the customers with respect to product structure and benefits and where risks are in line with the choice made by the customers. The WG has, however, also acknowledged that ILIP 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.

WG further said customer disclosures are extremely important for ILIP and the disclosures have to be proportional to the complexity of the product designs. However, a balance has still 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," the WG said.

ILIPs, meanwhile, differ from Unit Linked Insurance Plan (ULIP) – which is a mix of insurance along with investment. According to Nitin Shahi, executive director of Findoc, financial services group, the goal is to provide wealth creation along with life cover in the case of ULIPs, where the insurance company puts a portion of investment towards life insurance and rest into a fund that is based on equity or debt.

"On the other hand, index-linked insurance plan (ILIP) returns are linked to benchmark indices. For the longer-term horizon, ULIP/ILIP returns are expected in the range of 10-12 percent. The fund managed under ILIP are invested in a passively managed fund, the manager buys and holds securities of a benchmark index. The fund manager follows the index and does not use their own discretion," explains Shahi.

Source: CNBC Tv18