Softer rate regime to impact guaranteed-return products

Mumbai: A sharply reducing interest rate regime, with benchmark repurchase rates plunging to record lows, is set to impact returns and pricing on guaranteed products offered by life insurance companies.

With Reserve Bank of India (RBI) cutting repo rate by 40 basis points on Friday to 4% and the subsequent fall in interest rates across savings assets, experts predict an immediate revision in premium pricing and a possible impact on bonus payouts offered on participatory products as well.

“It does take an impact on the pricing,” said Sanjay Tiwari, director — strategy, Exide Life Insurance. “I can’t, for example, keep offering a 6% return where G-sec has fallen below a certain threshold. While insurance is a long-term product, the proposition is an interesting one when interest rates are down in the longer run.”

Furthermore, an aversion for illiquid assets by Indian households reeling with the financial uncertainty brought about by the coronavirus pandemic is likely to increase demand for protection covers over investment and savings-linked products, they said.

“Fixed deposit investors may suffer because those rates will have to be brought down by banks,” said Santosh Agarwal, chief business officer, “The exact implication on insurers is the same as well because insurance also offers non-participating fixed guarantee products where returns are similar to FD rates.”

Lower yields on such assets may make it challenging for companies to meet any existing investment guarantees, especially if pricing of a specific product doesn’t factor in the reinvestment cost, said experts. However, since the maturity of such savings products is long term, insurers typically hedge such investments.

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“Yields were in excess of 5% for guaranteed products with maturity of 10-15 years. These products will now have to be redrawn and repriced,” said Sandeep Ghosh, financial sector advisory leader, EY.

To be sure, a life insurance policy, which also doubles as a savings plan, can be classified in two ways: participating and non-participating plans.

Simply put, a participating plan is one in which bonuses are declared at the discretion of the insurer. In the case of a non-participating plan, the benefits of the policy are defined upfront.

Bonus rate on a participatory product is a distribution of investment surplus an insurer makes on savings funds parked in various asses such as equity, fixed income and security. It is widely anticipated that the bleak financial health of the Indian markets may hit investment portfolios of insurers.

“We have seen in 2020 the equity market has been highly volatile, the fixed income books have been prone to risks emerging from ILFS, Reliance Capital, DHFL, Yes Bank and most recently Franklin Templeton.

On top of it, yields on government security have fallen by over 60 basis points. The overall investment returns have taken a huge hit,” Ghosh said.



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