The insurance regulator's proposal requiring beneficiaries to compulsorily buy annuity from the same insurer from whom the pension plan was bought may go against policyholders' interest, say insurance industry experts.
The Insurance Regulatory Development Authority (IRDA) had released the draft guidelines on pension products offered by life insurance companies for discussion on August 1.
Earlier, pension plans allowed consumers to commute one-third of the total amount and two-thirds were to be used to buy annuity from any insurer. Under the present IRDA draft proposal on pension products, the investor will have to buy the annuity from the same insurer.
“By forcing customers to buy annuity from the same insurers, it is curtailing the customers' right,” said Mr S. B. Mathur, Seceratary-General, Life Insurance Council.
The regulator has proposed the provision to develop the annuity market and stem the systemic risk, as the state-run life insurance behemoth, Life Insurance Corporation, controls 95 per cent of the annuity business. Other insurance players have preferred to stay out of the annuity market.
IRDA's proposed provision will force life insurance companies to offer annuity products. However, experts in the insurance industry feel that Indian insurance companies may not be well equipped to operate in the annuity market.
“Annuity is a risky business where the capital build-up is huge and the private life insurance industry is also young, being just 10 years old,” said Mr V. Srinivasan, CFO, Bharti Axa Life insurance.
Mr Suresh Agarwal, Executive Vice-President, Kotak Life Insurance, said the proposal will broaden the annuity market, but offering an annuity guarantee will be difficult for insurance companies particularly as pension products are long term in nature.
“In our view, while provision of annuity by the same service provider is a good step and it can reduce the extra cost that the customer may incur in buying annuity from a different provider, there is merit in allowing a choice to the customer to buy annuity from any service provider since this will increase options for the customer at the actual stage when the customer wants to buy annuity,” said Mr Mayank Bathwal, CFO- Head Institutional Sales, Birla Sun Life Insurance.
Mr Hemant Baniwal, a certified financial planner and Director at Ark Primary Advisors Pvt Ltd, said that for an individual it would be difficult to ascertain at the accumulation phase, which typically will last at least 10 years, whether the insurer can offer competitive rates at the annuity stage.
Experts from the insurance industry have said that the insurance companies have approached the regulator for making suitable changes in the proposal. “We have sent our views to the regulator. This is one of the issues that we have highlighted,” added Mr Mathur.
Minimum guarantee
The other provision in the guideline includes the elimination of the minimum guarantee of 4.5 per cent in unit-linked pension products. The insurance companies have to offer some guarantee in absolute terms at the maturity of the pension plan.
The IRDA is trying to revive the flagging pension market by putting together new regulations for unit-linked pension plans and has invited comments from stakeholders. The regulator is expected to come out with final guidelines by the end of this month.