Life insurers bet on guaranteed return products to woo customers

Amid the trying pandemic times and low interest rate environment, private life insurers are seeing opportunity and pushing protection products with a promise of guaranteed income. These products bundle life insurance coverage with benefits of savings, offering a suitable product for risk averse individuals who are keen to get regular income and are eyeing assured financial returns over the medium term.

In view of a higher life expectancy, rising inflation, and rising healthcare costs, the combination of protection and savings with guaranteed returns and guaranteed additions in life insurance plans make them attractive for those who seek assured returns on their savings.

Alternative to FD

In the past few months, many insurers, including Bharti AXA Life, ICICI Prudential Life, Future Generali Life, and HDFC Life, have introduced insurance plans with guaranteed returns to help people secure financial stability and meet their different life goals. They have increased the focus on non-participating saving products with guaranteed returns, pitching them as an alternative to bank fixed deposits that have seen sharp fall in rates over the past year.

Recently, Bharti AXA Life launched ‘Guaranteed Income Pro’, a non-linked, non-participating savings insurance plan, that offers life insurance along with guaranteed returns and maturity benefits.

Parag Raja, Managing Director & CEO, Bharti AXA Life Insurance, said: “Guaranteed income is ideal for risk-averse individuals who aim to generate a substitute source of regular income and achieve assured financial returns for tomorrow. We designed Bharti AXA Life Guaranteed Income Pro as an innovative solution that provides life insurance coverage and benefits of a savings product. The hallmark of our offering is the sound financial returns amid uncertain markets. It not only offers flexible short, medium- and long-term income options, but also helps people meet different financial needs at various milestones of life.”

Launching Future Generali Assured Wealth Plan, a guaranteed endowment plan in October last year, its Chief Customer and Marketing Officer, Rakesh Wadhwa, had said: “Given the volatility in interest rates, many customers look for long-term solution with guaranteed returns. Also, the ongoing pandemic has made people understand the importance of being financially protected. Both of these factors have resulted in higher enquires for guaranteed life insurance products.’’

ICICI Prudential Life Insurance had, in December 2020, unveiled ‘ICICI Pru Guaranteed Pension Plan’ that offers guaranteed life-long income to lead a financially independent retired life.

Similarly, HDFC Life Sanchay Plus also works for those who are risk-averse and want assured returns for their later years.

Managing risk

So, how are life insurers able to manage the risks on guaranteed products in an environment of low interest rates? Are they knowingly exposing themselves to liabilities when they hard sell guaranteed products?

Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance, said: “Insurance companies need to carefully monitor the duration of their liability cash flows and then decide their asset allocation and duration to reduce interest rate risk. If interest rates move adversely as compared to assumptions, then products may need to be repriced or withdrawn. Insurance companies sell a variety of products with different liability cash flow durations. Hence, the overall interest rate risk gets reduced as some products have relatively shorter duration.”

Nanda adds that life insurance companies are required to have at least 50 per cent of their assets in government securities, and these are generally long-duration to match with liabilities and to benefit from the upward sloping yield curve. Interest rate derivatives such as forward rate agreements or swaps as permitted are also used to lock in rates of future cash flows. Several high-quality private and public sector issuers have also issued partly paid bonds, which are invested into by insurers who are looking to match cash flows at a pre determined interest rate.''

According to industry experts, life insurance companies are capitalising on exempt-exempt-exempt (EEE) taxation, implying tax benefit available on investment and no tax on accrual and when the product matures.

The experts pointed out that customers who buy insurance plans with guaranteed returns must ensure to run them till maturity as any exit before maturity will be very costly in such schemes.