Mr V. Srinivasan, CFO, Bharti AXA Life Insurance talks to Business Line about how the new ULIP regulations may have a lot of benefits for policyholders.

Why are insurers averse to launching pension products that are unit-linked?

Life insurance companies are averse to these because this product involves a long- term guarantee . The guarantee on pension products can be managed if it's short term but if it is for 20-30 years then it has risky elements.

Firstly, you have to take a huge call on economics and then there will be a re-investment risk. Currently G-sec is only available for ten years, after that you will have to re-invest. If I check the long term interest rate risk scenario, even in India interest rates fell to as low as 4.9 per cent and stayed there for some time. There is no guarantee that it will not happen again. How will insurers protect their portfolio if they don't have any hedging mechanism? The way out here is that insurers can give two options to policyholders - one with guarantee and other without a guarantee. But currently guarantee is the only option that is available for policyholders. Because of this, many insurers are not willing to explore pension products.

When interest rates are high, why should investors in the tax slab of 10-20 per cent, buy single premium products from insurance companies that guarantee only a 6-7 per cent return? Is it correct to say single premium products are neither investment nor insurance products?

One particular reason for buying a single premium product is that people with irregular income find it difficult to go in for regular premium. Single premium products are a good investment option. Today, if you want to manage without such products, you can do so because of the higher short term interest rates. But you will not get a long term guarantee on interest rate. However, life insurance companies can find investment options to lock in funds at better rates. The benefit of aggregation of funds will help life companies to offer better returns than what an individual can do.

What will be the impact of new Direct Tax Code on existing traditional products where the premiums are less than one-twentieth of sum assured?

There was an explanatory paper that was published prior to the latest DTC and it stated that there will be no ‘grandfathering' and the new products will be the only ones to be affected . But the clause was not found in the latest version of DTC. I think it's simply an omission. The intention of the government was always that the clause would apply to the prospectively sold products after the bill is passed. In my belief the concept is fully understood by the ministry and it's only a technical mistake and it will be corrected. Already Life Council and IRDA are lobbying with the ministry to bring back this benefit. I hope this will be clarified very soon; hence existing policyholders need not worry about this.

How far have recent controversies on ULIPs impacted investor appetite?

I think the benefits of the new regulation have not yet been understood by the investors. We undertook a survey and found that investors are yet to comprehend the benefits of a higher lock-in period, surrender charges, the spread of premium allocation charge over the years. I think there's a lot of work to be done. Currently, due to a backlash, agents are selling traditional products to earn higher commission. Life insurance products are still push products. If investors understand the huge benefits on account of new regulations, then ULIPs will definitely replace these. Since they have not understood the benefits, sentiments have still not improved.

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