Life insurers can go into pensions segment

Chennai: The existing Indian life insurance companies, apart from others like mutual funds and banks, will be permitted to enter the pensions sector as and when it is opened up.

Speaking at a seminar on Life Insurance: Emerging Concepts and Opportunities, Insurance Regulatory and Development Authority (IRDA) member P A Balasubramanian said the insurance regulator is favourably inclined to allow insurance players into the pension business without forming separate companies for the purpose.

The seminar was jointly organised by Indo-Australian Chamber of Commerce and AMP Sanmar Assurance Company here recently.

Balasubramanian said the proposed pension authority will fix the minimum capital requirement for new entrants. In fact, IRDA was pitching itself to become the regulator for the pensions segment.

A committee formed by IRDA and headed by IRDA chief N Rangachary had sent its recommendation in this regard, apart from laying the roadmap for opening up the pensions business. There are differing views on making IRDA the regulator of the sector.

IRDAs argument is that since the pension payout will be by a life insurer, it is most suited to control the sector after laying down the norms for accumulation and investments.

The new pension authority will fix the minimum capital requirement for new entrants, Balasubramanian added. Prospective players should convince their potential of their long-term commitment and responsibility and make known all components of options they intend to offer in pension products.

Ashvin Parekh of Arthur Andersen, also a member of IRDAs pensions reforms committee, said on the recommendation of the Oasis Report (of another pension committee) pension players guarantee a minimum return of 6 per cent as unviable. He cited the falling interest rates as the reason.

When asked about the possibility of interest rates falling below 6 per cent, making it impossible to offer returns as prescribed by the Oasis Report, he said: Even to guarantee the return of capital it will cost a player anything between 1.2 to 3.6 per cent. Hence, 6 per cent guaranteed return is impossible.

The pension business consists of four stages: accumulation (mobilisation of contributions and pension fund subscribers), record keeping, investment management and pension payout.

Parekh said in the pension business, the accumulation and payout stages are to be kept separate. The former is a simple banking product with the pension contributor given a passbook and entries are made like a bank savings passbook. In case a pension subscriber dies, then his contribution and the interest accumulated on it will be paid to his legal heirs. While midterm withdrawals are to be discouraged, portability within the schemes of the pension provider or between the players should be allowed to the contributor.

According to Parekh the regulator should not specify large start-up capital for accumulators as in the case of the life insurance sector. At the payout stage, the contributor should have the option to choose his annuity provider or life insurer.

Speaking about the prudent underwriting principles that would evolve in the future AMP Sanmar chief actuary Mike Wood said insurers might ask the prospective clients to provide genetic information after undergoing necessary tests. Countries like France, Belgium and Denmark specifically prohibit insurers from insisting on genetic information. In the UK and Germany disclosure of such information is voluntary.

Citing the AID endemic, he said insurers could insist a prospect to fill a special AIDS questionnaire before accepting the first premium. Policyholders could be asked to undergo AIDS test every five years till the policy matures. All the insurers should evolve a uniform code relating to genetic information and AIDS while underwriting a proposal.

Peter Akers, appointed actuary and chief financial officer, Birla Sun Life Insurance, said the current trend in product designing is to making it simple. The worldwide trend is to introduce unit-linked insurance products. Sales of such products are growing at a faster rate than the traditional. While agreeing that with-profit policies offer better returns than the unit-linked ones, he said life insurers have to deploy the funds carefully, and many fail on that account.

Comparing the Australian and Indian financial markets, AMP Asia managing director Gavin Pearce said the latter is still in its infancy. Indian customers are unsophisticated and the focus is on selling one product, which in turn is inflexible and difficult to comprehend. Customers here are unable to choose their own products, leaving the salesperson to decide on what is best suited for them.

On the other hand, Australian customers are willing to pay for the product as well as for the advice they get from financial advisors, he added. In Australia, there are sales forces that are tied to one particular company and non-tied sales forces that are free to sell products of any insurer. In India insurance agents are tied to one company and their revenue is only the commission on premium.