A discussion of the guidelines on pension products issued by IRDA - Presentation at 7th CILA Seminar

Transcription

1 A discussion of the guidelines on pension products issued by IRDA - Presentation at 7th CILA Seminar Sanket Kawatkar, FIA, FIAI 25 November 2011

2 Disclaimer The views and opinions expressed in this presentation are those of the author and not of the employer he represents. 2

3 Agenda Introduction Key provisions in the guidelines Critical analysis of the guidelines Suggested approach Q&A / discussion 3

4 Introduction Pension business in India Pensions business around 30% - 40% until September 2010 Enjoyed commercial success given the retail distribution reach of the industry, simplicity in sales process and given the absence of social security system in India IRDA September 2010 guidelines Minimum guaranteed return of 4.5%pa Sharp reduction in new business volumes Very few pension products launched since Exposure draft on revised guidelines in pensions August 2011 Proposed to review guaranteed return requirement 50% 40% 30% 20% 10% Ratio of unweighted individual pension new business premium to unweighted individual new business premium Raised hopes for revival of pension business Final guidelines effective 1 December 2011 Will this revive the pensions business? 0% FY FY FY FY FY Source: IRDA Quarterly Supplements Year/Quarter Q1 Q2 Q3 Q4 Q1 FY FY

5 Key provisions in the guidelines (1) Applicability Individual and group Linked and non-linked VIP Requirement to have explicitly defined assured benefits That becomes payable on death, surrender and on vesting date Disclosed at the point of sale What constitutes assured benefit? Any one of the guarantees from: (a) A minimum (non-zero) return on all premiums paid (b) Guaranteed maturity benefit (in absolute amount), death and surrender benefits Group products (where no member level accounts maintained) Assured benefits applicable on the entire fund Individual member benefits to be governed by scheme rules 5

6 Key provisions in the guidelines (2) Optional insurance cover Throughout the deferment period Can be through riders (not to be counted as part of assured benefits ) Maximum limit on rider premiums set at 15% Options upon surrender (after lock-in period) Immediate pension (after taking commutation) at the prevailing annuity rates Buy single premium deferred pension product Options upon vesting Immediate pension (after taking commutation) at the prevailing annuity rates Buy single premium deferred pension product Extend the accumulation period (provided policyholder age < 55 years) Option upon death during deferment Immediate pension at the prevailing annuity rates Lump sum 6

7 Key provisions in the guidelines (3) Same annuity provider Annuity at vesting should be provided by the same insurer that offered the original pension policy Compliance with discontinuance of ULIP regulations All individual unit-linked pension products to comply with IRDA (Treatment of Discontinued Linked Insurance Policies) Regulations 2010 Point of sale disclosures In line with sales literature guidelines of Life Insurance Council (Feb 2004) Disclose: (a) An illustrative target purchase price (b) Risks involved in meeting the target purchase price (c) Target annuity rate / pension rate for the illustrative target purchase price (d) Risks involved in purchasing the target annuity / pension rates 7

8 Key provisions in the guidelines (4) What is target purchase price? Absolute amount guaranteed and / or the accumulated value of premiums at 4%pa and 8%pa, which is expected to meet policyholders pension needs after commutation What is target pension rate? The pension that the policyholder expects to receive at vesting at an illustrative assumed interest rate of 4%pa and 8%pa (used in pricing the annuity) Ongoing disclosures (on 1 April every year) Disclose: (a) The current account value (b) Projected account value to vesting date (with caveats) (c) Likely annuity amounts based on the then prevailing annuity rates and on assumed interest rates of 4%pa and 8%pa and expected longevity of X years (with caveats) 8

9 Mixed industry reactions The second option guaranteed maturity benefits would be more attractive to customers. But insurers would take a cautious approach towards investments if they have to give guarantees, and returns are likely to suffer We are happy with this because guaranteeing annuity wouldn t have attracted customers anyway as it s a long-term goal. Now, since the guarantee is either on the capital or returns we can play this option in a better manner. This move will definitely help revive pension products The new guidelines provide insurers some clarity on products. Now the industry would witness the emergence of new pension products fitting into the new regulatory framework. But there are chances of unhealthy competition. If that is the case, because of the long-term nature of the product, shareholders may be forced to fill the deficits on occasions Aneesh Khanna, SVP, IDBI Federal Business Standard, 10 November 2011 Andrew Cartwright, Chief Actuary, Kotak Life DNA India, 10 November 2011 K Sahay, CEO, Star Union Dai- Ichi Life DNA India, 10 November 2011 The option to add life insurance cover as a rider is a benefit that puts the policyholder at an advantage. The extension of vesting date beyond the originally opted vested date gives flexibility in pension products. The benefit illustration has to be provided not only at the time of sale but in every year of the tenure so that the policyholder can track year after year The new guidelines, though appear to be relaxed in terms of guarantee, may still not achieve the objective of reviving sales of pension products. Retirement saving is meant to provide protection against inflation. Any kind of guarantee would restrict investment freedom and hence may not achieve the objective of providing protection against inflation... Would we have liked an option for no guarantee? Yes, since that would have allowed flexibility for the funds to be invested in equity in a higher proportion which would have meant potential higher returns. But I think the regulator is rightly focused on ensuring capital protection for customers who are saving up in a pension plan for their retirement. Rithuraj Bhattacharjee, Head - Market Management, Bajaj Allianz Life DNA India, 10 November 2011 G.N. Agarwal, Chief Actuary, Future Generali Life Moneylife, 11 November 2011 Amitabh Chaudhry, MD and CEO, HDFC Life Moneylife, 11 November

10 Critical analysis of the guidelines (1) Group business Assured benefit to include return of all premiums at scheme level upon scheme surrender, but member benefits governed by scheme rules Scheme surrender benefit required to be annuitised Implied capital guarantee investment restrictions Would the guidelines apply to group gratuity business? It seems impossible to apply these guidelines to group business 10

11 Critical analysis of the guidelines (2) Assured benefits in ULIPs Can different minimum (non-zero) returns be provided on death, surrender and maturities? The illustration format does not seem to provide for this Requirement of surrender value guarantee in ULIPs means either or both of: Very low positive investment return guarantee Conservative investments Not in the best interest of policyholders Surrender value guarantees on ULIPs are not appropriate 11

12 Critical analysis of the guidelines (3) Point of sale disclosures For ULIPs, benefit illustrations format in Annexure II specifies interest / 6% whereas the guidelines specify the / 8%. The illustrations are required to be issued based on the format in Annexure II in addition to existing illustration guidelines (@6% / 10%). Annual disclosures Disclosure of projected accumulated amounts at vesting based on the likely economic & demographic environment with caveats / 10%; / 8% / 6%?). Projected amounts of pension from vesting at: the then prevailing annuity rates; and the annuity rates calculated / 8% / 6%?) and expected longevity of X years Target purchase price and pension rate Target purchase price = premiums / 8% / 6%?) (i.e. IRR to policyholder) Different from the / 10% illustration guidelines Target pension rate = calculated at arbitrarily determined rates / 8% / 6%?) Effect of inflation not explicitly considered / illustrated Significant room for confusion and risk of mis-selling 12

13 Critical analysis of the guidelines (4) Surrender after lock in Surrender option 1 = Annuitisation Surrender option 2 = SP deferred pension Death option 1 = Annuitisation What s lock in period for ULIPs? 5 years? May result into trivial annuity amounts Is this the paid-up facility? No annuity rates may be available at young age What s lock-in period for traditional? 3 years? What s lock in period for VIP? Significant liabilities for companies given longevity and interest risks Better to offer paid-up facility? Are deferred annuity rates guaranteed? Significant risks for companies given longevity and interest rate risks, if guaranteed rates Need for a minimum age? Paid-up facility or portability of surrender values to another insurer would be better options 13

14 Critical analysis of the guidelines (5) Same annuity provider at the time of vesting Would vesting here cover annuities payable on surrenders / death? Unfair to the policyholders Risk of insurer exploiting the policyholder through unattractive annuity rates Open market option would be a much better proposition 14

15 Critical analysis of the guidelines (6) Application of the discontinuance of ULIPs regulations Unclear if assured benefits apply to policies discontinued during the first five years? Compulsory termination of policy after five years may not appropriate for discontinued pension plans If the intention is to have a compulsorily annuitisation after lock-in, it would also not be appropriate as not sufficient time to accumulate funds to get reasonable levels of annuities No annuity rates may be available at young age Better to offer portability of surrender values to another insurer 15

16 Critical analysis of the guidelines (7) Why? Maximum limit on rider premiums at 15% Inconsistent with the maximum premium on riders on non-pension plans, which is at 30% Treatment of rider sum assured is inconsistent against (and contravenes the provisions of) the Policyholder Protection Regulations, specifying that the rider SA can t exceed that of the basic plan. Time to review all regulations related to riders? 16

17 Will the guidelines revive pensions business? Pre-September 2010 pension plans No need for death benefits Potential for higher returns through equity investments (up to 60% in ULIPs) Surrender benefits could be received in lump-sum Open market option for annuitisation Interim pension plans with 4.5%pa guarantee No need for death benefits Implicit restrictions on investments given the 4.5%pa guarantee requirements Upon surrender, compulsory annuitisation (after commutation) Open market option for annuitisation New pension guidelines November 2011 No need for death benefits Implicit restrictions on investments given the requirements for assured benefits Upon surrender, compulsory annuitisation (after commutation) No open market option for annuitisation Enhanced disclosure requirements which are potentially more confusing and misleading Will the insurers introduce pension plans? Will the policyholders be interested in buying these plans? Will the plans be in the best interest of the policyholders? Will the disclosure requirements help control potential mis-selling? 17

18 Suggested changes in the guidelines Guidelines not to apply to group pension products No surrender value guarantees No compulsory annuitisation upon discontinuance / surrender offer portability of surrender values to another insurer instead No requirement of annuitisation with the same insurer offer open market option instead Need to streamline disclosures and bring out effect of inflation on pension amounts Need to streamline regulations on discontinuance of premium payments on ULIPs as they would apply to ULIP pension What else needs to happen? Fiscal incentives More investment options - long term zero coupon bonds / longevity swaps 18

19 19 Q&A and discussion