In a research report, HSBC Global has said that Indian insurance industry has a risk of mis-selling of annuity products as most life insurers indicate high returns.
The report lists three key trends in the insurance industry.
Mis-selling risk of annuities
The report said that mis-selling of annuity products seems a bigger risk since the quoted annuity rate (18%) is much higher than the actual IRR (Internal Rate of Return), which after commission and expenses delivers 5-6% investment returns.
IRDAI has capped commissions on annuities at 2% of single premium to reduce mis-selling.
Most Indian insurers sell immediate annuities. Only handful of insurers LIC, HDFC Life and Tata AIA offer deferred annuity plans, said the report.
Non-participating products gained significance
For most insurance companies, non-participating savings business is now a significant proportion of annualized premium equivalent.
Internal rate of returns of customers are in the range of 5-6% after commission and expenses.
Commission rates on regular premium non-par savings products are between 15% and 35% depending upon premium payment term, higher than that of annuities.
Insurers used to manage interest rate risk on their non-participating offerings by managing the policy terms of their products, so that interest rate exposure falls with the liquid part of the yield curve. In recent years, however, insurers have started offering longer-duration guarantees.
LIC aggressive on new products
PSU insurer LIC, which for a long time did not have a term offering, has recently launched two term plans.
One plan is being sold only via the LIC website. The other term plan is sold through agents, and is not available online.
The premium rates of both plans are higher compared to private players but competitive compared to previous iterations.
LIC is also working on launching a ULIP offering soon. While LIC has an unmatched agency network, it remains to be seen how successful these plans are considering that LIC is largely known for traditional savings contracts, says the report.
