Variable annuity plans to hit market within three months; to be linked to market indices

The array of annuity plans by insurance companies available to the Indian people is about to be expanded soon as the Insurance Regulatory and Development Authority of India (IRDAI) has given the green light for launching variable annuity plans which is a significant departure from the fixed annuity products that life insurance companies can offer currently, The Economic Times has reported.

The annuity market in the country is estimated at about Rs 40,000 crore a year which is expected to get a shot in the arm with the expansion of product portfolio.

The first variable annuity policies could be offered in the coming two-three months.

Variable annuity payments will be determined with the help of a benchmark, which will be publicly available, the regulator has said. According to the new rule, insurance companies can offer variable annuity plans that a minimum guaranteed annuity amount. Annuity products for both group and individuals will have this feature.

“The regulator has finally allowed insurers to provide variable annuity plans, which has the potential to offer higher returns linked to market conditions, coupled with guaranteed minimum rates,” a senior executive of a life insurance company told the newspaper. He also said that in developed economies such as the US, variable annuity products are a common product. These are complex in structure including derivatives and long-term options and provide enhanced guarantees and returns.

“It is like a ULIP (unit-linked insurance plan) with an underlying guarantee which will enable customers to take benefit of market upsides while protecting part of the amount invested,” another insurance industry official said.

The early variable annuity products could focus on plain vanilla options with equity-linked returns, indicated insurance industry officials. The benchmark for these returns can vary, ranging from popular indices such as the Nifty or Sensex to specific equity funds chosen by the insurance companies.

Variable annuity products would typically have two parts. The return on purchase price will need to be guaranteed at least to a minimum predetermined percentage – say about 60%. This guaranteed portion is usually invested in fixed-income instruments to provide stability similar to fixed annuity policies.

The remaining portion would be designed to bring higher returns into play. The variable part can range from 20-40%. Customers will have the choice to allocate this portion into equity investments, with returns linked to equity market performance.

The IRDAI has directed insurance companies to explicitly state the variation of annuity payouts in relation to the benchmark in their documents. The companies have to mandatorily furnish clear illustrations of annuity rate variability coupled with the attendant risks. The entire goal is to offer customers a clear understanding of the options before them.