Category: Banking & Finance

Amid the trying pandemic times and low interest rate environment, private life insurers are seeing opportunity and pushing protection products with a promise of guaranteed income. These products bundle life insurance coverage with benefits of savings, offering a suitable product for risk averse individuals who are keen to get regular income and are eyeing assured financial returns over the medium term.

In view of a higher life expectancy, rising inflation, and rising healthcare costs, the combination of protection and savings with guaranteed returns and guaranteed additions in life insurance plans make them attractive for those who seek assured returns on their savings.

Alternative to FD

In the past few months, many insurers, including Bharti AXA Life, ICICI Prudential Life, Future Generali Life, and HDFC Life, have introduced insurance plans with guaranteed returns to help people secure financial stability and meet their different life goals. They have increased the focus on non-participating saving products with guaranteed returns, pitching them as an alternative to bank fixed deposits that have seen sharp fall in rates over the past year.

Recently, Bharti AXA Life launched ‘Guaranteed Income Pro’, a non-linked, non-participating savings insurance plan, that offers life insurance along with guaranteed returns and maturity benefits.

Parag Raja, Managing Director & CEO, Bharti AXA Life Insurance, said: “Guaranteed income is ideal for risk-averse individuals who aim to generate a substitute source of regular income and achieve assured financial returns for tomorrow. We designed Bharti AXA Life Guaranteed Income Pro as an innovative solution that provides life insurance coverage and benefits of a savings product. The hallmark of our offering is the sound financial returns amid uncertain markets. It not only offers flexible short, medium- and long-term income options, but also helps people meet different financial needs at various milestones of life.”

Launching Future Generali Assured Wealth Plan, a guaranteed endowment plan in October last year, its Chief Customer and Marketing Officer, Rakesh Wadhwa, had said: “Given the volatility in interest rates, many customers look for long-term solution with guaranteed returns. Also, the ongoing pandemic has made people understand the importance of being financially protected. Both of these factors have resulted in higher enquires for guaranteed life insurance products.’’

ICICI Prudential Life Insurance had, in December 2020, unveiled ‘ICICI Pru Guaranteed Pension Plan’ that offers guaranteed life-long income to lead a financially independent retired life.

Similarly, HDFC Life Sanchay Plus also works for those who are risk-averse and want assured returns for their later years.

Managing risk

So, how are life insurers able to manage the risks on guaranteed products in an environment of low interest rates? Are they knowingly exposing themselves to liabilities when they hard sell guaranteed products?

Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance, said: “Insurance companies need to carefully monitor the duration of their liability cash flows and then decide their asset allocation and duration to reduce interest rate risk. If interest rates move adversely as compared to assumptions, then products may need to be repriced or withdrawn. Insurance companies sell a variety of products with different liability cash flow durations. Hence, the overall interest rate risk gets reduced as some products have relatively shorter duration.”

Nanda adds that life insurance companies are required to have at least 50 per cent of their assets in government securities, and these are generally long-duration to match with liabilities and to benefit from the upward sloping yield curve. Interest rate derivatives such as forward rate agreements or swaps as permitted are also used to lock in rates of future cash flows. Several high-quality private and public sector issuers have also issued partly paid bonds, which are invested into by insurers who are looking to match cash flows at a pre determined interest rate.”

According to industry experts, life insurance companies are capitalising on exempt-exempt-exempt (EEE) taxation, implying tax benefit available on investment and no tax on accrual and when the product matures.

The experts pointed out that customers who buy insurance plans with guaranteed returns must ensure to run them till maturity as any exit before maturity will be very costly in such schemes.

The time is ripe for the government to provide a framework for pre-packaged insolvency resolution process (pre pack) as an additional option for resolution and the ordinance route should be used for this purpose, the government-appointed Sahoo Panel on pre-packs has recommended.

IBBI Chairman MS Sahoo, who headed the panel, on Sunday expressed hope the government would soon take a decision to introduce a pre-pack framework, which could side step the difficulties of the current Corporate Insolvency Resolution Process (CIRP).

Sahoo’s remarks are significant as the report, which was submitted in October 2020 and now made public on Friday last, had flagged that pre-packs are warranted, given the rigidities in the current formal CIRP mechanism, and more so when there is a likelihood of increase in insolvencies once the suspension on initiation of CIRP expires (CIRP suspension due to Covid-19 willexpire on March 25 after extension from December 25 last year).

The report suggested that a pre-pack should be available side-by-side with CIRP so that the CIRP is used as the last resort for resolution of stress. Pre-pack introduction would require amendment to Insolvency and Bankruptcy Code (IBC). “CIRP being a formal process has some amount of rigidities, while market prefers flexibility to work out a tailor made resolution best suited to their circumstances. CIRP offers benefits. It also has difficulties. Today, CIRP is not available in terms of Covid-19 defaults; is not available for defaults less than ₹1 crore; also, availability of resolution applicants is a concern in wake of Covid-19.

“So, a hybrid mechanism like pre-pack that blends both informal and formal part is necessary. The ground is ready in India to experiment pre-pack as an additional mechanism for resolution of stress,” said Sahoo.

A restructuring plan

Put simply, a pre-pack is a restructuring plan, which is agreed to by the debtor and its creditors prior to the insolvency filing, and then sanctioned by the court on an expedited basis. In a pre-pack, a troubled company and its creditors negotiate the terms of an insolvency resolution plan prior to the commencement of the formal insolvency process, which allows the formal process to be completed at maximum speed.

Sahoo said that insolvency laws around the world provide for pre-packs, in addition to the regular resolution process. Pre-packs have emerged as an innovative corporate rescue method that incorporates the virtues of both formal and informal proceedings. It is the preferred hybrid framework as it is considered fast and cost-effective in the resolution of stress, with least business disruptions and stigma associated with a formal insolvency process, he added.

What the report says

Sahoo panel has, in its report, recommended that pre-pack should be available for all corporate debtors (including MSMEs) and for any stress – pre-default and post-default. Pre-pack regime should be implemented in phases; must begin withdefaults from ₹1 lakh to ₹1 crore and Covid-19 defaults. This can be followed by default above ₹ 1 crore, and then default from ₹ 1 crore to ₹1 lakh, the panel recommended.

This panel has recommended a “simplest variant” of the pre-pack framework within the basic structure of the IBC. More advanced features can be built in course of time, the panel has said.

Invites public comments

The Corporate Affairs Ministry (MCA) has now invited public comments on the Sahoo panel report by January 22.

The report said that promoters who get disqualified under Section 29A of the IBC cannot participate in pre-packs. Also, the corporate concerned would remain under the control and possession of the current promoters and management during pre-pack process, the panel suggested.