The Indian economy is gradually moving towards a low interest rate regime. The fact that RBI has reduced the repo rate for four times this year to 110 basis points cumulatively makes us believe that our economy has to adjust to this scenario. Inflation has been low for quite some time and banks have been reducing the lending rate to make loans for industry cheaper.
In such a scenario, insurers are likely to feel the heat in maintaining guaranteed return on a few products and even in managing cash outflow in respect of annuities guaranteed for a long term or for life.
Interest sensitive
As the financial results as on March 31, 2019 indicate, more than 50% of the total premium of several insurers is mobilised through the group insurance business which is highly interest sensitive. The rate once guaranteed at the time of purchase of annuity policy is to be maintained for 30 to 40 years. Hence maintaining handsome return on investments in bonds and the money market may prove to be a very challenging task. The companies’ ability to honour the expectations of the policyholders comes under severe stress. Sale of policies with guaranteed returns cannot be stopped suddenly and the guaranteed returns also cannot be reduced substantially as such actions will have serious reactions from the sales force. The other option for the insurer could be to increase the premium rate but in a fiercely competitive and heavily regulated market that also becomes very difficult.
When the return on traditional policies shows negative trend, customers tend to look for annuity products and try to lock the rate of return in their favour by buying such policies with annuity commencing at a much later date. In such cases the policyholder or the annuitant secures himself against declining rate of interest in the market but the insurer takes a beating and may suffer huge losses. With the increasing average longevity of the population, annuities bind the company to higher rate of out-goes for as long as 40 to 50 years in most of the cases.
Lessons from Japan
In the late 1990’s and early 2000’s nine Japanese life insurers collapsed under the pressure of low interest income on their funds. Faced with serious crisis, the life insurance industry in Japan found many innovative solutions to ensure their survival and for honouring their commitments to the policyholders. They reworked product mix and rationalised the sales force structure and size with thrust on multiplying per capita productivity.
They introduced new low cost distribution channels like bancassurance. But the legacy business in their books continued to pose a challenge. To augment the cash flow into the company’s reserve, they launched massive contact programme with customers for reducing lapse rates. The activities were maintained at a very low cost by adopting the best possible use of technology through minimal manpower involvement. Preventing attrition of customers resulted in cash flow into the company at a very low cost.
Mortality profits were also used for funding return to policyholders. Slowly protection products were introduced and endowment products were gradually reduced. The investment strategies were also aligned to making best out of a difficult situation.
For prospective policyholders it is necessary to adopt a discerning approach to the various insurance products in the market and take a quick decision before the insurers make the products costly or reduce the rate of bonus or annuity. Those aged 50 and above must buy annuity policies at the current rate and price to enjoy continuously high income during the rest of their life. Delay or indifference in planning for funding post retirement expenses may prove costly. The time is not far when insurers will reduce the annuity rate. They may even increase the price for purchase of such annuity products.
