Change would ensure company enters market and competes with private competitors. DESIGN: JAMAL KHURSHID
After two decades of the introduction of unit-linked insurance products in Pakistan, government-owned State Life Insurance Corporation has finally shown interest in entering the market segment that has hitherto been served by its private-sector rivals only.
“State Life is in the process of setting up an integrated software solution pertaining to core insurance business applications and Enterprise Resource Planning (ERP). Upon its implementation, State Life will be in a position to enter this (unit-linked insurance products) market segment,” company’s General Manager Muhammad Izqar Khan told The Express Tribune in a recent interview.
As opposed to conventional insurance products that guarantee policyholders investment income, unit-linked insurance products let policyholders select high-, medium- and low-risk investment options besides offering the flexibility to choose the sum assured and investment ratio in the annual targeted premium.
“There’s an intention to introduce such products. However, the ultimate decision rests with the board of directors,” he added, claiming that the company has so far given a priority to the conventional segment of insurance products because it has ‘considerable expertise’ in this area.
While most insurance professionals belonging to the private sector are strong proponents of unit-linked insurance products due to the market-based growth they offer (without making policyholders actually participate in the stock/bond market), State Life management believes otherwise.
“Investment risk is mostly borne by the policyholder under unit-linked products. The investment income earned by the policyholder is subject to downfall risk until death or maturity,” he said while referring to the stock market crash of 2008 where unit-linked policyholders had to bear significant losses due to a sudden drop in the value of equity investments.
On the other hand, State Life bears the entire investment risk through its conventional insurance products. Of course, the fact that the government of Pakistan – which owns 100% stakes in the company – guarantees policyholders their sum assured and declared bonuses on with-profit products cannot be ignored easily.
Although unit-linked insurance business has existed in Pakistan since the early 1990s, the country still lacks specific regulations to govern such products. The Securities and Exchange Commission of Pakistan (SECP) issued draft regulations for unit-linked insurance products in February. It has sought suggestions from insurers, including State Life, and is yet to release the final set of regulations.
According to Khan, the SECP has never asked State Life to enter the segment of unit-linked insurance products. “However, some policyholders do get fascinated by the impressive marketing of unit-linked insurance products … there still exists a small chunk of risk-seeking policyholders who want to enjoy short-term benefits,” he said.
Khan says it is ‘beyond any doubt’ that the persistency of conventional products is better than unit-linked products. As an example, he cites data from the top three life insurance companies that reveals the ratio of lapse, surrender and forfeited polices in the total number policies in force at the beginning of the policy year in the case of unit-linked products was 14.34% 2012. In contrast, this ratio stood at 6.46% in the case of conventional insurance products in 2012.
“As persistency is a key factor in the profitability of insurance companies, one can easily imagine the risk factors inherent in it,” Khan noted.
Published in The Express Tribune, April 7th, 2014.
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Conventional products are always better for customers compared to unit linked policies. ULIP policies provides advantages for only insurance companies.