Variable annuity products set to enter markets in 2-3 months

The Insurance Regulatory and Development Authority of India (IRDAI) has announced a new rule allowing insurance companies to offer variable annuity plans with a minimum guaranteed annuity amount. This option is available under both group and individual defined annuity products, based on publicly available benchmarks.

"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 ," a senior executive of a said on condition of anonymity.

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In overseas markets, particularly the US, variable annuity products are well-established and form a significant portion of the market. These products often involve complex strategies, including derivatives and long-term options, to provide enhanced guarantees and returns while investing in equities, said the executive.

The first variable annuity products could enter the market within the next two-three months, he said.

To start with, variable annuity products are likely to focus on plain vanilla options with equity-linked returns, said industry experts. The benchmark for these returns can vary, ranging from popular indices such as the Nifty or Sensex to specific equity funds offered by insurers, they said.

Under variable annuity products, the return of purchase price will need to be guaranteed at least to a minimum specified percentage, typically around 60%. This guaranteed portion is usually invested in fixed-income instruments, providing stability similar to fixed annuity policies.

“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,” said an insurance executive, who did not wish to be identified.

The remaining portion, which can range from 20-40%, is where the variability and potential for higher returns comes into play. Customers will have the freedom to allocate this portion into equity investments, with returns linked to equity market performance.

The regulator has asked insurers to explicitly state the variation of annuity payouts in relation to the benchmark in their filing documents. They are also required to provide clear illustrations of annuity rate variability along with associated risks, helping customers in understanding the options clearly.

At present, insurers offer fixed annuity products which are available under immediate and deferred payment structures, with immediate annuities starting payments immediately and deferred annuities starting payments after an accumulation period.