Forcing customers to buy annuities from the same insurer isn't the way to derisk LIC

The insurance regulator Irda wants a customer to buy an annuity from the same insurer who sells the pension plan. The proposal is, perhaps, meant to reduce the potential risk for Life Insurance Corporation ( LIC) that controls 95% of the annuity business.
If a prospective annuity buyer knows, one, that LIC offers superior annuity plans, and, two, she would be tied for buying an annuity to the same company that manages her assets during the stage of accumulation, she would choose LIC for asset management during accumulation as well, effectively nationalising the pensions business.

It needs to be examined why LIC offers a superior annuity plan. If not having to capitalise itself the way private insurers have to plays a role in this, regulation must address this, to create a level-playing field. LIC and other insurers could be left free to offer, if they so choose, a loyalty incentive to those annuity buyers who had saved with them during the phase of accumulation.

Beyond stipulating that pension fund managers should not refuse their savers annuity plans, regulation should refrain from tinkering with the market. A vibrant market for annuities where players enjoy a level-playing field is the right course.

Policy holders switch to LIC for two reasons. One, the corporation offers rates that are at least 200 basis points higher than the rates offered by private insurers. Two, policyholders have the comfort of a sovereign guarantee, implying a government bailout in case of a default.

However, compelling a customer to stay with a company is not the way to de-risk LIC. The demand for annuities will surge when subscribers to the New Pension System (NPS) - open to civil servants who joined service from January 2004 and, later, voluntary subscribers - start buying annuities.

Insurers must take advantage of this opportunity as they have the ability to manage long term funds and actuarial expertise, factoring in lengthening life expectancy, to assess risks and forecast future payouts. The pension business also entails efficient record-keeping of contributions of pensions and lumpsums converted into annuities.