Risk firms eye gratuity funds via ULIPs

Unit-linked products (ULIPs) may not only be the preferred choice of individual policyholders but corporates as well.

While private life insurers have been offering unit-linked option to corporates under group gratuity funds, the country's largest public insurer, the Life Insurance Corporation, is also expected to join the bandwagon.

R Venugopal, executive director-pension and group gratuity schemes of LIC, said the corporation has filed a unit-linked gratuity product with the Insurance Regulatory and Development Authority. The product would be launched once the final Irda clearance comes.

Tarun Chugh, head of group solutions and alliance, ICICI Prudential Life Insurance, said privately owned and run companies are the ones largely opting for unit-linked gratuity funds.

Under a unit-linked gratuity scheme, there are three options: high risk, medium risk and low risk. Corporates can choose high risk pattern of investment, under which about 60 per cent of the investible amount is invested in shares and the balance in government securities, bonds and money market instruments.

Existing corporate clients of LIC would be allowed to switch over to unit-linked gratuity product without charging any exit load. With the introduction of unit-linked gratuity product, LIC would be the only insurer to have a unit-linked gratuity product as well as conventional product for gratuity available for corporates, Venugopal said.

LIC's holds the largest corpus of Rs 35,490 crore under the group business, of which gratuity fund accounts for Rs 17,800 crore, superannuation funds Rs 9,020 crore and Rs 8,670 crore under annuity funds as on March 31, 2004.

Sandeep Shirkhande, vice-president and head-group insurance, Kotak Mahindra Old Mutual Life Insurance, said since LIC was the largest and oldest insurer, it has a major chunk of gratuity funds of corporates.

It was only by offering unit-linked schemes that private insurers were able to make small inroads into corporate gratuity funds, added Shirkhande.

A senior LIC official said there was no solvency margins required for unit-linked policies compared with endowment policies and, therefore, private insurers found it convenient to offer such policies. The only limitation in unit-linked gratuity scheme was the risk was entirely on the corporate, he added.

In a conventional group gratuity scheme, funds are invested in government securities and approved investments as per the investment pattern approved by Irda.

Interest earnings of all the funds together are assessed at the end of the year and distributed to trustees, pro-rata. The rate of interest generally depends on the size of fund or on the date the funds are handed over to insurers for investment.

According to Venugopal, generally companies prefer statutory liabilities to be set aside through conventional group gratuity products since for such liabilities, what is important is not return on capital but return of capital when required.