Bajaj Allianz - a success story

The secret behind early profits of Bajaj Allianz Life Insurance is out. The company has managed to avoid losses on new unit-linked policies through a product that allows it to front-end charges and show higher first-year allocations at the same time.

While nearly all new insurance companies continue to be in the red, Bajaj Allianz Life Insurance has reported a net profit of Rs 63 crore last year, which was followed by a Rs 30-crore profit in Q1 of 2007-08. The company has managed the profit despite a growth in annualised premium of 86%. The profit has surprised the industry since companies typically lose money in the first year of a new policy. As long as premium from new policies outstrip renewal premium, it is difficult for a life insurance company to break even.

Bajaj Allianz’s Capital Unit Gain has placed IRDA in a dilemma as insurers feel that it violates the spirit of regulations, which require insurers to provide for the first year expenses upfront

A similar product is also being sold by Aviva India. IRDA has received proposals to launch similar products. Sources said IRDA may set up a team of actuaries from the life insurance industry to look at the product.

Capital Unit Gain was introduced by Bajaj Allianz last year. The difference between this and other unit-linked products is that in Capital Unit Gain, the first year premium is used to allocate capital units and the regular premium payable thereafter will be used to allocate accumulation units. In other words, while units are allocated to policyholders in the first year, only a part of the investment happens in the first year, the
rest of the units are credited to the policyholders account, but are not available to them. In the long run (after six-seven years), this may
not make any difference to them, but this feature reduces the surrender value. Speaking to ET, Sam Ghosh, MD, Bajaj Allianz Life, said: “IRDA does not allow any unit-linked policy with less than a three-year tenure, so the surrender value in the first three years are not of relevance to the policyholder.” He added that for those who hold the policy until maturity, the returns are in line with other unit-linked policies. While unit-linked insurance plans by themselves are complex products, the capital unit gain takes the complexity even higher. It requires different software to calculate separately the net asset value of capital and accumulation units. The product details disclose this feature.

According to the product brochure, if the regular premium is not paid in three years and the policy has lapsed, the surrender value would be 100% of the capital units. Immediately upon completing the third year, the insured would lose a big chunk of the premium because of the product structure. However, as years move on, the surrender value would converge with
the regular unit-linked policies.