Insurers in a cleft over new norms

The life insurance industry is caught in a web of uncertainty. While the regulator, the Insurance Development and Regulatory Authority (Irda), has asked them to launch products adhering to the new guidelines by September 1, several questions have yet not been answered.

While a list of issues have been sent to the regulator a fortnight back, the industry is still awaiting a response from the regulator. “We have been given a deadline by the insurance regulator to launch at least three-four products by September 1. However, we are stuck as there is still no clarity on a few critical issues,” said the chief financial officer of a leading insurance company.

After the clarifications are issued, the industry will have to rejig the products, refile and launch these — all in less than a month. That will be quite a feat, if one considers that there are 22 life insurers who will have work at break-neck speed to achieve this.

The most important clarification is regarding the payment of 4.5 per cent for pension funds. Earlier, the insurers had approached the regulator unsuccessfully to reduce the rate of return; now, they are seeking clarification on whether this has to be paid on net or gross premiums. The amounts will be significantly different. For instance, if a policyholder pays Rs 1 lakh as premium for a pension plan in the first year, the net amount invested is Rs 60,000-70,000.

If the insurer has to be pay 4.5 per cent on the gross premium, the returns that the insurance company has to generate on the investment will be quite high. The only cushion that insurers have is that policyholders in pension plans will not be allowed to exit in the interim period.

In addition, clarification has been sought on whether this rate of return will apply for existing products too. “In case, this rate of return is extended to existing policies, the investment strategy of these products has to be changed now,” said an actuary.

Irda, in its fresh guidelines issued last month for unit-linked insurance plans, had specified that insurance companies have to maintain a margin of 3.75 per cent between net and gross yields in the sixth year (for a 10-year insurance scheme). These margins would fall in the following years and be 3 per cent in the 10th year. Insurers have asked if these margins have to be maintained at the beginning or the end of the sixth year.

When contacted, a senior Irda official said: “The regulator has constituted a committee consisting of executive members of Irda to study the issue. The recommendations of this executive committee are with the chairman. The industry can expect a response in the next few days.”