Irdai panel reviews investment norms for life insurance sector

A committee constituted by the Insurance Regulatory Authority of India (Irdai) has suggested a host of changes in the life insurance sector, including in the investment norms to improve the returns generated by the funds.

The committee in its report among other things has recommended that the investment norms "should undergo significant change" with a view to improve the returns generated by the funds while taking account of the risks inherent in the various asset classes.

Current investment norms governing traditional business are quite restrictive, making it difficult to provide competitive returns to the policyholders, the report noted. It cited the low returns in certain mandatory investment assets like government securities where the returns are very low.

Referring to customers' "reasonable expectation", it said life insurance savings products are often compared to products offered by banks such as fixed deposits and recurring deposits.

This makes generating a return of at least 8 per cent per annum is a "tall order" given that at least 50 per cent of assets of the insurer are mandatorily to be backed by government securities (G-Secs), which currently yield about 6.7 per cent - 7.2 per cent annually.

Further, given the downward pressure on interest rates, the actual yields on future premiums are only expected to be lower, it said.

The panel proposes to "lower the mandatory proportion of 'G-Secs' in the Life Fund and the Pension and General Annuity Funds and allow for higher exposure in alternative higher yielding assets (like equity or property) or high rated corporate bonds" to help insurers generate a high gross return on investments so that insurance savings products can compare favourably in the financial savings space.

There was a divergence in views amongst the committee members on the level of surrender value in traditional products, particularly at earlier durations.

Currently, the withdrawal (commutation) clause is liberal for NPS as compared to Pension plans available with life insurers.

"Since this flexibility is a key consideration by a customer choosing a pension plan, the Committee recommends allowing commutation to the extent allowable under National Pension System (NPS). Currently 60 per cent of total accumulated corpus can be commuted as compared to one-third of total accumulated corpus allowed for pension plans from life insurers," the report said.

Two divergent views emerged - one on increasing the surrender value in traditional products and the other on retaining status quo.

"Considering that this is a sensitive aspect for various stakeholders in the industry, while the Committee recommends that the surrender values be moved upwards, it should be carried out in a phased manner so as to minimise any disruption this may cause," the report said.

"Life insurers, with their reach and network, can play a vital role in meeting the pension needs for this sector," it said.

The report further suggested introduction of new pension schemes along with existing ones like NPS, EPF,PPF, to reach the untapped working population.

The Indian life insurance penetration surged from 2.15 per cent in 2001 to 4.60 per cent in 2009. Since then, it has exhibited a declining trend reaching 2.6 per cent in 2014, marginally increasing to 2.72 per cent in 2016.

Irdai had notified the IRDAI (Non-Linked Insurance Products) Regulations, 2013 and IRDAI (Linked Insurance Products) Regulations in February 2013. However, it was observed that there is a need to review the regulations due to changing market and economic environment.

In view of this, the Authority had constituted a committee in January this year to make recommendations on the amendments to be carried out on the regulations. Accordingly, the committee has submitted its detailed report on 7 December 2017 with a review of the regulatory provisions and its recommendations.

Irdai has asked all stakeholders to offer their comments/ suggestions on the recommendations of the committee latest by 28 December 2017, for consideration of the same by the Authority.  The Authority's notification contains the format for making commends the comments/ suggestions in MS-WORD format should reach us latest by 28 December, 2017 in the format attached by e-mail.