Mumbai: The Insurance Regulatory and Development Authority (Irda) may consider relaxing investment norms for insurance companies to allow them greater flexibility.
“Our pattern is largely on par with global standards. But within the available architecture, we are thinking what can be done for insurers,” Irda chairman J. Hari Narayan said in Mumbai on Wednesday. “We have to keep in mind that the best return by a product was 27%, and the least, 6%. So there is a huge gap.”
Bridging the gap: J. Hari Narayan.
This assumes significance in the backdrop of a lack of high-quality debt paper and the ongoing equity market lull. Irda allows investment in only highly secured AAA-rated and AA-rated debt paper.
The norms allow at least 50% in government securities, 15% in infrastructure-related securities and the rest in equity, mutual funds, corporate bonds, debentures and money-market instruments.
Hari Narayan was addressing the Confederation of Indian Industry’s 14th Insurance Summit.
Savings and low-maturity products are gaining popularity and the rising trend in interest rates is a major concern, said Ashvin Parekh, partner and national leader, Global Financial Services, Ernst and Young.
IRDA chairman J. Hari Narayan talks about the importance of defining pension products and expanding micro insurance.
Of the total debt holdings, current norms mandate that an insurer allocate a minimum of 75% in instruments with AAA credit rating. Insurers are finding it difficult to mobilize funds because of a shortage of such high-quality paper as a result of a slowdown in the overall investment scenario and delays in projects.
If the rules are relaxed to allow investment in lower-quality bonds, insurers may get more investment opportunities, holding out prospects of better returns. Bonds with lower credit ratings typically fetch higher returns.
At present, there are 24 life insurers that have total assets of more than Rs 13 trillion.
Hari Narayan was critical of the way the insurance industry has been selling pension products. Irda had mandated a guaranteed benefit of 4.5% on all such pension products in September 2010 to make unit-linked pension plans transparent and more useful.
Following this, insurers had to withdraw all old products but could not afford to introduce new ones as it was difficult to attach such benefits to pension plans. Last week, the regulator allowed insurers to offer pension products without the 4.5% guaranteed benefit clause, but with certain non-negative guarantees. Irda has made it compulsory for policyholders to buy annuities on pension products from the same insurer. The new rules will allow insurers to invest in equities as well and aim to improve returns.
“There has been a considerable slowdown in the sales of retail pension plans,” said S.B. Mathur, secretary, Life Insurance Council, an industry lobby group.
Hari Narayan said, “We need to ask ourselves honestly, were we really selling pension plans? What was being sold was not pension but some kind of accumulation product. Either sell pension product or create a new category of products.”
He also highlighted the importance of increasing the penetration of micro insurance products through continuous engagement and going beyond mere numbers.
“There are some structural issues in micro insurance products in terms of benefits payout,” Hari Narayan said.
There is a lack of efficiency in delivery and hence rural and social sector obligations may suffer, the Irda chief said, adding that the annual products offered by insurers may not be suitable.
Hari Narayan suggested the industry adopt the concept of Lead Insurance along the lines of the Reserve Bank of India’s Lead Bank Scheme to ensure continuous engagement of crucial products such as health insurance.
On the distribution front, he suggested that it was feasible to have a well-mentored agency model including business correspondents and tied agents. Irda asked the industry to focus on an appropriate ticket size that promotes economies of scale, reliability of operations and above all assured guarantee to end customers.