Mumbai: India’s Insurance Regulatory and Development Authority (Irda) is set to change rules for pension plans that account for about 30% of the life insurance industry’s business, a top official said.
This may help the industry recoup business volumes that have dropped sharply after the regulator imposed stringent guidelines late last year.
“There was a representation from life insurers pressing on the need for expanding the range of unit-linked pension products,” an Irda official said on condition of anonymity. “Various models are being worked out and we need to see what suits the companies best. It’s a priority item and we will come out with the revised guidelines as soon as possible.”
Also Read | Irda to look into cost of regulation
Irda in June altered norms that govern unit-linked insurance plans (Ulips)—a hybrid insurance product that invests part of the premium in equities.
The changes, which came into effect from September, included the so-called linked pension schemes that invest in equities and bonds, but there was no stipulation on the quantum of such investments.
In contrast, traditional plans invest at least 50% in government bonds, 15% in infrastructure instruments and the rest in equity, bonds and other assorted money market instruments.
Irda had made it mandatory for insurers to offer a 4.5% guaranteed return on all linked pension and annuity schemes.
The Life Insurance Council, a representative body of Indian life insurers, proposed some changes to the regulator for pension schemes, said a member of the council.
Another Irda official said the regulator is likely to accept most of the suggestions. Both declined to be named.
Under the revised guidelines, the 4.5% guaranteed return portion in a pension scheme may no longer be mandatory.
Policyholders are likely to be given options to choose from a range of pension products linked to equity without a guaranteed return, but holding prospects of better return in the long run.
There would be yet another option where the insurers may be allowed to offer products with a guaranteed return of 4.5%, but with many riders, including health cover.
“At present, to guarantee a return of 4.5% in the long run, we need 30-year debt papers with a coupon of at least 7%, which are unavailable. Also, 4.5% is a small guarantee and it doesn’t appeal to customers, who are used to buying Ulips with hopes of higher returns,” said the marketing head of a Delhi-based private life insurer.
“If a major portion of the premium is allowed to be linked to equity, it will be easier for the insurers to offer higher returns to policyholders,” he added.
“The revised rules may allow insurers to link a higher proportion of the premium to equity,” said another person familiar with the development. “But the regulator may mandate the insurers to have at least a certain portion of their pension scheme portfolio under products with 4.5% guaranteed return.”
Both persons spoke on condition that neither they nor their organizations be named.
Irda’s stringent norms kept many firms from launching new pension products under the new guidelines.
Of the 23 life insurance companies, only four— Life Insurance Corp. of India, ICICI Prudential Life Insurance Co. Ltd, SBI Life Insurance Co. Ltd and Aegon Religare Life Insurance Co. Ltd—have launched new plans.
These 23 life insurers have assets under management of about Rs14 trillion. During the first 11 months of fiscal year 2011, the new business premium of private insurers grew just 4% to Rs30,756.02 crore over the April-February period of the previous year.
According to a March report by Towers Watson, a global financial services research and consulting firm, there has been a sharp reduction in business since the new rules came into force.
“The private insurers...experienced negative growth of about 34% over the period September 2010 to February 2011 compared to the same period in the previous financial year,” the report said.
“Last year, we added nearly Rs2.65 trillion total premium. Going by the historic trend, this year the total premium should have been at least Rs3 trillion,” said S.B. Mathur, secretary, Life Insurance Council. “But with the plunge in sales following the new pension policy guidelines, the total premium could be maximum Rs2.8 trillion by March end.”
Following a high-profile regulatory turf war on Ulips between Irda and capital market regulator the Securities and Exchange Board of India, the insurance regulator made a number of changes in rules governing the instrument.
To help policyholders protect lifetime savings from adverse market fluctuations, it mandated insurers to offer a minimum guaranteed return on unit-linked pension plans.
It disallowed partial withdrawals in such pensions and annuity products during the premium-paying period. The insurers were asked to convert the accumulated fund value into an annuity at the chosen retirement date.
Under the new guidelines, policyholders are allowed to withdraw up to a maximum of one-third of the accumulated value as a lump sum at the time of vesting. In case a policy is surrendered, the money is locked up to the vesting period and no withdrawals can be made.
Insurers expect Irda to relax these norms.
“The two-third annuitization part will be relaxed under the revised guidelines as policyholders want a certain amount of corpus in hand under any circumstances,” an official of a Mumbai-based private life insurance company said. “It can be around 40% as allowed in the new pension scheme”, run by the Pension Fund Regulatory and Development Authority.
He, too, declined to be named due to the sensitivity of the issue.