New investment norms may raise policyholders' returns

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Traditional plans from insurance companies have always suffered from one handicap. The returns from these plans tend to be very low, despite their long-term nature. To remedy this situation and ensure that life insurance plans are able to offer higher returns to policyholders, a committee constituted by the Insurance Regulatory and Development Authority of India (Irdai) has suggested a host of changes to the investment norms of the life insurance industry. Analysts feel the panel’s recommendations will benefit both the life insurance sector and policyholders.

The product regulations review committee report, which was submitted to the insurance regulator on December 7, 2017, has a few other important recommendations as well, such as creating a level playing field for life insurers in the health insurance business, and revamping their pension business.

Lower exposure to G-Secs: The most significant recommendation made by the committee is lowering of investment in government securities and raising exposure to equities, property and corporate bonds in life, pension and general annuity funds. The report says that to expect traditional insurance plans to generate a return of at least eight per cent per annum is a tall order, given that at least 50 per cent of an insurer’s assets have to be mandatorily invested in government securities (G-Secs). The current yield of the 10-year G-Sec is 7.34 per cent. Further, given the structural direction of interest rates, which is downward, yields may fall even further in the future. However, the committee has not clarified the extent by which exposure to G-Secs should be reduced from the current levels. 

Industry experts are of the view that the move to increase equity allocation is a positive. “The world over insurance companies’ investments in equities are higher than in other asset classes, particularly G-Secs. G-Secs may seem to be risk free, but that comes at a price: The yields on these instruments are very low. I think that phase is over when policyholders would put up with low investment returns. There is growing acceptance that policyholders are capable of tolerating a higher level of risk,” says Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.

Raise surrender value: Committee members also debated on the level of surrender value that should be offered in traditional products, particularly when the plan is surrendered at an early stage. Two divergent views emerged: While some members were in favour of increasing the surrender value, others were in favour of maintaining the status quo. If a policyholder decides to terminate the policy before maturity, the amount that the insurance company pays him is called the surrender value. Says Rakesh Goyal, director, Probus Insurance Brokers, “I think there is a need to increase the surrender value of life insurance policies.This will be beneficial for policyholders who need the money in an emergency. However, a high surrender value could also lead to mis-selling of insurance.” 

Allow life insurers to offer indemnity-based health policies: The committee has also called for liberalising the regulations that restrict the kind of health covers that life insurance companies can sell. It has recommended that life insurance companies should also be allowed to sell indemnity products and provide wellness benefits. Currently, only general insurance companies and standalone health insurance companies offer them. Life insurers can only offer fixed-benefit products. 

Says R M Vishakha, managing director and chief executive officer, IndiaFirst Life Insurance: “The premium rates will turn more competitive once life insurers are allowed to offer these policies.”   

Pension regulations: The panel has recommended that Irdai should review the pension regulations so that insurers are able to regain a foothold in the pension segment. The committee’s report says that the insurance sector’s sale of pension products declined after the Irdai notified regulations in 2010 which mandated insurers to provide inherent guarantees and annuitisation. The share of pension products in life insurance individual new business dropped from 32 per cent in 2009-10 to just 2 per cent  in 2014-15. The committee has recommended withdrawal (commutation) clause for pension plans from life insurers, similar to that of National Pension Scheme (NPS). Another recommendation of the committee is to allow partial, limited withdrawals in case of medical and other emergencies (for self, spouse, dependent children and parents), subject to foreclosure clauses.

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