Irda set to drop 4.5% guaranteed return rule

01-Aug-2011
Source : Business Standard

The insurance regulator is set to drop the 4.5 per cent guaranteed return clause in the controversial pension product norms. The revised guidelines for pension products will do away with this guaranteed annual rate of return, linked to the reverse repo rate prevailing in September 2010, when the guidelines were issued. Instead, insurers will have to provide only a capital guarantee.
This is a major relief for life insurers, as pension products used to account for nearly 30 per cent of their sales before the new regulations came into force.
“The regulator has indicated there will be only one guarantee, and that is capital guarantee,” said a senior official of a private life insurance company.
Insurance Regulatory and Development Authority (Irda) Chairman J Hari Narayan confirmed the authority was working on the proposal. “We are examining that model. There should be one form of guarantee which is necessary to protect the interests of policy holders. Insurers are free to provide other guarantees, but as riders,” he said.
This will effectively end the impasse on pension plans. The industry has not introduced any pension product based on the new guidelines.
The guidelines had mandated that returns from pension products be linked to the reverse repo rate. It asked insurers to offer 50 basis points more than the rate. Last year, the guaranteed return was 4.5 per cent. At the current reverse repo rate of 7 per cent, the minimum return should be 7.5 per cent. Reverse repo rate is the rate at which the Reserve Bank of India absorbs funds from banks.
The guidelines led to a sharp fall in the number of unit-linked pension products. While Life Insurance Corporation launched a regular unit-linked pension product, the private players introduced single-premium unit-linked pension plans.
At a recent meeting with Irda, the finance ministry expressed concerns over the drop in sales of life insurance products in the last financial year.
In 2010-11, private insurers posted a marginal 2.55 per cent increase in premium collection, the lowest since 2002-03, when sales had fallen 14 per cent. The drop in sales continued during the first two months of the financial year. The yearly premium collected by private life insurance companies fell 23.2 per cent in April-May compared to the corresponding period last year. Insurers said due to the guaranteed return, they were being forced to invest only in debt.
In 2009-10, around Rs 65,000 crore came from sale of pension roducts. Total premium collected rose 18 per cent to Rs 2,61,025 crore.
Meanwhile, an Irda official said insurers would also be allowed to trade in equity futures and options. The products would have to be structured on the basis of benefits that were to be guaranteed and would be priced accordingly, he said. He added that customers could have a varied equity exposure but two-third corpus on maturity must be converted into an annuity.

Irda to bring new pension norms in April

After unit-linked pension products disappeared from the market following an imposition of guaranteed returns of 4.5 per cent, the Insurance Regulatory and Development Authority (Irda) has decided to revise the pension norms in April. "Since companies are busy this season, we have decided to come out with new guidelines in the next financial year. We will issue the draft guidelines in April," said a senior Irda official. In the new guidelines too, the regulator will ensure the capital of policyholders was protected.

He said the existing guidelines were not liberal and the revised ones would give some flexibility to the insurers. It would look at protecting premium along with adding some returns. "Guarantee at this level is unattainable and is the main reason for drop in sales," the official added. New product offerings have declined following the introduction of new rules in September. While only the Life Insurance Corporation (LIC) of India launched a regular unit-linked pension product, others like ICICI Prudential Life launched unitlinked pension plans on a single-premium platform.

Most insurers say offering 4.5 per cent on one-time premium is feasible compared to long term. Also, a single-premium pension product does not provide long-term protection. Returns on pension products have been linked to the reverse repo rate and insurers have to offer an additional 50 basis points over the same. Given the recent rise in reverse repo rate, the returns on unit-linked pension plan are likely to be 5.5-6 per cent for 2010-11.

"We have not launched any pension product as we do not believe in offering a guarantee of 4.5 per cent. Capital guarantee would be a welcome option and would give us some flexibility," said a senior executive of a life insurance company. Last year, pension products constituted 20-25 per cent of the total premium collected by the industry. Around Rs. 65,000 crore came from the sale of pension products. Total premium rose 18 per cent to Rs. 2,61,025 crore. With only a few players selling the product, it has fallen significantly.