Move To Save Life Insurers Several Hundred Crores In Capital Requirement, Boost Sales Of Unit-Linked Insurance Plans
Hyderabad/Mumbai: In a move that will save the life insurance industry several hundred crores in capital requirement, the insurance regulator has eased solvency margins for unitlinked insurance plans. Solvency margin is the excess of assets over liabilities that an insurer maintains as a prudential measure in the interest of policyholders.
“The move will help enhance Ulip sales, especially pension and health products. It will also lower the cost structure in Ulips. Life insurers selling Ulips will have a level playing field compared to companies selling traditional products whose solvency margins were lowered recently,” IRDA member R Kannan said. A lower solvency capital would mean that insurers will also have more money to underwrite new business. It will also ease the pressure on bringing in extra capital.
For a life insurer, the impact would vary depending on the product composition. For instance, on products with a guaranteed return, the capital requirement has been eased by 7%, whereas for products where there is no guarantee the reduction is 20%. Given the industry’s product composition, the overall capital requirement towards solvency margin would be lower by 18%.
For the country’s largest private life insurer, ICICI Prudential, the new norms will free up close to Rs 150 crore of capital. “This has been a good new year gift from the regulator,” ICICI Prudential managing director Shikha Sharma said. Insurers reckon the new norms will ease capital requirements by 10-15%. Although private life insurers have brought in over Rs 21,000 crore as equity capital, most of the money has gone towards distribution infrastructure, expenses and reserve requirements. A portion of the capital goes towards capital requirements, of which companies will save between 10-15%.
“This reduction will benefit not only existing business but also future business,” Kotak Mahindra Life Insurance MD Gaurang Shah said. When asked about the possibility of a reduction in price, Mr Shah said: “Competition has already been a major factor in driving down prices. Margins on our products has been consistently coming down since 2004 and the products are becoming cheaper”.
Many in the industry feel that capital requirements were high considering that in most Ulip products the investment risk is borne by the customer. In many cases, the Ulip plan is structured similar to a longterm mutual fund.
While IRDA has eased solvency requirement, it has not revised its diktat on companies maintaining 150% of the prescribed solvency margin. The capital requirements have been eased by reducing the allocation towards two components that are used to calculate the solvency margin.
Ulips are similar to mutual fund with an added life cover. The returns on Ulips are reflected in the increase in net asset value declared by the company. Many private insurers garner a large chunk (80%) of their premium from Ulip sales. But the NAVs have eroded in the stock market crash. There are concerns that the erosion could make the life insurance business unstable for companies in the medium and long term.
Earlier this week, IRDA chairman J Hari Narayan said that Ulips had lost their sheen among investors due to the volatility in the market. The new business premium of life insurers grew by a modest 3% to touch Rs 39,686 crore up to October this year as against Rs 38,614 crore last year. This is in contrast to the blistering growth in Ulips last fiscal when the markets were buoyant.
EXPANDING HORIZON
Lower solvency capital means insurers will have more money to underwrite new business
It will also ease the pressure on bringing in extra capital
For products with a guaranteed return the capital requirement has been eased by 7%
