The finance ministry has prescribed a three-pronged strategy to arrest the slide in premium growth in the life insurance sector. This follows the industry asking the government to revive the sector, as business growth saw a decline since new regulations on unit linked plans were introduced in September 2010.
Sources said the finance ministry had identified the impasse surrounding pension plans as the main reason behind dwindling sales. The challenging economic scenario, high interest rates and a choppy equity market added to the woes. During the first six months of the current financial year, life insurance sales were down 22 per cent, while the number of policies issued by these companies declined 17 per cent.
The finance ministry has prescribes three measures: First, allowing more options to customers in terms of pension plans, without any guarantee. Second, erstwhile popular unit-linked plans may be revived, but under a different product category and third, relaxing debt investment norms by allowing insurance companies to invest outside AAA rated papers.
| SNAPSHOT |
| Prescription |
| * Allowing more options to customers in terms of pension plans, without any guarantee |
| * Erstwhile popular Ulip pension plans would come in New Avtar |
| * Tweaking debt investment norms by allowing insurance firms to invest outside AAA rated papers |
| Concerns |
| * New premium collection down 22% in 2011-12 |
| * No of policies issued down 17% in 2011-12 |
| * Collection under pension plan down to Rs 600 crore |
| * Ulips accounting for only 18% of the total sales |
The move assumes importance, considering the Insurance Bill is still pending in Parliament. The Bill seeks to raise the foreign direct investment limit for the insurance sector from 26 per cent to 49 per cent.
"We have conveyed our deliberations on the current health of the industry to the ministry. It has assured us it would will look into the matter,” S B Mathur, secretary, Life Insurance Council, the representative body for the life insurance industry, told Business Standard. He added the primary reason behind the decline in industry sales was pension plans, which had no takers at the moment.
According to data collected by Life Insurance Council, premiums collected from pension plans stood at Rs 600 crore in the first six months of 2011-12, compared with Rs 18,000 crore in 2010-11. This was mainly due to the new regulations on pension products, mandating a minimum annual guarantee of 4.5 per cent, which came into effect in September 2010.
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The industry failed to recover, even though the Insurance Regulatory and Development Authority (Irda) dropped the 4.5 per cent minimum guarantee clause from such products. To revive the sector, the government has asked Irda to consider allowing more choices to customers, and these may include products without guarantees. “The current guideline restricts investments in equities, as there is a guarantee element. So, young customers who can afford to take risks are shying away from the product. So, there must be some options,” said a source.
The regulator may also allow erstwhile popular unit-linked pension products, albeit under a different category. “Pension plans sold earlier did not fit the definition of pension. However, these products, which were accumulative in nature, can be treated as a different category,” Irda Chairman, J Hari Narayan, said at a recent industry seminar.
Another concern for the ministry is the decline in equity and debt inflows from insurance companies. Equity inflows fell, as the sales mix shifted in favour of traditional policies. Unlike unit-linked products, in which up to 95 per cent of the funds can be deployed in equity, traditional plans cap equity exposure at 25 per cent. After the new guidelines came into effect, the mix between unit-linked and traditional policies, which was earlier 80:20, reversed.
With more money to be invested in debt, insurance companies are also tied down by the regulation that mandates that 75 per cent of its debt investments be in AAA rated papers. Hence, the government has prescribed a relaxation in this norm, allowing investments in lower rated papers. “There are a lot of good companies which have AA+, AA, AA- and A+ rated issues and these can be safe options for insurance companies,” said a source.