The Insurance Regulatory and Development Authority (Irda) has directed the insurance players to revise the rate of interest on their guaranteed assurance products downwards. This is possibly the first instance of any regulator directing the players to modify their product profile in keeping with market realities.
Irda chairman N Rangachary said with interest rates moving south, they cannot support the level of assured rate of returns as in the past.
"We have asked the industry to revise the rates which we feel they are not sustainable," he pointed out.
The Irda had started this process eight to nine months back when it directed the Life Insurance Corporation of India (LIC) to scale down its rates on the single premium product -- Bima Nivesh. Since then, the LIC has downward revised the assured rate of return on this product thrice.
Rangachary said that some of the new insurance players have also been asked to scale down their rates to meet market realities since interest rates have moved south. The Irda chief further stated that in a falling interest rate scenario, this could bring down the bonus declaration. To date, with only LIC making profits, this possible downward revision in bonus rates would apply to the state player.
The Reserve Bank of India (RBI) does not directly tell banks to revise their interest rates, but signals the need for a change through modifications in the bank rate. This is in contrast to the insurance scenario, where every single product has to be vetted with the Irda under "file and use" before it can be sold in the market.
"We tell companies to revise their product profile when we feel the interest rates are not supportive in present market conditions," said Rangachary. LIC is closing down Bima Nivesh II, which offers 8.3 per cent annual returns for a 10-year product.
SBI Life Insurance Company withdrew its single premium product -- Sukhjeevan -- on August 16, replacing it with a new product -- Sukhjeevan Pratham. The revised product offers lower annual guaranteed returns and a reduced loyalty addition to be paid on maturity.
Customers are writing directly to the IRDA, seeking its recommendation and advice on the choice of product and company. As the regulator has made it clear that one player is as good as the other, "we have to see that companies perform well, and that their reliability is ensured," said Rangachary.
While the Irda does not wish to project itself as a personal financial advisor, it is taking care to ensure what the companies have committed themselves to is sustainable. Hence, the regulator's proactive role in the current market scenario.
