The Insurance Regulatory & Development Authority (Irda) has reduced the solvency margin from the start of 2009.
KOLKATA: There’s good news for the age-old traditional, or non-linked insurance plans. The Insurance Regulatory & Development Authority (Irda) has reduced the solvency margin — the percentage of funds capital insurers must set aside while underwriting policies — from the start of 2009.
The move could see a decrease in premium for such plans in the next few months. Traditional pension and annuity plans stand to benefit.
R Kannan, member (actuary), Irda, told DNA Money, “There are three important points here. There was a need to bring in a harmonisation of solvency ratio after we reduced the solvency margin for term products a few months back.”
Secondly we want pension, health and annuity products to increase. Importantly, we want traditional products to take a lead.”
The regulator said this change was brought to make insurance products ‘affordable’, keeping in mind the current turmoil in the financial markets, and to provide insurance companies with an incentive to lower their cost of capital. The lower solvency requirement will reduce the capital requirement at insurance companies.
Moreover, there are instances of consumers declining to buy unit-linked products (ulips), whose fortunes are much dependent on the equity markets. Ulips account for a majority of sales and have been instrumental in fuelling the industry’s growth.
“We have noticed around 15-20% reduction in premium rates for term plans since Irda lowered the solvency requirements for term products in March. In a competitive scenario, any lowering of solvency requirement will have an impact on premium. I think premiums would go down on traditional products after a while, maybe in 3-4 months,” Kannan said.
This easing of solvency margin could benefit companies which have a block of traditional products. An LIC official said, “It is a welcome step. But as a company, we already have a solvency margin of 152%.”
G L N Sarma, chief actuary, Bharti Axa Life, said the move would also benefit companies offering guaranteed plans on the traditional platform. “Back of the envelop calculations suggest that there would be between 4-5% reduction on the required solvency margin,” he said.
“As far as Bharti Axa Life is concerned, we have a small kitty of traditional products.
This move will be to our advantage if we plan to enter into the traditional space in a larger way,” Sarma added.
Debashis Sarkar, senior director and chief marketing officer, Max New York Life said, “This is a positive step, which will enable companies to push traditional products.”
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