Panel constituted by Irdai suggests host of changes in life insurance sector

The committee in its report among other things has recommended that the investment norms "should undergo significant change" with a view to improve the returns generated by the funds while taking account of the risks inherent in the various asset classes.

Currently, the report said, the investment norms governing traditional business are quite restrictive, making it difficult, if not impossible, to provide competitive returns to the policyholders. The current investment regulations mandating investment in certain asset classes limit the returns that may be generated to enable better return for the policyholders.

Referring to customers’ "reasonable expectation", it said life insurance savings products are often compared to products offered by banks such as fixed deposits and recurring deposits.

The report also observed that the expectation of generating a return of at least 8 per cent per annum is a "tall order" given that at least 50 per cent of assets of the insurer are mandatorily to be backed by government securities (G-Secs), which currently yield about 6.7 per cent - 7.2 per cent annually.

Further, given the downward pressure on interest rates, the actual yields on future premiums are only expected to be lower, it said.

The panel has suggested to "lower the mandatory proportion of ‘G-Secs' in the Life Fund and the Pension and General Annuity Funds and allow for higher exposure in alternative higher yielding assets (like equity or property) or high rated corporate bonds" to help insurers generate a high gross return on investments so that insurance savings products can compare favourably in the financial savings space.

There was a debate amongst the Committee members on the level of surrender value in traditional products, particularly at earlier durations.

Two divergent views emerged - one on increasing the surrender value in traditional products and the other on retaining status quo.

"Considering that this is a sensitive aspect for various stakeholders in the industry, while the Committee recommends that the surrender values be moved upwards, it should be carried out in a phased manner so as to minimise any disruption this may cause," the report said.

The report, on which Irdai has sought comments till December 28, further said along with existing avenues like NPS, EPF,PPF, multiple other avenues will be required to reach the untapped working population.

"Life insurers, with their reach and network, can play a vital role in meeting the pension needs for this sector," it said.

Currently, the withdrawal (commutation) clause is liberal for NPS as compared to Pension plans available with life insurers.

"Since this flexibility is a key consideration by a customer choosing a pension plan, the Committee recommends allowing commutation to the extent allowable under National Pension System (NPS). Currently 60 per cent of total accumulated corpus can be commuted as compared to one-third of total accumulated corpus allowed for pension plans from life insurers," the report said.

The Indian life insurance penetration surged from 2.15 per cent in 2001 to 4.60 per cent in 2009. Since then, it has exhibited a declining trend reaching 2.6 per cent in 2014, marginally increasing to 2.72 per cent in 2016.