Five things to know about IRDAI suggestions to life insurance sector
1. The committee 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.
2. Currently, the investment norms governing traditional business are quite restrictive, making it difficult, if not impossible, to provide competitive returns to the policyholders.
3. Referring to customers' "reasonable expectation", life insurance savings products are often compared to products offered by banks such as fixed deposits (FDs) and recurring deposits (RDs). 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.
4. 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.
5. 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.