Insurance regulator Insurance Regulatory and Development Authority (IRDA) would likely to allow some level of investment by insurance companies in derivatives to enable them to hedge their risks. There is a shortage of assets to match the guarantees embedded in the liabilities and need to have derivatives and futures to hedge mis-matching risk of insurance liabilities, said J. Hari Narayan, Chairman, IRDA, here, while delivering the keynote address at the 14th Global Conference of Actuaries.
These products include equity derivatives, credit default swaps and interest rate futures. Life insurance industry suffered a 25 per cent fall in its business in terms of premium (new business) in the current fiscal as compared to the previous financial year. “The changes in the regulations made life insurers to change their business strategy ........However, these changes are good and positive and companies will take time to adapt all these changes,” said Liyaquat Khan, President, Institute of Actuaries of India.
He was listing out the changes introduced by the IRDA over a period. In January 2010, the IRDA came out with new regulations on charges. The regulations did not prescribe maximum charges that can be levied by life companies. However, there is a limit in the sense that the difference between gross yield (percentage returns had there been no charges) and net yield (returns after factoring in charges) should not be more than three percentage points for Unit-Linked Insurance Products (ULIPs) with a maturity of up to 10 years. For policies with a maturity of over 10 years, the difference should be not more than 225 basis points (two-and-a-quarter percentage points).
From September last year, the IRDA asked insurers to scrap existing products and come up with the new plans that were compliant with the new guidelines. The new regulations lower charges and consequently improve return for policyholders — even if the investor withdraws early. Second, it distinguishes ULIPs from mutual funds by forcing insurers to incorporate protection that is at least 10 times the premium. To live with the lower charges, insurers have been forced to halve commissions and cut expenses.
The regulator has also prescribed minimum number of policies that an agent has to bring and the minimum percentage of renewals required to renew the agent's licence. Mr. Khan said that all insurance companies would be able to tide over the present situation as these companies had strong foreign partners.
The products include equity derivatives, credit default swaps and interest rate futures