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GIC Re Proposed To Set Up Natural Catastrophe Pool

General-Insurance-Corporation-of-IndiaCountry’s sole reinsurer, General Insurance Corporation of India (GIC Re) has proposed to set up a natural catastrophe disaster fund to cover the country’s entire population for a minimum specified amount in the event of natural calamities. This means, insurance industry is getting ready to launch standalone catastrophic cover, which was earlier a part of fire and property cover.

India has seen many natural catastrophes since the 2005 Mumbai floods. There were flash floods in Uttarakhand and cyclone Phailin last year. There were Jammu & Kashmir floods and cyclone Hudhud this year.

The standard cover will have a fixed cover for certain amount with a minimum premium and will be underwritten by the general insurance companies but eventually transferred to the proposed pool.

GIC Re has the expertise of managing the terrorism pool effectively and the same would be applied for supervising the proposed catastrophic pool. Many global reinsurers like Swiss Re, Munich Re and SCOR have expressed their interest in participating in the pool. The Insurance Regulatory and Development Authority (IRDA) has also underlined the urgent need for separate catastrophe insurance.

IRDA Asked Life Insurers To Submit Data For Last 4 Years

IRDAThe Insurance Regulatory and Development Authority (IRDA) has asked life insurance companies to submit data for the last four years to the Insurance Information Bureau (IIB).

The data should be submitted in the prescribed format from the financial year FY’11 to FY’14 before December 15, 2014.

In addition, insurers would need to submit data for the periods ending September and March of each financial year within a period of one month from the last date of respective month.

IIB will also undertake other analytics work including those sought by the IRDA and also the insurance industry from time to time. IIB could also prepare standardized reports relevant to the industry.

Heavy Discounts On Group Insurance May Go Away

insurance_discountHeavy discounts in group insurance are likely to go away, as premium for group insurance may increase. The Insurance Regulatory and Development Authority (IRDA) has crack-down on general insurance companies offering heavy discounts in the group insurance portfolio to attract and retain corporate clients.

The IRDA, in its guidelines on pricing of risk, has said that industry-wise loss cost must be the starting point and should be considered for pricing a product.

It further said that insurance companies can consider burning cost – an insurance industry calculation of excess losses divided by total subject premium – of a particular risk on its own past acceptances for all available products. It further said that since burning cost for property risks are published by Insurance Information Bureau of India (IIB) are for perils other than natural catastrophe; insurers need to consider adequate pricing for the said risk, if offered.

Applicable on fire, property and group health space in the initial phase, this will be enforced from January 1, 2015.

The burning cost is the estimated cost of claims in the forthcoming insurance period, calculated from previous year’s experience adjusted for changes in the number of insured, the nature of cover and rate of medical inflation. This is a ratio used by insurers to protect themselves from larger claims that exceed premiums paid.

If there is acceptance of burning cost lower than the above mentioned and the board approves it subject to Nat Cat covers or based on experience, the board has to give an approval. Further, this has to be filed as an exception report and IRDA will formulate suitable standards for bringing it out on regular basis.

The insurer’s own experience on procurement and management costs also needs to be considered to a large extent of current levels. The IRDA said due to aggressive competition in the market, risks are not being adequately priced.

IRDA also said that now there will be right pricing. Due to the right pricing, premiums will go up and companies may ask employees to part pay the premium amount.

IRDA is also looking at having higher capital requirements or solvency rates for those insurance companies who quote unviable prices.

IRDA To Tighten Management Expenses

investment-cap-insurance-companies-policymantraThe Insurance Regulatory and Development Authority (IRDA) is tightening rules regarding expenses of management in life insurance companies. This could bring down premiums of participating products, since higher expenses would not be allowed in the participating product segment.

IRDA has asked insurers to opt for the lower of either the expenses as mentioned in file-and-use filing with IRDA or the norms under rule 17D of Insurance Act, 1939.

According to rule 17D, there will be a limitation on expenses of management in the life insurance business. No company is allowed to exceed these expenses in any calendar year. It is calculated as a percentage of the premium (first year and regular premium) and size of the business.

Insurers say that it would bring discipline in expense management. If the limit was breached, the excess amount would come out of the shareholder’s account.

However, on the contrary, some insurers are of the view that it will impact all companies. It will hit the branch and business expansion plans.

On an average, it is capped at 90% of first year premiums and 15% of renewal premiums if the company is in operation for ten years and its in-force business is Rs 10 crores or above. These expenses of management are part of the premium rates of the insurers.

As per Insurance Act, expenses of management means all charges wherever incurred, whether directly or indirectly. In includes commission payments of all kinds and any amount of expenses capitalized, among others. This includes branch expansion expenses.

Life insurance companies, especially in the first five years of their business, have a higher cost head. This is due to expansion in the business, recruiting of staff, and setting up new branches, apart from marketing expenses. Hence, these newer companies might have to maintain a stricter expense ratio.

IRDA’s draft says that insurers would have to compare the limit allowed by insurance rules and the actual expenses, choosing the lower of the two. Further, the expenses for two similar looking products in the participating and non-participating segments cannot be different.

Some participating products tend to have a higher cost than non-participating ones. Hence, if IRDA implements this, charges could come down for customers.

Participating products are those where policyholders are entitled to bonuses from companies and are with participation in profit’s policies. Non-participating policies are where policyholders are not entitled to any share of surplus (profit) during the policy tenure.

IRDA has said that if the expenses are breached up to a stipulated limit, the actuary would have to explain. If the limits are breached even further, both the chief executive and actuary have to explain. At a later stage, if there is a large breach, both would have to visit the IRDA headquarter and give a detailed explanation.

Insurers Seeking Limited Liability On Third Party Claims

third party liabilityGeneral insurers have sought a cap of Rs 10 lakh on liability for third party claims arising from road accidents. Insurers have sought this cap due to high losses arising from third party motor insurance claims. As per estimates, these claims are in excess of Rs 12,000 crores.

At present, there is no limit on third party compensation. And even draft of new motor vehicle act has not defined a limit on the liability for a claim in the case of a road accident.

For vehicle owners who want to buy additional cover, insurers have proposed an option for additional liability limit cover. This additional cover will be for over and above the basic Rs 10 lakh policy.

Insurers feel a limited liability cap will not just help insurers in bringing down huge losses, but also in bringing down third party motor insurance rates.

Cap on liability will ensure that insurers can estimate the losses and look at appropriate pricing of policies. This is currently difficult to ascertain due to the unlimited liability.

Motor insurance policy has two components –third party and own damage. Third party cover is mandatory by law in India. It covers third party damage in terms of property or life, whereas, own damage component, covers damage to one’s own vehicle. The premium for third party cover is decided by the Insurance Regulatory and Development Authority (IRDA).

IRDA Imposed Fine On Sahara Life, Aviva Life

FinesThe Insurance Regulatory and Development Authority (IRDA) has imposed a fine of Rs 25 lakh and Rs 5 lakh on Sahara Life and Aviva Life, respectively for violation of norms.

For FY’14, Sahara Life did not fulfill the social sector obligation. The company, in its ninth year of operation, had covered 16,174 lives as against the mandatory requirement of covering 45,000 lives under social sector obligations in FY’14. The company failed to comply with the social sector obligation for the consecutive second year.

On the other hand, Aviva Life has been violating not only certain regulatory provisions, but also the fundamental principles governing the contract of life insurance while underwriting or accepting the policies. IRDA has imposed fine on the company for not obtaining proper approval of customers on certain issues including extra mortality rate charge.

Low Interest Rates Could Pose Challenges For Insurers: IRDA

Infrastructure Sector Slowdown

The Insurance Regulatory and Development Authority (IRDA) has warned that the low interest rate regime could pose a challenge for insurance companies in giving good returns to policyholders.

As long as interest rates are high, people are happy, when inflation and interest rate drop, the insurance industry will face challenges, said IRDA.

However, country’s largest insurer, Life Insurance Corporation of India (LIC) has said that it will not face any problems in meeting the guaranteed return scheme, while acknowledging that the interest rate cycle is changing.

The yield on the 10-year benchmark guilt with a coupon interest rate of 8.40% and maturing 2024 has fallen 80 basis points from its peak of 9.10% to 8.30% on expectation of rate cut by Reserve Bank of India (RBI) due to ease in inflation.

Banks have, over the last one year, lowered interest rates on deposits and some have reduced interest rates on short term loans even as the RBI has not tinkered with policy rates.

IRDA said that a low interest rate regime is prevailing in overseas markets and that’s causing a lot of challenge to the insurance industry in delivering potential returns to policyholders. Overseas markets saw a continuous low interest rate regime for a long time and rates may remain low for another 5-10 years, so insurance sector is grappling with challenges in delivering good returns to policyholders.

IRDA also said that another challenge for the industry would be moving to a risk based solvency regime and new accounting standards.

Only 5 Products Can Be Filed In A Year

IRDAThe Insurance Regulatory and Development Authority (IRDA) has come out with a new product planner rule. As per this rule, an insurance company can file only five products for approval in a year, riders are not included in it. However, Life Insurance Corporation of India (LIC) might be given a special dispensation by the IRDA.

With an aim to reduce the time taken for product approvals, IRDA has asked life insurers for a product planner before every financial year. The planner would give an indication of the number of products an insurer proposes to file each quarter.

LIC say that the product appetite of company of its size is huge. And hence it needs a special dispensation.

If number of products exceeds five, the insurer should furnish supporting market research, product wise persistency for the 13th month, 25th month and 37th month as on the April 30 of the previous year.

Beginning April 2014, insurers have been advised to file this planner at least 45 days before the beginning of the next financial year (before February 15 of every year).

The new product guidelines for traditional products were implemented in January 2014. The new rules made changes in the product structures, commissions and surrender charges; it also increased transparency in product return disclosures. As a result, all insurers were required to re-file all products with the regulator to comply with the new norms.

On an average, insurers file 8-10 products including riders each year, which are in addition to their existing portfolio. Now, when it has been capped at five, insurers are worried that the choice given to a customer might be limited because insurers would not able to file more than one product in each category (pension, health, group, individual and others).

Insurers say that as they had to re-file entire portfolio, IRDA should have either relaxed the norms for at least this year or increased the cap to ten.

Regulators Keeping Close Watch On ULIPs Reversal

gurantee-ulipsAfter taking a big hit in 2008 meltdown, Unit-Linked Insurance Plans (ULIPs) are back in demand. To ensure that investors are not taken for ride with such schemes, regulators are keeping a close watch on reversal of trends.

Before 2008 meltdown, ULIPs were very popular. But big fall in equity markets led to huge losses for investors as well as for fund managers.

As markets gain momentum, investors are again being lured into investing in ULIPs, but they may face the heat in case the markets fall.

Due to this change in trend, insurers selling purely traditional insurance products including Life Insurance Corporation of India (LIC) have registered a decline in sales. On the contrary, ULIPs have been driving growth for some players, including some large players and those promoted or supported by banks.

Insurers have expressed concern over this reversal of trend. They say that it will hurt the industry. Unless the policies are bought with a long term horizon, when the cycle turns, there will be erosion in asset under management (AUM) and fall in persistency.

However, those with ULIPs accounting for a significant part of their portfolios say that these concerns are mis-placed and the industry has already learnt its lesson from 2008 meltdown.

LIC To Come Up With ULIP Soon

LICWith booming equity markets, insurance behemoth, Life Insurance Corporation of India (LIC) is working on launching a Unit-Linked Insurance Plan (ULIP) before the end of the year.

LIC so far has only traditional life insurance products in its product basket. Currently, LIC has 16 individual products and eight group products in its portfolio. LIC said that it cannot live on five products a year. The appetite of a company large as it is huge and therefore it needs a special dispensation.

After the Insurance Regulatory and Development Authority (IRDA) revamped ULIPs in 2010, bringing down charges and agent commissions, life insurance industry shifted to selling traditional policies.

IRDA then revamped product guidelines for traditional life insurance products in February 2013 and all products had to comply with the regulations from January 2014. IRDA asked insurers to file not more than five products per company in a year to ensure faster product approvals.

Top private life insurers like ICICI Prudential, HDFC Life, Max Life and couple of smaller players with significant portion of ULIPs in their product portfolio have been able to register double digit growth in individual new business premium during April-August 2014. On the contrary due to absence of ULIP, LIC witnessed negative growth.