Unit-linked insurance schemes are life insurance

It is a well-known fact that insurance companies rake in huge income from investments. And now, to prevent private life insurers from engaging in mutual fund operations under the guise of life insurance, the unit-linked life insurance business is to be brought under the definition of life insurance business, in letter and spirit.

This is one of the main recommendations of the Reserve Bank of India's (RBI) advisory group on insurance regulation. The group, headed by Mr. R. Ramakrishnan, consulting actuary and a member of the Malhotra Committee on Insurance Reforms, recently submitted its final report to the RBI. It may be recalled that the committee had given its first report some time ago.

The country's central bank had set up this group to chalk out ways to align India's insurance regulations/practices with those of international standards, to periodically review the status on progress and to make available reports to all concerned in public and private sectors.

While in India there are virtually no linked life insurance dealings, at the international level this is a fully developed business. Some life insurers engage in pure mutual fund operations by incorporating a token life cover in their schemes, the report adds.

As it is unclear whether the Insurance Regulatory and Development Authority (IRDA) or the Securities and Exchange Board of India (Sebi) would be regulating the unit-linked insurance schemes, the committee calls for a close co-ordination between the two regulatory bodies to have an efficient unit-linked insurance business.

While the Indian standard relating to the estimation of loss reserve is at par with the international norms, the advisory group observes some marginal gaps in calculation of unearned premium reserve in respect of the general insurance sector. Unearned premium is the amount of premium estimated to cover the risk during the balance policy period falling after the balance sheet date.

The advisory group is of the view that the European directives relating to unearned premium reserve are scientific in nature as they ensure taking into account the distribution of business during the year. As per this norm, the unearned premium reserve is shown for each class of business according to the month of policy issue in the case of gross premiums and according to amounts paid for reinsurance in case of net premiums.

As per IRDA regulations, unearned premium reserve would be 50 per cent of the net (of reinsurance) premium for all classes of business, except marine hull business for which it is 100 per cent. The RBI committee notes that the Indian system does not take into account the distribution of business during the year and is more "empirical" in nature.

Similarly, the group cites the absence of appropriate Indian standards in setting up of a catastrophe reserve that is at par with international norms. A catastrophe could cause serious financial strain on non-life insurers unless adequate reserves are built systematically over a period of time.

IRDA has to spell out the overall maximum and maximum annual transfers to such a reserve. Further, the utilisation of this reserve in case of adverse financial results of the insurer caused by a catastrophe (and not supported by reinsurance recovery) has not, however, been clearly indicated, states the committee.

According to the advisory group, IRDA could also recommend allowing such additions to the reserve of pre-tax profits, as is being allowed in many countries and not out of post-tax profits as stated by the regulatory body.

The group also states that the recommendations of the Mukherji Committee report on solvency margins and methods of valuation of assets and liabilities of insurance companies in India may be referred to in this connection.

In respect of investment norms prescribed under the Insurance Act, 1938, and the IRDA (Investment) Regulations, 2000, the advisory group opines that the norms are fairly reasonable viewed in the context of the country's investment climate and as insurers' duty towards the society. On the other hand, the group feels that the solvency margin requirements are bit stringent.

Rating the Indian regulations relating to taxation of life insurers to be "simplest and at par with international norms", the group notes that the same cannot be said in respect of the general insurance sector where the Indian standard is "marginally below" that of the international one.