ULIPs to get cheaper as IRDA eases norms for insurers

The Insurance Regulatory and Development Authority of India (IRDA) has reduced the solvency margin for Unit Linked Insurance Plans (ULIP) by 20 per cent, bringing them on par with the norms for traditional products.

It has also cut the solvency margin for guaranteed return products by 10 per cent.

With the reduction in the solvency margins the insurer has more available capital for investments and it is likely that Unit-linked Insurance Products (ULIPs) will be cheaper by 10-15 per cent

Simply put, solvency margins are the excess of assets over liabilities that an insurance company has to maintain by law as a safety margin.
 
The move will help insurers save around Rs1,000 - Rs1,200 crore in capital requirements. 
 
When IRDA reduced the solvency margin of pure term products last year, policy rates came down by 10 to 15 per cent over a six-month period. On 18 December 2008, the insurance regulator had announced that the solvency margins for traditional insurance and pension funds would be reduced by the beginning of January 2009.

The regulator has also relaxed debt and equity investment norm limits for insurers.

Insurance firms can now invest up to 20 per cent of their funds in infrastructure and housing sector with an additional 5 per cent debt investment if it is investing in one company.

IRDA has adopted the solvency norms set International Association of Insurance Supervisors (IAIS) that represents insurance regulators and supervisors worldwide.

Some of the important features of these norms are:

  • Regulatory capital requirements should be established at a level such that the amount of capital an insurer is required to hold should be sufficient to ensure that, in adversity, an insurer's obligations to policyholders will continue to be met as they fall due.
  • A total balance sheet approach should be used to recognise the interdependence between assets, liabilities, regulatory capital requirements and capital resources and to ensure that risks are appropriately recognised.
  • The solvency regime should include a range of solvency control levels that trigger different degrees of intervention by the supervisor in a timely manner. 
  • The solvency regime should allow a range of approaches for determining regulatory capital requirements, including standardised approaches and, subject to approval of the supervisor, internal models
  • The solvency regime should be explicit regarding the risks addressed in technical provisions and in regulatory capital requirements. 
  • The supervisor should set out appropriate target criteria (such as the confidence level, risk measure and time horizon) for the calculation of regulatory capital requirements, which should underlie the calibration of a standardised approach.
  • The solvency regime should be open and transparent about regulatory capital requirements