Investing in insurance companies

Every life insurer is required to maintain a Required Solvency Margin as per Section 64VA of the Insurance Act 1938. As prescribed by the IRDAI, Required Solvency Margin is the amount by which an insurance company's capital exceeds its projected liabilities; effectively a measure of its financial health.

The IRDAI (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000 describes in detail the method of computation of the Required Solvency Margin. In case of Life Insurers, the Required Solvency Margin is the higher of an amount of Rs.50 crore (Rs. 100 crore in case of Re-insurers) or a sum which is based on a formula given in the Act / Regulation. IRDAI has set a working Solvency Margin Ratio (Ratio of Actual Solvency Margin to the Required Solvency Margin) of 1.5 for all insurers. During 2007-08, IRDAI has introduced the quarterly reporting of Solvency Status for all the Insurers. Accordingly, all the insurers are now required to file their Solvency Status as on June 30, September 30, December 31 and March 31.

One of the important factors that influence insurance penetration is the capital requirement under solvency margin. The pure term products provide simple life cover and it is believed that companies could design products, which could reach various segments of the population in meeting their insurance needs thereby enhancing insurance penetration. In line with this objective, the Authority has decided to allow the life insurers to reduce the capital requirement in the case of pure term products without changing the factor loadings in the case of the remaining products. It is expected that the lower level of solvency for pure term products would provide significant relief to the life insurers both under individual products and under group products. This will also help the insurers in launching more pure term products for sufficiently longer periods and at affordable rates.

As linked products are assuming significant share in the total premium collected by the insurance companies, and as the investors in these products are bearing the investment risk, it is necessary that more information is disseminated to the prospects / policyholder so that he / she can take informed decisions. In this regard, the Authority has asked the life insurers to be more transparent in the policy wordings of the ULIP products and mandated the insurers to submit to the Authority details on guaranteed benefits and non-guaranteed benefits for each policy year. A format has also been introduced for this purpose and the Authority instructed that when the prospects/policyholder propose to take a ULIP policy he/she should sign on both the formats in the proposal form itself.

This will benefit the policyholders in knowing about the terms/benefits of the policy and also reduce mis-selling by the agents in quoting abnormal investment returns.