The Insurance Regulatory and Development Authority (Irda) has stuck to its guns on returns from unit-linked pension plans. Despite several representations from the industry, the regulator has decided that insurers will have to provide guaranteed returns of 4.5 per cent on gross premiums until March 11, 2011.
After that, returns will be linked to the reverse repo rate or the rate at which banks deposit their surplus funds with the Reserve Bank of India for a day. Investors will get half a percentage point more than the average reverse repo rate at the end of each quarter. In a note to insurance companies, the regulator said returns will be in the range of 3 per cent to 6 per cent.
This move will result in increased returns for investors after the new rules come into effect from September 1.
On group pension plans, the guaranteed return will be applicable to individual contributions made to group pension products, if the contract has been in force for five years continuously. After failing to reduce the rate of return earlier, insurers had in a meeting held a fortnight back with the regulator, requested that the 4.5 per cent should be paid on the net premium. But Irda rejected this request.
Insurers are predictably unhappy. "Managing this return on gross premium will make the product costlier by 2 per cent. We wanted return to be subjected to net premium," said an actuary of a large insurance company.
In another significant clarification to its June 28 circular, Irda has asked insurance companies to come to a formula while charging the premium allocation and premium administration charges during the first five years of the policy contract. "The charges could change from year-to-year in a reasonably, orderly manner so that the difference between the maximum and the minimum charges shall not vary by more than 1.5 times," Irda said. For instance, if the charge in the fifth year is say, 10 per cent, the first year's charge cannot exceed 15 per cent.
In another clarification, Irda said the top-up premiums on unit-linked insurance plans (Ulips) will not be based on the entry age, but on the age at which the top-up premium is paid. "The top-up premium will also have a lock-in period of five years. Policyholders will not be allowed to top-up the premium during the last five years of the term. The contractual premium payable by the policyholder cannot be altered during the policy term," Irda has said.
For example, if a person wants to top-up his premium under the present norms, his premium will go into the investible corpus. Under the revised norms, he will not be allowed to pay a top-up premium in the initial five years. After that, when he pays a top-up premium on the existing policy, he will be provided a life cover based on his existing age, not the entry age. This implies that the mortality rate would come into play and the policyholder will have to pay a higher amount.
While loans have been allowed against policies, insurers can now charge interest.
