The Insurance Regulatory and Development Authority (Irda) has decided to reduce the solvency margins on term products in an attempt to make term insurance products cheaper and popular.
Since the term insurance policies provide pure life cover with no maturity/survival benefits, they haven't gained popularity with the customers.
Insurers are currently required to maintain a solvency margin of 150 per cent. Solvency margin requirements are the prudential norms governing the capital requirements of insurance companies.
They are equivalent to the capital adequacy ratios prevalent in the banking industry. The move on margin reduction will ease the capital requirements for both individual and group term policies by one third. Insurers are likely to pass on the benefit to the customers.
"With Irda reducing the solvency margin on term products, the premium on these policies is likely to come down by 5 to 10 per cent," said G N Agarwal, the executive director and actuary of Life Insurance Corporation of India.
For example, if a person aged 35 years buys a term insurance policy of Rs 1 lakh, he would have to pay around Rs 250 as the annual premium. The insurer had to provide a solvency capital of Rs 450. With Irda reducing the solvency margin to one-third, the amount will now come down to Rs 300.
"The proposed reduction in the solvency margin for pure term products would provide a significant relief to life insurers. It will motivate insurers to launch pure-term products for a sufficiently long period and at affordable rates, and this would ultimately result in increased insurance coverage," said R Kanan, the member actuary of Irda.
