In what may translate into lower premium rates for traditional pension and annuity policyholders, the Insurance Regulatory Development Authority today said the capital requirement for these segments would be lowered from the end of this month.

Accordingly, it announced changes to the solvency margin, which is the proportion of capital that life insurance companies have to invest for every additional rupee of business underwritten by them. A lower solvency requirement will mean that insurance companies have to infuse or set aside less capital and can pass on the benefit to policyholders in the form of lower premium rates. The changes will not be applicable to unit-linked plans, the regulator has said.

"In the light of the recent developments in financial markets there is an urgent need to emphasise the efficient use of capital and provide insurance products at affordable premium rates while maintaining the continued safety of the insurance companies so that they remain solvent at all points of time," Irda said in a circular. It said pure term products provided simple life cover and companies could design products which could reach various segments of the population so as to meet their insurance requirements.

While most companies said the move would benefit policyholders, ICICI [Get Quote] Prudential Life Insurance said only a small part of the market would benefit. "This is a welcome step though this will have an impact only in the conventional (products) market. The share of the conventional market is small and as annuity is a savings business, it will not be affected by (this) slight reduction in premium rates" said ICICI Prudential Chief Actuary Avijit Chatterji.

"It will bring down the capital requirement for these products and will benefit the overall industry. The reduction in the solvency margin may result in bringing down the premium rates as the cost of insurance is brought down," said an SBI [Get Quote] Life executive. Insurers were yet to tap the potential market for annuities since the demand was high and there was tremendous need for more innovations in the market, he added.

"The move will especially encourage non-linked businesses as their cost of capital will go down and future products will see an impact. This is driving towards bringing non-linked products on a par with the linked ones," said Max New York Life Chief Marketing Officer Debashish Sarkar.