eServe Newsletter February 2012

Insurance regulator rejects new pension product filings

19-Jan-2012 - Source : Business Standard - By Niladri Bhattacharya,

The recent controversy surrounding pension plans has taken another turn, with the Insurance Regulatory and Development Authority (Irda) rejecting all pension products filed under the new guidelines issued in November.

The regulator has asked insurers to refile their products, as the filings "did not conform" to the issued guidelines. Since November, when the new guidelines came into effect, at least 23 pension products were filed by different insurers. All leading life insurance companies which Business Standard contacted confirmed the development.

According to sources in insurance companies, the regulator was not happy with the surrender value norm associated with the filed products, according to which insurers offered either 50 per cent of the fund value or accumulated premiums (whichever was higher). Accordingly, Irda has asked insurers to refile the products for which the surrender value should be based on the fund value or the premiums accumulated at a guaranteed rate, whichever was higher.

The officials claimed offering a guaranteed surrender value at the prescribed rate would restrict investments options in short-term securities, which would make the product unattractive. "This would force insurance companies to invest in short-term cash-type instruments, which is not ideal as an asset allocation strategy for managing funds under a pension product. This would not be beneficial for customers, given the long-term nature of these products," said an actuary with a private life insurance company.

The Life Insurance Council, the representative body for life insurance companies, would take up the matter with the regulator later this week.

"Whenever a person buys a pension plan, it means he enters into a long-term contract with the insurer. Accordingly, the company invests in long-term securities to guarantee a rate of return. Now, if somebody wants to come out early and the insurer is required to pay the same rate of return, it would restrict investments. Hence, there must be some penalty for premature withdrawal or surrender," said an industry expert.

The controversy surrounding pension plans began in September 2010, when Irda came out with new regulations on such products, mandating a minimum annual guarantee of 4.5 per cent. As a result, sales of pension plans plummeted to Rs 600 crore during the first six month of the current financial year, compared with Rs 17,000 crore in the same period a year ago. In terms of the number of policies issued, the share of pension plans dropped to a mere 0.36 per cent in the first six months of the current financial year, compared with 16 per cent in the year-ago period.

In the revised pension guidelines issued in November, Irda withdrew the 4.5 per cent guaranteed returns clause, but maintained there should be some guarantee element with the plan, either by way of offering positive returns on premiums paid during the period of the contract, or through assured maturity benefits.

Starved of funds, government asks LIC to help
capitalise small public sector banks

06-Feb-2012 - Source : Economic Times

Sandwiched between an urgent need for capital and a financially wrecked owner, small state-run banks will knock on the doors of Life Insurance Corporation as they prepare to sell new shares to raise funds, said three people familiar with the plans.

Dena Bank and Bangalore-based Syndicate Bank may be the first among nearly a dozen small public sector banks which will sell shares in the next few months to raise a few thousand crores, they said.

LIC, the biggest institutional investor in the country with annual equity investments of about 40,000 crore, will walk along with the government in capitalising banks that are restructuring debt even as they are saddled with rising bad loans.

The government, which is set to breach the fiscal deficit target of 4.6% of the gross domestic product by a percentage point, has committed to pump 18,000 crore into large lenders such as State Bank of India, Punjab National Bank and Central Bank of India.

"There is a chance that LIC may step in to support the government," said a bank executive who hasn't got the government's commitment on capital. "The pricing will be based on a Sebi formula and will leave no room for speculation."

A government starved of resources and a weak equity market, despite a 14% rise this year, is hampering fund-raising plans of public sector banks. With the government unwilling to let its stake fall, it is leaning on LIC to buy new shares, which would give it the comfort that it indirectly retains ownership in the banks.

The Dena Bank board will meet on Monday to consider a share sale to insurance companies and government-sponsored mutual funds.

Syndicate Bank, in which LIC holds more than 10%, will meet on Saturday to consider sale of shares.

Budget 2012 likely to increase income tax exemption limit
to Rs 2 lakh

07-Feb-2012, Source : PTI

The government is likely to provide some relief to individual income tax payers in the forthcoming Budget by raising the exemption limit to Rs 2 lakh, as provided in the Direct Taxes Code (DTC), and hiking the slabs for different tax brackets.

The possibility of lowering the tax rates, however, is remote in view of the fiscal constraints being faced by the government, sources said, adding that the government will take on board some of the key recommendations of the DTC.

DTC, which is currently being scrutinised by the Parliamentary Standing Committee, has suggested that the income tax exemption limit be hiked to Rs 2 lakh from Rs 1.8 lakh at present. It also proposes that the highest personal income tax rate of 30 per cent should apply to annual income above Rs 10 lakh, as against Rs 8 lakh.

Finance Minister Pranab Mukherjee will be unveiling the Budget proposals for 2012-13 sometime around mid-March. The industry too is demanding that in view of high inflation, the income tax slab should be increased although the government may retain the existing tax rates.

CII Director General Chandrajit Banerjee suggested that basic exemption limit should be increased from Rs 1.8 lakh to Rs 2.5 lakh for individuals. "We have suggested that the income in the range of Rs 2.5 lakh to Rs 6 lakh should be taxed at the rate of 10 per cent, whereas that in the next slab up to Rs 10 lakh can be taxed at the rate of 20 per cent. Above Rs 10 lakh, it should be taxed at 30 per cent," Banerjee said.

Ficci Secretary General Rajiv Kumar said the government should incentivise people to come into tax bracket.

"Given the revenue constraints, the income tax rates for individuals may not be reduced. It is, however, imperative that the peak rate of 30 per cent for such assesses be made applicable over an income of Rs 10 lakh, against Rs 8 lakh at present," Kumar said.

Assocham President Dilip Modi said the Budget should provide basic exemption limit of Rs 2 lakh and the tax rate of 10 per cent should apply to persons having income above Rs 2 lakh and up to Rs 5 lakh. Calling for raising the tax exemption limit, PHD Chamber Secretary General Sushmita Shekhar argued that it is necessary to increase disposable income and boost demand in the economy.

"India is a consumption led economy. Role of private sector consumption in boosting the overall economic growth is immense," she said.

LIC to buy 5% stake in Dena Bank

07-Feb-2012, Source : India Infoline

Dena Bank Ltd.'s Board has approved a preferential allotment of shares to Life Insurance Corp. (LIC), a top official was quoted as saying on Monday.

LIC will hold a 5% stake in Dena Bank post allotment, Sudhir Kumar Jain, general manager treasury, Dena Bank said.

IRDA clashes with industry over single premium policies

09-Feb-2012, Source : CNBC-TV18

There's a battle brewing between insurance regulator IRDA and life insurance companies, and this one is over single premium policies, reports CNBC-TV18's Mitra Joshi and Payaswini Upadhyay.

Insurance regulator IRDA is going slow when it comes to approving single premium policies - policies where the policy holder makes a one-time premium payment. It believes these policies do not help the industry in the long term. On the other hand, industry body Life Council says these bring more people into the life insurance net.

"There are strong logical reasons for people to be taking single premium policies. For example, there are people who are in a job which gives seasonal income or periodical income once in two-three years and these people will like to take single premium policies," explained SB Mathur, secretary general of Life Insurance Council.

The truth is that single premium policies have found quite a few takers. In 2011, individual single premium policies contributed 16% of total premium collected by the industry while group single premium accounted for 30%. That's a whopping Rs 33,200 crore.

But IRDA argues that these policies see no customer servicing once the premium is paid and wants insurance companies to launch schemes that require regular premium payments over at least five years.

The industry, meanwhile, says these products are an agent's favourite, and should not be done away with. According to senior vice president of strategy and product at HDFC Life, it is easier to tell a customer to pay once and forget about it. "If single premium is done away with, what you will find is an industry which is finding it difficult for agents and distributors to be able to generate volumes. You will find another avenue blocked in terms of convenience of selling," he said.

It all boils down to this - IRDA wants greater investor protection but the industry sees this as a threat to its distributor and agent workforce.