The solvency margins for unit-linked insurance plans have been eased by IRDA and it is being seen as a move that will help the life insurance industry to save several hundred crores in capital requirement. Solvency margin is the excess of assets over liabilities that an insurer maintains as a prudential measure in the interest of policyholders.

R Kannan, member, IRDA reported, “The move will help enhance Ulip sales, especially pension and health products. It will also lower the cost structure in ULIPs. Life insurers selling ULIPs will have a level playing field vis a vis companies selling traditional products whose solvency margins were lowered recently.”

It comes as good news for the insurers, as with lower solvency capital, they will also have more money to underwrite new business and the pressure on bringing in extra capital would also be eased.

The impact would vary depending on the product composition for a life insurer. To illustrate an example, for products with a guaranteed return, the capital requirement has been eased by 7%, whereas for products where there is no guarantee, the reduction is 20%. The overall capital requirement towards solvency margin would be lesser by 18%; given the industry’s product composition.

The new norms will free up close to Rs 150 crore of capital for the largest private life insurer, ICICI Prudential. Shikha Sharma, managing director, ICICI Prudential, said, “This has been a good new year gift from the regulator.”

It is being considered by the insurers that the new norms will ease capital requirements by 10-15%.

Gaurang Shah, MD, Kotak Mahindra Life Insurance said, “This reduction will benefit not only existing business but also future business.”

“Competition has already been a major factor in driving down prices,” he added when asked about the possibility of a reduction in price.