The Institute of Actuaries of India will be making a last ditch effort to pressure the Insurance Regulator and Development Authority (Irda) to do away with the requirement of guaranteed returns on pension plans of insurance companies.

GN Agarwal, president of Institute of Actuaries of India, told Financial Chronicle that the institute is preparing a report on the issue that would argue against the logic of having guaranteed pension products. The report would be presented to the insurance regulator for discussion.

“We are against guaranteeing returns on pension products. The actuarial society is readying a report which we will place before Irda shortly,” Agarwal said.

Agarwal, who is also the appointed actuary of Future Generali Life Insurance, said guaranteeing returns will force insurers to alter the investment patterns to meet the guarantee requirements at the expense of higher returns. “If companies have to guarantee returns then they will also have to invest mostly in fixed income securities. In past two years, pension products have been providing 25-30 per cent returns. That will not be possible after the new guidelines come into force,” he says.

The actuarial institute is a crucial arm of the life insurance industry that provides critical inputs for calculating premium based on intricate mortality and life expectancy statistics.

Agarwal also pointed out that the investment patterns are prescribed for insurance companies for all products. “One cannot provide guarantees if investment patterns are prescribed,” he said.

Pension products of insurers are mostly Ulips that have a heavy bias of investment in equities, with the promise of higher reward based on higher risk. In 2009-10, premium from pension products was nearly Rs 65,000 crore out of a total new premium of Rs 261,025 crore.

Irda has said insurers will have to provide guaranteed returns of 4.5 per cent on gross premiums until March 11, 2011. Subsequently, returns will be linked to the Reserve Bank of India’s reverse repo rate (the rate at which banks deposit their surplus funds with the central bank). Investors will have to be given 50 basis points more than the average reverse repo rate at the end of each quarter. The minimum returns will be in the range of 3-6 per cent. The new norms come into effect from September 1.

SB Mathur, secretary general of Life Insurance council, the body looking after the interest of the industry, said unless there is a change of heart of the regulator, the companies would not have any option but to follow the norms.

“We have already pointed out to the regulator on behalf of life insurers that it (guaranteeing returns) is not in the interest of the industry. Unless Irda has a rethink we will have no option but to follow the guidelines,” Mathur said.

Irda has indicated that it is not looking at reviewing the norms immediately.

Prithvi Haldea, CMD of Rime Database, felt that guaranteeing returns is not the appropriate thing for equity-linked products. “If you are looking for guaranteed returns, you should consider fixed income securities such as post office saving deposits, bank fixed deposits and public provident fund. If you want higher returns, you will have to take higher risks.”

sarbajeetsen

@mydigitalfc.com