After the impressive growth in 2008, the Indian insurance sector is expected to fall in 2009 as the global recession is likely to increase uncertainty among the ULIP investors.
As per the Insurance Regulatory and Development Authority (IRDA), the dramatic growth observed in the Indian insurance market in 2008 may decline marginally in 2009 in the wake of global economic downturn. However, there is no need to fret about the solvency of life insurance companies in India.
According to IRDA, the market growth is expected to fall from 24% to 17% in 2009. The figures indicate that till October 2008, the market registered new business of worth Rs 39,000 Crore. Also, more than 80% of the business in the Indian insurance sector is driven by Unit Linked Insurance Products (ULIPs).
The slow growth in the Indian insurance market is basically due to the rising uncertainty among ULIP investors. ULIPs are a blend of a life insurance policy and an investment plan. In recent times, the popularity of ULIPs has increased dramatically in India. But ULIPs have lost their shine among the investors because of the volatility in the market.
Moreover, the profitability and growth of the insurance companies are likely to get dampened in coming times.
However, as IRDA has introduced a reduction of 20 basis points in the required solvency margin for the linked business plans, ULIPs are expected to get 10-15% cheaper. The motive behind reducing the ULIPs solvency margin is to make them competitive with traditional products. Still, considering the present macroeconomic environment and risk parameters, there is a need for optimum capital utilization.
According to a Research Analyst at RNCOS, “Cheaper ULIPs will prove to be a boon for customers. As the insurers are anticipated to pass on benefits of reduced cost to customers, the popularity of these instruments will rise. General parameters to examine the financial growth of insurance companies consist of lapse rate, solvency, variable expenses, etc. Moreover, these efforts are expected to give desirable results in near future. A lower solvency capital indicates that the insurers will have higher amount of money to finance new businesses. This will also reduce the pressure on drawing in surplus capital.”
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