Profitability of life insurers is likely to be impacted as the insurance regulator plans to crack down on participating products, which constitute the majority of their present sales.

Participating products are essentially non-guaranteed products, where the insured gets a ‘profit or loss’ that the insurer generates by investing the premium collected.

According to industry experts, participating products currently constitute about 70 per cent of industry sales. While the Insurance Regulatory and Development Authority of India (IRDAI), over the last two years, had come out with a series of regulations to streamline other product categories, such as unit-linked insurance products (ULIPs), most life insurers had shifted to selling participating products due to better margins.

Asked about the regulatory action on participating products, Nilesh Sathe, Member-Life of IRDAI, said the regulator will be shortly coming out with final guidelines on expenses limit to take care of participating products.

Expense limit

Under the proposed guidelines, if insurers cross the expense limits in these products, shareholders will have to bear the hit and pump in additional capital.

Previously, in participating products, insurers used to share with the policyholder not just the profitability but also the expenses incurred, but after regulations pertaining to expenses are implemented by IRDAI, the life insurer will be unable to charge the policyholder beyond the prescribed expense limit, which will then have to be borne by the shareholder’s fund.

“We need to ensure that policyholders get reasonable returns in these products. If there is a lot of loading of expenses then the returns will be impacted,” Sathe added.

According to Sanket Kawatkar, Principal and Consulting Actuary at Milliman, an actuarial consulting firm, “The crackdown on participating products will have a big impact, especially on those insurers that have a significant participating business and have a significant level of expenses.

“Also, profit generation of the participating business will be impacted because the shareholder will have to bear the entire excess expense burden.”

Kawatkar also added that many insurers will also have to look at bringing down their expenses, which will have a spiralling effect on new business premium volumes.

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