Amid the ongoing controversy surrounding net asset value-guaranteed products, the Insurance Regulatory and Development Authority is standardising the method of calculating NAV under the unit-linked plans of life insurance companies.
According to one circular issued by Irda, the life insurers will have to follow a single uniform pricing methodology for calculating NAV and update it every day. Insurers followed different pricing methodologies, based on appropriation (units purchased) and expropriation (units sold), where they charged an additional amount that inflated NAV. The current guidelines mandate insurers to remove the appropriation and expropriation.
Ideally, if a person invests Rs 1,100 at NAV of Rs 10, he should get 110 units of Rs 10 each. However, in some cases NAV was inflated to, say, Rs 11.
To balance this, the insurers reduced the number of units to 100. Under the new system, a policyholder will get 110 units and there will be no change in NAV.
"It's a simpler method of calculation and removes the additional load on policy holders, which means they will get higher number of units," an actuary with a private life insurance company said.
The life insurance companies have started implementing the new process from October 1. The guidelines assume importance given Irda's ongoing scrutiny of the highest NAV-guaranteed products, which currently account 20 per cent of Ulip sales.
Controversy surfaced last month, when Irda informally sounded out its discomfort about the highest NAV-guaranteed products, on the grounds of perceived "systemic risk" associated with the way the funds were managed.
Such products are said to give more emphasis on debt instruments and run the risk of heavy sell-off in equities in case of a stock market fall.
The insurance regulator has also introduced more stringent guidelines for the fund approval process under the unit-linked plans, which is aimed at ensuring higher disclosure and transparency from insurance companies.
Insurers will now have to create a separate fund, segregated fund, and outline a detailed investment policy under each fund, subject to which the products will be approved by Irda.
In other words, they will have to maintain a separate fund for each Ulip and the fund will be exclusively used to invest according to the requirement of the product.
Also, insurers will have to assign a separate bank account for each segregated fund, along with a unique code associated with it, so that each fund can be identified.
Earlier, insurers were allowed to have two-three generic funds like Life Fund, Ulip Fund and Equity Fund. Investments pertaining to all policies and schemes were channelised from these set of funds only.
"The appointed actuary shall, as a part of the product filing, confirm that the investment policy fully complies with Irda regulations. Every purchase, sale of investment, income of investment shall be identified with reference to the particular segregated fund and accounted for," Irda said in the circular.
"This will also allow the regulator to keep a close vigil on the nature of investment under particular schemes," an Irda official said.
Similarly, the chief actuary and the chief investment officer will have to certify that the proposed "new scheme or fund" offered by the insurer is "not a minor modification" of an existing fund.
"There are a number of instances where insurers have launched relatively same schemes with slight modifications under new names. This confuses the customer and, hence, should not be encouraged," the Irda official said.
