The Hindu Business Line : Life insurers may have to make provisioning for lapsed policies

The Insurance Regulatory and Development Authority (IRDA) is contemplating a system similar to provisioning for non-performing assets (NPAs) in banks for protecting the interests of policyholders in life insurance.

“Policy lapsation is very critical for a life insurer. As income depends on premium, it is important to keep a tab on continuity of premium payments,” Mr J. Hari Narayan, Chairman, IRDA, told Business Line.

The persistence ratio in life insurance industry is calculated on the lapsed policies. “In banks, there are clear norms for NPAs. My view is that if a bunch of premiums are due for a fixed period of time, it is like NPAs in banks,” the Chairman said.

The calculation of NPA-like policies in the insurance sector is “very complex’ as different companies have different grace periods for payment of premium after due dates, he observed.

The situation in insurance differs from a bank’s NPA in the sense that an insurance company would not lose money as a bank does in case of a policy lapse. “But the income levels and subsequently the solvency ratios may be adversely impacted,” Mr Hari Narayan said.

The regulator had already sought information from the insurers on the premium-awaited for a quarter or more period as a first step in the direction.

“According to our circular, the insurers are supposed to send information from October 15, 2009, onwards. We are in the process of receiving the data,” he added.

When asked for a definitive answer as to whether the IRDA was going to introduce the provisioning norm, he said: “Definitely it helps. That’s why we asked the information on premium-awaited polices. But we need to study the entire data,” he said.

Even if the situation is not alarming now, in view of the long-term and to tackle the eventuality of economic slowdown in the days to come, provisioning would be advisable, he added.