A cut in interest rates looms large for businesses big and small, drawing mixed reactions from businesses of all stripes. Insurance companies were among the first to voice dismay and concern over the news as they largely depend on their bank deposit returns as a lifeline and be able to stay afloat.
Insurers claim that non-life insurance, which accounts for 90% of their policies, is simply not profitable. In 2013 alone, insurance companies incurred 11.64 trillion rials ($400 million) in losses for third party auto insurance claims—the most common policy in the country according to the Central Insurance of Iran. This leaves them with little option but to park life insurance premiums in banks as a buffer against less lucrative and loss-making ventures.
Since the legal rate of return ceiling for life insurance policies should not exceed 18% and considering the 20% deposit rate offered by banks for now, it is obvious that a likely two percentage point rate cut would be a blow to the working ties between banks and insurers. The situation looks more ominous for insurance firms affiliated to banks as they are more dependent on their cash in banks.
Tug-of-War
Insurers’ fears about lower deposit rates seem premature given the opportunity to attract more life insurance buyers in the absence of high deposit rates. However, due to cultural reasons and lack of awareness, life insurance will struggle to outpace banks — the traditionally favored venue for investment by Iranians.
Currently, life insurance accounts for hardly 10% of all policies but even this meager share is considered an investment bonanza for insurance companies because they can stay in banks for long years.
While law requires insurance firms keep 40% of their initial capital in banks, figures show at least 60% of their earnings are locked in bank accounts.
Now another rate cut would apparently be a rude awakening for insurance companies, who, instead of fostering a culture of insurance among the population, turned to banks for easy and risk-free profit.
Alternative Earnings
What insurers need to understand is that unlike other industries, which are subject to stringent investment rules, they have a wider sphere to look forward to.
Article 60 of Insurance Law offers them a couple of options to diversify their revenues through the equity and real estate market, each at 40% and 25% of their assets respectively.
The Supreme Council of Insurance also allows insurers to offer loans to life insurance policyholders through their mathematical reserves amount that a life insurance company must set aside and capitalize in order to meet its commitments to the insured. Such loans should be promoted due to their easy terms and collateral ability by the insurance premiums.
Promotion
Insurance firms need to broaden their scope, first and foremost by launching awareness campaigns that introduce the benefits of life insurance and thus prevent scams that have tarnished the industry’s reputation in the past.
For now, insurance firms’ incentives focus on agents by rewarding them 75% of the life insurance policy premium in the first year of the contract and this has contributed to the stereotyping of insurance agents as dishonest.
The insurance industry should rise to the challenge and by promoting transparency and diversifying sources of revenue prepare itself for a post-sanctions era where foreign insurers would be strong rivals
