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Life Insurance ROR Cut Hurts Industry’s Future

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Life Insurance ROR Cut Hurts Industry’s FutureLife Insurance ROR Cut Hurts Industry’s Future

A recent decision by the Supreme Council of the Insurance Industry to lower the rate of return for term life insurance policies and shorten the minimum duration of their contracts has jeopardized the insurance industry’s plans to increase the share of life insurances in their portfolio.

Based on the ruling last week by the council, insurers will have to offer approximately 16% returns on two-year term life insurance policy (cash-value life insurance). The rate for four-year term policies is set at 16% for the first two years and 13% for the rest of the period, while for periods exceeding four years, insurers are allowed to offer only 10% returns. The ruling will come into effect from August 20.

Currently the legal ROR ceiling for five-year term life insurance policies is 18%. The rate for policies spanning 5-10 years is 18% for the first five years and 15% for the rest of the period. For periods exceeding 10 years, insurers are allowed to offer 10%.

The decision comes in the wake of successive cuts in bank deposit rates that is a common source of revenue for insurers. The cut in ROR will make life insurance less appealing to those who see life insurance a conservative form of investment.

Abolhassan Sadrieh, a life insurance expert, says that a cut in rate of return was expected, though “nobody was expecting a shortening of the terms.”

The cut in the contracts’ duration seems questionable simply because long-term commitment was a notable advantage of life insurance policies. A five-year term life insurance policy at the maximum rate of return would be attractive, considering the fact that the banking sector is allowed to offer fixed interest on deposits at a maximum one-year contract.

“Long-term commitments are a key feature of life insurance policies,” quoted Sadrieh as saying.

The expert questions the legal premise of the council’s ruling. “Life insurance is basically a long-term contract. Insurers are supposed to encourage the purchase of policies with longer commitments.”

Analysts also question the council’s method of calculating ROR for contracts with a duration longer than two years which is 13% for 2-4 years and 10% for more than four years.

“Article 68 of the Insurance Law only requires a fixed rate on five-year term policies,” Sadrieh said.  “Setting fixed rates for longer periods is a risky decision.”

 Economic Realities

 Elaborating on the reasons for lowering the rate of return on life insurance policies, Farzin Hajati, director of technical affairs at Central Insurance company of Iran, said that lowering rate of return is in line with the decline in the rate of inflation and bank interest rates.

“The ROR is set based on economic conditions as well as the returns offered on other low-risk investments,” he told IRNA on Wednesday.

According to the Central Bank of Iran, the rate of inflation fell below 10% as of June 20 after almost three decades.

When asked about the impact of lowering ROR on life insurance policies on insurers’ plans for boosting their portfolio in life insurance category, he said, “The CII has introduced other regulations to encourage the people to buy life insurance policies.”

Enhancing supervision, raising public awareness about life insurance and training insurers are measures taken by the CII to promote the life category, he said without elaboration.