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Insurers in the red can declare bonus

india Updated: Jun 02, 2009 21:18 IST
Falaknaaz Syed
Falaknaaz Syed
Hindustan Times
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Life insurance policyholders with participating traditional insurance policies have a reason to smile. Life insurance companies that continue to reel under severe losses have been allowed to declare bonus on participating plans up to 10 years of their operations by the insurance regulator.

In a participating traditional plan, policyholders have a share in the profits generated in the life fund. In such a case, 90 per cent of the profit in the fund are distributed to policyholders, while 10 per cent is retained by the insurance company.

According to Insurance Regulatory & Development Authority (IRDA) rules, insurers who have a deficit in the life fund have to transfer funds from the shareholder’s account into the policyholder’s account in order to distribute bonus.

A shareholder account is the capital infused by the promoters of the company while a policyholder account is the new
business premium, renewal premium, actuarial liabilities (bonus) towards the policyholder.

This dispensation was given only for the first seven financial years, beginning from the year in which the life insurance company commences operations. The IRDA has now extended this period up to the tenth year of operations.

In order to compete with public sector behemoth Life Insurance Corporation of India, private insurers have also been declaring bonus each year despite making losses for the last eight years.

“When the norms were laid down, it was expected that operations of insurers would be stabilised and they would declare bonus from surplus within the life fund. However, this has not happened. The relaxation is welcome move,” said an industry official.