Welcome to our blog! Today, we will be discussing an important financial trend in the insurance industry that is impacting private insurers. The fall in long-term bond yields, combined with pressure from reinsurers, is causing private insurers to reassess their term insurance rates.
According to a senior industry source, three of the top five private life insurance companies are expected to increase their term rates soon. This shift is in response to the decrease in yields on long-term bonds. For example, the yield on the 40-year bond has dropped from 7.34% to 7.09% since its issuance last year.
Similarly, yields on other long-term bonds have also fallen. The 27-year bond maturing in 2051 is currently trading at a yield of 7.06%, only slightly higher than the 10-year bond yield of 7%. These bonds were already in high demand, with insurance companies seeking them more than they were available.
The recent entry of new foreign investors into the bond market, following JP Morgan index’s inclusion of government bonds, has further pushed down yields. Moreover, if the RBI decides to cut rates later this year to align with the US Federal Reserve, as some economists anticipate, bond yields could decrease even more.
Insurers must set aside a certain amount for claims they anticipate paying over the next four decades from the policies they issue today. As bond yields decline, the required set-aside amount increases. Additionally, the reinsurance market remains challenging. Many private insurance companies had issued large policies without thorough medical underwriting, leading to a shift in policy as all companies now require full medical underwriting for policies exceeding Rs 50 lakh.
These developments highlight the complex interplay between bond yields, insurance rates, and market dynamics in the insurance industry. Stay tuned for more updates on this evolving situation!
