- Insurance
- 1 min read
Bond yields are falling, life insurers may raise rates
As part of their balance sheet management, insurers have to set aside a certain amount for claims they expect to pay over the next four decades, from the policies they have issued today. If bond yields fall, the amount that insurers must set aside goes up.MUMBAI: The fall in long-term bond yields, coupled with pressure from reinsurers, is causing private insurers to reevaluate their term insurance rates. Three of the top five private life companies are expected to raise their term rates soon, a senior industry source said.
The yield on the 40-year bond has decreased from 7.34% at the time of issue last year to 7.09%. Similarly, the yields on other long-term bonds have also dropped. For example, the 27-year bond maturing in 2051 is trading at a yield of 7.06% - only marginally higher than 10-year bond yield of 7%. These long-term bonds were already highly sought-after, with demand from insurance companies surpassing supply.
As part of their balance sheet management, insurers have to set aside a certain amount for claims they expect to pay over the next four decades, from the policies they have issued today. If bond yields fall, the amount that insurers must set aside goes up. The other factor is that the reinsurance market continues to be hard. "Many private insurance companies had gone overboard issuing large policies without medical underwriting. Now all companies are insisting on full medical underwriting for policies above Rs 50 lakh," said a distributor.
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