The Insurance Regulatory and Development Authority on Wednesday issued strict guidelines for life insurance companies regarding their profit sharing and experience rating in group insurance schemes. Experience rating means the basis (experience) on which the insurance companies underwrite their proposals.

As per the new guidelines, life insurers cannot consider announcing bonus or any other such profit sharing if the number of life years covered under a group master policy is less than 1,000, i.e. if the number of persons covered under the scheme is less than 1,000.

In case for a scheme year, the available experience is less than 1,000 persons, profit sharing arrangement shall be deferred until the end of the scheme year in which the minimum number of 1,000 persons in the scheme is reached on cumulative basis.

The guidelines are effective from September 1. They are also applicable to all the new products filed with the Authority pending for clearance.

The new guidelines also stipulate that profit sharing shall not be allowed other than on a scheme year basis, i.e. any bonus shall be announced only at the time of policy anniversary and not during the middle of a year.

Similarly profit sharing percentage should not exceed 75 per cent (of the profit) if number of lives covered by a scheme is less than one lakh and shall not exceed 90 per cent if the number of lives is one lakh and more for a scheme.

In another significant directive, the authority said that mortality assumption for profit sharing should not be lesser than 60 per cent of the rates under the standard mortality table prescribed for the pricing assumptions.

Currently LIC (94-96) table is being used by the insurers as ultimate mortality experience. It has also directed that the experience rating / profit sharing formula and related assumptions should be furnished at the time of filing the product with the authority.

With regard to the existing group policies, the authority said ongoing profit sharing arrangement may continue for all the life companies, but if profit sharing arrangement is to be provided for the first time under existing contracts the above guidelines will apply.

However, the formula and assumptions related to profit sharing arrangements of the existing group contracts should be filed immediately with the authority.