The finance ministry will no longer offer special rates to the department of posts for deposits under the Postal Life Insurance Fund and the Rural Postal Life Insurance Fund.
The move will result in lower returns on investment for policy holders as the DoP will not be able to sustain its current interest and bonus rates, which are higher than market rates.
Besides, from April 1, 2006, the department will have to make its own arrangements to invest these funds. However, it has no experience in full-fledged insurance business despite being a player in this sector since 1884.
DoP officials said the move will not have much impact on existing policy holders but admitted that bonus rates would fall.
The department has been sustaining a bonus of Rs 95 for every Rs 1,000 insured under whole life policies, Rs 77 per Rs 1,000 for endowment products and Rs 65 per Rs 1,000 for money back policies for over 12 years. "We will not be in a position to sustain it," said a senior official.
From the next financial year, under the present terms and conditions, incremental accretions under the Postal Life Insurance Fund and the Rural Postal Life Insurance will have to be invested as per Insurance Regulatory Development Authority's guidelines, which mandate that a majority of the investments be in government securities.
Beginning April 2006, the existing corpus under the two insurance schemes will be frozen at the end of this fiscal, and each year, a third of it will be converted to dated securities.
A third of these funds in the Postal Life Insurance Fund and the Rural Postal Life Insurance will need to be invested by the department, officials added.
The DoP plans to approach asset management companies or appoint a consultant to help it in making these investments, officials said. With special deposit rates no longer available, the DoP has decided to approach the government, seeking a level-playing field for its insurance business, by removing the existing limitations imposed on the scope of its activities.
At present, Postal Life Insurance coverage is open only to the employees of the Central and State governments, nationalised banks, universities, government-aided institutions, autonomous financial institutions and local bodies, while Rural Postal Life Insurance is open to anyone living in rural areas.
"The DoP will also ask that it be allowed to introduce new insurance products and features on existing policies," an official said.
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