Reply To: Non Negative Claw Back Additions
Rishabh Surana
IRDAI puts a cap on the maximum reduction in yield. If the difference between calculated reduction in yield and maximum return in yield required is positive then an equivalent number of units shall be added to the Policyholders’ Fund in such a way that the calculated reduction in yield shall be equal to the maximum reduction in yield. This is called as Non-negative claw-back addition. The units of the Non-negative claw-back shall be based on the NAV declared as on the date of Non-negative claw-back addition.
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Can you explain it further, I am not able to get it.
ULIP policies have many charges, like Allocation charges, Fund management charges, Mortality charges, administrative charge etc. Some charges are fixed while other are variable and are different during the policy term. These charges directly affects the return on the investment. This reduction in returns is called reduction in yield.IRDAI has effected a cost cap through the net reduction in yield. It means, the costs of policy can’t drag the overall return or the gross return down by more than the prescribed percentage points. IRDAI has mandated that the net reduction in yield should not be more than 4% in the fifth year coming down to a difference of 2.25% by the 15th year and thereafter to ensure that the costs don’t lower the net reduction in yield. Suppose the calculated reduction in yield in the 10 year of the policy is 3.15%. But as per IRDAI guideline, in the 10th year of a ULIP policy maximum reduction in yield should not be more than 3%. It means there is a positive deviation, so insurer have to add equivalent number of units to policy holders fund value to bring down the calculated reduction in yield to 3% or less in that year. This addition of unit to maintain the reduction in yield up to a definite level is called Non-negative claw-back Additions.
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