Mumbai: In a bid to ensure that more insurance funds flow into infrastructure projects rather than into the equity market, the Insurance Regulatory and Development Authority (Irda) may ask life insurance firms to shift focus from unit-linked insurance plans (Ulips) to traditional products such as endowment plans, money-back policies, pension plans and term policies.
According to provisional data by the Life Insurance Council, a representative body of life insurers in India, for the quarter ended June 2009, the total premium generated by private life insurers was Rs13,243 crore, and 85.5% of this came from Ulips.
Ulips offer a policyholder an element of insurance cover and freedom to invest a part or the entire sum of her premium in equity markets. The value of one’s investment in Ulips depends on the net asset value of the units of investments.
New guidelines: The LIC headquarters in New Delhi. There are 22 life insurance firms in India, including LIC, the largest and oldest insurer. Ramesh Pathania / Mint
“We are examining various ways to get long-term capital for the country’s infrastructure growth from the insurance industry. Companies should generate a minimum amount of capital selling traditional insurance products, instead of focusing mainly on unit-linked products,” said R. Kannan, member-actuary, Irda.
However, he declined to comment on what Irda would do to ensure this. “We are examining it but have not yet decided on whether there should be any stipulation on the minimum percentage of total premium that an insurance firm would need to generate from traditional products,” Kannan said.
Another senior Irda official said that as a major part of Ulip premiums flows into equity markets, the regulator is concerned that enough long-term money is not being generated for supporting the country’s infrastructure growth. “We are closely watching how the firms are selling insurance products and whether they are raising long-term money,” he said. He declined to be identified as he is not directly involved in this exercise.
“Private life insurers should have a fair mix of traditional and unit-linked products in their portfolio. In traditional policies, the companies should increase their share in participatory life insurance plans to provide better support to the infrastructure growth of the country,” Kannan said.
A participatory plan provides life cover for a fixed number of years and if no claim is made, gives the insured a cut of the firm’s profits, in addition to the sum assured. In insurance parlance, the profits are termed bonuses.
In sharp contrast to Ulips, the investment norms for traditional insurance products are stipulated by Irda. Under its norms, a life insurer is required to invest at least 50% of premiums in government securities, 15% in infrastructure-related projects and companies, and the remaining 35% in equities, mutual funds, non-convertible debentures, and other money-market instruments.
Bonuses given on such life insurance plans represent the returns on investing in those products.
As the government envisages $500 billion (Rs24.45 trillion) investment in India’s infrastructure developments by 2012, the insurance regulator is concerned that private life insurance players contribute only a minuscule portion to this growth, as the bulk of their premium comes from Ulips and gets invested in stock markets.
There are 22 life insurance companies in India, including the state-run Life Insurance Corp. of India, the largest and oldest player.
Private insurers hard sold Ulips in past few years, riding high on a bull market. The Sensex, the country’s bellwether equity index, rose seven times, from around 3,000 in March 2003 to 21,200 in February 2008.
After the Sensex lost 52% in 2008 after a 45% annual rise for three years in a row, investors’ appetite for Ulips was dented. This also pulled down the premium income of insurance players in 2008 and at least some of them recorded a decline in such income for the first time since India allowed private players to set up shop earlier this decade.
According to the Life Insurance Council, total assets held by private sector life insurers in equity stood at Rs81,294 crore as on 30 June against Rs45,641 crore a year earlier. In contrast, their investment in the infrastructure sector stood at Rs16,255 in June, up from Rs10,077 crore in June 2008.
“It is desirable to bring a minimum amount of premium through traditional policies. We have been making efforts to achieve this,,” said S.B. Mathur, secretary-general of the council.
“We agree with Irda on bringing more capital of long-term nature from traditional policies. We are planning to grow the premium in our traditional products by 30-40% this financial year,” said Sam Ghosh, chief executive officer, Reliance Capital Ltd, which owns Reliance Life Insurance Co. Ltd. At present, Ulips constitute 95% of its new business premium.
Some 90% of the June quarter premium income of the country’s largest private sector life insurer, ICICI Prudential Life Co. Ltd, was generated from Ulips. For the year ended March, the company collected a total premium of Rs15,350 crore, of which about Rs13,800 crore came from Ulips.
According to Sashi Krishnan, chief investment officer of Bajaj Allianz Life Insurance Co. Ltd, the nature of investments depends on investors’ appetite. “It is true that long-term money in traditional products could be put into long gestation infrastructure projects, but it is the investor who decides which product to buy,” Krishnan said.
About 85% of Bajaj Allianz’s premium income comes from Ulips. “We will focus on increasing the mix of traditional policies, but investors’ choice is most important. Bringing a minimum regulatory requirement as premium from traditional products could impact the freedom of insurers,” Krishnan added.
Jayant Khosla, chief executive officer, Future Generali India Life Insurance Co. Ltd, seconds Krishnan. “We cannot dictate the customers to buy traditional products. The customer will buy a policy, based on his risk-return profile,” he said.