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Views on the Insurance Industry.

FDI Cap in Insurance Sector needs to be Re-looked: RBI

Posted on May 6, 2012 by
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FDIIn view of Indian economy’s integration with global economy and if local economy and political condition permits then as per Reserve Bank of India (RBI) there is need to hike Foreign Direct Investment (FDI) cap in some sectors including insurance.

As per RBI FDI cap in India in insurance sector is relatively low compared to global patterns, FDI cap in insurance sector is even higher in China.

According to RBI FDI cap in insurance sector should be reviewed taking into consideration the changing demographic patterns and role of the insurance companies in supplying required long term finance in the economy.

Insurance is a high gestation, capital intensive business and hence, it needs fresh capital to fund its existing businesses and expansion. Increasing capital will also help in increasing the penetration of insurance in the country.

Insurance industry is eagerly waiting that FDI in insurance should be increased from strategic minority to dominant minority.

Despite slow down, Indian insurance sector still remains attractive in long term. At present insurance sector needs substantial capital and since Indian entrepreneurs don’t have that amount of money hence, the only way that remains is to allow capital infusion through FDI which will help the industry to grow, and this can happen by increasing the FDI limit to 49% from current 26%.

It is expected that foreign players will immediately invest money in insurance sector after the FDI cap is raised knowing that India has huge potential.

Growth of insurance sector will also help in developing other sectors and providing capital to government for long term infrastructure projects.

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Life Insurer’s First Year Premium Collection Declined by 10.79% in 2011-12

Posted on April 19, 2012 by
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InsuranceFor financial year 2011-12 life insurers witnessed decline of 10.79% in first year premium collection on year-on-year basis.

 

In FY’12 private life insurer’s first year premium collection dipped by 16.91% to 32,718.25 crore as against Rs 39,381.3 crore in FY’11.

 

Public sector insurer Life Insurance Corporation of India (LIC) during FY’12 witnessed decline of 5.7% in first year premium collection which stood at Rs 81,514.49 crore as against Rs 86,444.72 crore in FY’11.

 

Private sector life insurers witnessed growth in group single premium products while they registered decline in all other three segments –individual single premium, individual non-single premium and group non-single premium. In FY’12 private life insurer’s first year premium from group single premium products stood at Rs 5,023.33 crore as compared to Rs 3,467.58 crore in 2010-11.

 

However, LIC witnessed decline in first year premium collection from individual single premium to Rs 13,386.18 crore in FY’12 as compared to Rs 27,620.15 crore in FY’11.

 

However, non-life insurance companies continued to show growth in 2011-12 as private sector general insurer’s first year premium collection surged by 25.01% to Rs 24,230.36 crore compared to Rs 19,382.68 crore in FY’11.

 

First year premium underwritten by public sector non-life insurers grew by 21.88% in 2011-12 to Rs 34,113.79 crore as against Rs 27,990.1 crore in FY’11.

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ICICI Prudential Life’s Maiden Dividend

Posted on February 1, 2012 by
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ICICI Prudential Life Insurance – the largest private life insurer – has declared a maiden dividend after reporting a profit of Rs 1,056 crore for the first nine months of the current fiscal, which is more than double the Rs 513 crore profit in the corresponding period last year. The company has paid a dividend of Rs 150 crore to ICICI Bank, which is included in the third quarter earnings.

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Product liability insurance segment growing by 20% y-on-y basis

Posted on October 4, 2011 by
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Insurers are witnessing increasing demand of Product Liability insurance. As awareness of inherit risk in the business operations is rising among companies; hence they are opting for Product Liability insurance.

Companies may take full precautions but still there is a possibility that a consumer gets injured or their product is damaged then company may be sued. As consumer court cases are increasing and litigation costs are also rising; this may hit the balance sheets of companies; to cover all these losses companies prefer to buy Product Liability insurance. This segment is showing the growth of 20% on year-on-year basis.

Demand for Product Liability insurance is primarily driven by contractual requirements; mainly by exporters having export contracts with foreign companies.

Especially pharmaceutical and automobile company are demanding for Product Liability insurance but insurers are cautious to provide them this cover as these industries are considered high risk category.

Product Liability insurance particularly covers whole sellers, manufactures, distributors and retail’s legal liabilities against third party bodily injuries, damage to property damage liabilities arising out of use or consumption of product manufactured, sold, distributed, handled or disposed by the company. This cover the legal fees or any compensation awarded in a suit.

This policy excludes any losses incurred by repairing of products, costs incurred in recall or fines of products and exemplary damages.

Manufacturing companies who exports to North America and Europe opt for this cover as litigation costs in these countries are very high.

Usually big companies opt for this cover but as per insurers smaller supplier who supply to intermediaries and small manufactures should also opt this cover as litigation costs can go upto 50 lakh to 1 crore which can severely impact their balance sheets.

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Edelweiss Tokio life expecting to achieve break even in sixth year

Posted on October 4, 2011 by
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When for life insurance companies it takes 8-9 years to break even; newest entrant in the life insurance space Edelweiss Tokio Life Insurance Company is expecting to break even in sixth year of its operations. As per company efficiency and productivity of agents will help it to break even early

For growth company is looking at tier 4 and tier 5 cities. It will focus on agency channel for distribution for it is planning to hire 3,000 agents initially and it will also train them.

Company is expecting to cover 10 lakh lives by 2015 and it is also planning to have market share of 1.5% by 2015.

Company has commenced its operations last month itself; it has opened 8 branches and it is also expecting to open 22 branches in current fiscal. Company will also use branches of Edelweiss capital to sale its products as 30 branches of Edelweiss have already started to distribute its products. It is also trying to distribute products through its 137 branches. Edelweiss life will also try to sale products to the customer base of Edelweiss.

Company will keep its focus on need based selling. Company has already got Insurance Regulatory and Development Authority’s (IRDA) approval for seven products which include term plan, Unit-Linked Insurance Plan (ULIP) and endowment plan.

Edelweiss Tokio life is a joint venture between Edelweiss capital and Japan based Tokio Marine having 74% and 26% stake respectively. Both partners have invested Rs 550 crore as initial capital. Both partners will infuse Rs 1,100 crore within six years.

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Rigorous penalty mechanism needed for uninsured vehicles

Posted on August 17, 2011 by
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As per the Insurance Information Bureau (IIB) which was set up by Insurance Regulatory and Development Authority (IRDA) in 2009 only one-third of the vehicles had any type of insurance in FY’09; there are 12 crore automobiles and two wheelers out of which only less than 4 crore are insured.

According to the insurers why only one-third of vehicles are insured is that when people buy a vehicle than for registration it is mandatory to have insurance but as time passes people do not renew their car insurance after 5 years as its value depreciates; hence according to insurers there is need to have mechanism to enforce third party insurance.

Vehicle insurance have two components i.e. own damage cover which is for the vehicle damaged in a accident and second is third party cover which covers  any injury or damage caused to another person or vehicle.

Driving uninsured vehicle is prohibited under Motor vehicle’s Act 1988 and if some one found violating this rule than he can be imprisoned for three months or fined for Rs 1,000 or both; but insurers says if you compare it with other countries than this penalty is not serious as if some one found without insurance in foreign country than there is a even chance of loosing license.

Incurred claim ratio for own damage is less at 55% as compared to third party liabilities incurred claim ratio is 98%; incurred claim ratio is the claim paid during the year plus closing provision at the end of the year and is expressed as a percentage to the premium; although third party insurance is mandatory than also 40% vehicles plying on the road do not have this cover.

IRDA has also increased provisioning towards the third party motor pool due to which insurers have to infuse capital to meet the solvency ratio.

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General insurers should shift their focus on profitability instead of growth

Posted on August 13, 2011 by
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General insurance companies are facing the biggest challenge of profitability not of growth as the industry had witnessed the growth of 22% in the financial year 2010-11 and industry is also expected to grow by 15% in the current fiscal but still most of the companies are not in profits as most of them have reported losses in the last fiscal and this is mainly because currently companies are focusing to grow their top line to gain market share for which they are undermining risks; as they are not pricing products as per the risks as riskier business need to be priced higher and less riskier business should be priced lower and industry in order to grow the top line are not focusing on appropriate pricing which implies they are compromising bottom line to top line.

Another reason why General insurance companies are not able to post profits is that their claim ratios are increasing (claim ratio is the amount claimed for every Rs. 100 for premium collected) as main reason for it is that the companies are not pricing appropriately as their claim ratio for their top two contributor segment i.e. Motor and Health are in excess; as their claim ratio of third party motor pool stood at 150% for premiums this could have faced the eminent danger of insolvency of the companies as losses were wiping out the balance sheets; but insurance regulator giving a big relief to the industry has increased the third party prices from first April 2011 and now industry is planning to introduce the index-based pricing to review the third party pricing annually which will be based on the cost and frequency of claims.

General insurers are also experiencing losses on their Health insurance portfolio as their claim ratio for the Health portfolio stood at 120% but now to restore profits from Group Health insurance segment insurers have started taking steps to make this segment profitable; first step is companies have increased premium by 12-15% during last one year secondly they have started co-pay and about 35% of corporate have co-pay element in their health insurance policies which has also reduced their losses and thirdly they have introduced sub limits on certain ailments which were prevalent 7-8 years ago.

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IRDA to change form of guarantees for ULPPs

Posted on August 5, 2011 by
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Insurance Regulatory and Development Authority (IRDA) has released draft guidelines for the Unit-linked pension plan (ULPPs) according to which clause of the 4.5% per annum guaranteed return on pension plans has been dropped which was implemented by IRDA last year as it didn’t find good response by the insurance companies due to its certain inherent problems.

Instead of it IRDA has altered guarantees and given insurers three options to offer guarantees in different forms; according to draft guidelines insurers need to offer at least one of the three guarantees; these guarantees are :-

  • Minimum positive returns
  • Absolute value of maturity corpus
  • A guaranteed rate of annuity

Annuity is a pension product that gives you regular income against payment of lump sum.

IRDA linked the return of pension products to the reverse repo rate of the Reserve Bank of India (RBI). IRDA mandated the return of 4.5% as when IRDA issued the guidelines that time reverse repo rate was at 4% and IRDA had asked insurers to provide 50 basis points more return than reverse repo rate; reverse repo rate is the rate on which RBI borrows from banks.

Insurers stayed away from ULPPs as due to guaranteed return they were not able to invest in equity as pension products are ideally long term products and equity gives better return over longer term hence ULPPs had become unattractive for the insurers.

According to insurers among three guarantees guarantee of maturity benefit is most practical as giving a guaranteed rate of return is difficult unless it is minimum guarantee possible rate of return and guarantying the annuity in the beginning is difficult as annuity rates depends on the interest rates and mortality costs and to predict these is also difficult.

Insurers also says that guarantees are still there though their forms have been changed these guarantees will not allow insurers to launch pure equity based products hence annuity products will still remain debt oriented products ; therefore insurers will launch more debt or balanced ULPPs.

IRDA has also recommended that investor should stick to the same insurer that means investor after maturity should buy the annuity from the same insurer however on this point insurers hold different view as they says that investor should have the freedom to buy the annuity which will give him best return.

In this regard IRDA has said that this is a interim arrangement to develop the annuity market as companies are not developing  annuity market and eventually Life Insurance Corporation of India (LIC) have to pay annuity.

Guidelines also suggest that insurer should give the illustration so that customer can understand the costs and return at the time of buying the policy; and for illustration insurers should assume growth rate of four and six percent.

For policyholders to understand and agents to explain to the policyholders what will help is the discloser of the illustrative target purchased price or maturity corpus and illustrative targeted annuity at the time of sale of a policy. Assuming the premium you are willing to pay than your agent can tell you how much maturity corpus you are going to accumulate and what annuity or regular income you are going to get.

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IRDA to control transfer and dilution of stake of insurers

Posted on August 4, 2011 by
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Insurance Regulatory and Development Authority (IRDA) has released draft guidelines with the aim to control the dilution and transfer of ownership in insurance companies to prevent the financial investors flipping short term gains which may affect the long term prospects.

As per the draft guidelines it would be mandatory to have the prior approval of IRDA for anyone to raise stake above five percent in a insurance company; if anyone wishes to buy one percent stake or more than also regulatory approval is needed and if there is any structural change in the share holder pattern than it should have the approval of IRDA. IRDA’s proposal also includes that if stake of a bank or an investment firm exceeds 2.5% in an insurance company than regulatory approval will be needed.

Under the Section 6A of the insurance Act if a insurance company transfers its stake to another insurer than it will need a regulatory approval however IRDA’s draft guidelines stipulates there will be no minimum lock-in period.

IRDA’s measures to tighten the transfer among share holders and fresh equity investments has come prior to the announcement of the norms for the Initial Public Offering (IPO) by insurance companies; as there is possibility that private equity firms and institutional investors may buy stake in insurance companies at the high valuations just before the IPO and they can exit them once the stock is listed; as private funds are known for engineering the financial ratios to present the rosy picture.

IRDA is also aiming to promote the beneficial owners in this processes some proxy promoters are getting the control take for instance as new rules are triggered by the stake change in MetLife India in which minority share holder IGE private equity got controlling stake as one of the founder Jammu & Kashmir bank lost the ownership as it could not invest along with other investors to expand the business.

MetLife’s share holding pattern has changed since it started; as earlier MetLife had 26%, J&K bank had 25%, Shapoorji Pallonji had 24%, IGE had 19% while remaining 6% was held by SHPL by subsequent capital infusion now IGE holds 33% stake while J&K bank’s stake fell to 12%.

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PMEAC recommended 49% cap for FDI in all sectors

Posted on August 2, 2011 by
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The Economic Advisory Council for the Prime Minister (PMEAC) in its economic outlook for the financial year has recommended the boldest reform ever which has suggested that Foreign Direct Investment (FDI) limit should be capped for all sectors at 49% except for the negative sector such as defense and nuclear power etc.

Council has said that it is necessary to take pro-active steps as there are clear signs of slowing down of the FDI flows in India this is evident as inbound FDI has declined from $ 33.1 billion in FY’10 to $ 23.4 billion in FY’11 and for the current fiscal inbound FDI is expected at $ 35 billion.

Council is also expecting less than half investments from Foreign Institutional Investors (FII) in the current fiscal year as compared to the last fiscal due the adverse financial condition in the U. S. A. and Europe.

Among the Financial sectors; for the Banking sector FDI is capped at 33% while for insurance it is at 26% and for pension sector it is not yet clear but it is expected to be at same lines with insurance sector.

Council has also recommended accepting the recommendation of the U. K. Sinha committee on financial flows which had recommended that there should be single window for the registration of qualified foreign investors i.e. there should be no distinction between FII, Foreign venture capitalists and NRIs.

Council has also expressed its concern over the worsening world economic situation as many developed countries have revised their GDP growth estimates downwards and it will also have the effect on the Indian economy; it will effect India in two ways firstly it will impact the exports growth and secondly due to this internationally commodities prices may face the dampening effect.

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