Policy Trading: Free or Macabre?

Last week the Bombay High Court adjudged that insurance policies can be freely assigned to a third-party for a price. Reactions to this judgement based on a 70-year-old law have been varied. While some see this as a validation of individual rights in a free market, others fear the birth of a macabre market where investors take bets on the lives of others. The suit was the fallout of LIC’s decision in 2003 to not assign policies in favour of an investor who saw an arbitrage opportunity between low surrender values on lapsed policies. Arbitration was possible by purchasing the maturity benefits through assignment. Assignment entitles the third-party to receive the maturity value of the policy as well as receive claims amount in case of a claim. There’s, however, a catch. The original policyholder continues to remain the insured party and claims can arise only when this policyholder meets with an accident or expires. This third party, however, will have to continue to pay premium for the policy, till it matures or the original policy holder /insured files a claim. LIC officials have objected to assigning policies to investors on three grounds — the practice is not suited for the social milieu in India. Secondly, it goes against the principles of insurable interest and amounts to gambling and it creates a moral hazard. Principles of insurable interest require that the beneficiary of an insurance policy should suffer an emotional or financial loss if the insured event occurs. “Without insurable interest , there could be cases where the beneficiary may put the original policyholder in a situation which could lead to claims — a situation which will require police intervention,” said a senior official from Kotak Mahindra Old Mutual Life Insurance. Sam Ghosh from Bajaj Allianz Life Insurance said, “Allowing trade makes these policies liquid, but the ‘moral hazard’ aspects are also there. But I guess such events would be rare. We need to examine how it is done in the US or the UK.” Nevertheless, the regulator — IRDA — feels it is alright to trade insurance policies but cautions that it should be practised with some sort of safe guidelines .
Source: Times News Network

ICICI Lombard at top place in premium growth

Bangalore: ICICI Lombard General Insurance Corporation has grabbed the second spot in insurance premiums growth displacing three public sector companies.
According to figures released by the Insurance Regulatory and Development Authority (IRDA) on Thursday, ICICI Lombard earned the second largest premium of Rs448.65 crore for April but was at top place in terms of premium growth of 35 per cent over the corresponding period of the last financial year.
Public sector New India Assurance remained on top with a gross premium of Rs650.82 crore for the same period but grew by only 8.2 per cent over the corresponding period of the last financial year.
Oriental Insurance Company Ltd remains at the third spot with gross premiums of Rs413.50 crore. Oriental's growth has remained flat during the period.
In the first month of financial year 2007-08, private sector insurers grew 37.34 per cent to Rs1,272.22 crore over April 2006. In the process, the market shares have further undergone a change.
Private sector has grabbed a market share of 40 per cent in the non-life insurance business, from 34 per cent in the financial year 2006-07. Public sector market share is now only 60 per cent.

Source : Domain-B

Property insurance to be made mandatory

NEW DELHI: In a bid to protect property buyers from unscrupulous developers, who construct weak structures to maximise profits, the government plans to make property insurance compulsory, the premium of which would be borne by developers. Developers will also be required to get layouts and designs approved by registered architects apart from getting general clearance from local bodies. The urban development ministry is giving final touches to the Real Estate Management and Regulation Bill that stipulates constituting state-level regulators to monitor real estate development in cities. Apart from scrutinising building plans and ensuring mandatory insurance of buildings, the regulator would also make sure the developer has all necessary amenities such as water and electricity connections, lifts and parking facilities. Buildings would also have to be quake-resistant. The Bill is slated to be tabled in the monsoon session of Parliament. “It would be a model law to be incorporated by other states. Delhi would have to mandatorily put a real estate regulator in place after the Bill gets passed by the Parliament. With the coming of regulator, all scrupulous activities of builders duping end-users would be curbed to a great extent,” minister of state for urban development Ajay Maken told ET. At present, the city dwellers are facing hard times coping with the problem of inadequate parking. In cities like Delhi, parking problems have lead to instances when people shoot down each other in fist of fury. To tackle the problems, when passing the lay-out plans, the architect would keep in mind that ample space or floors have been dedicated to parking. There have also been instances, when people, after taking possession of house, do not find adequate water and electricity connections. Real estate players, however, believe the big players in the market have been always adhering to the measures. These are mainly fly-by-night operators where there is a yawning gap between promises and deliverance. “In any case, we have set standards to comply before we deliver apartments or bungalows. If a legislation comes into place, it would put an end to the practices of small players,” Parsvnath chairman Pradeep Jain said.

source: RAJAT GUHA & MAYUR SHEKHAR JHATIMES NEWS NETWORK

Foreign allies can hike stake in insurance JVs with PSBs

While MNCs get the option to hold up to 49% after change in FDI laws, PSBs will retain 26% stake. Also, the stake sale will be at ‘current’ valuation, reports Sangita Mehta

FOREIGN partners have been given the option by public sector banks to significantly raise their equity stake in their respective insurance joint ventures. The foreign companies, currently holding 26% in JVs, will have the right to buy additional shares to reach 49% holding soon after regulations allow higher FDI in insurance. However, the agreement also says state-owned banks would retain their equity stake at 26% — the critical level which ensures the veto power — at all point of time. But, unlike the Bajaj Allianz deal, where Bajaj Auto has a pact with the German insurer to sell shares at nominal value, state-owned banks will sell at a price based on valuation of insurance venture at that point of time. Such agreements have been struck by most private players. At present, FDI holding in insurance venture is capped at 26% and the government has proposed to raise it to 49%. For instance, the MoU of the IDBI-led insurance venture with Fortis stipulates that the foreign partner will be allowed to raise the equity stake to 49%, but it also states that IDBI will always hold 26% stake in the venture. Currently, IDBI holds 48% stake while South-based Federal Bank and Fortis have 26% each. Both IDBI and Federal Bank will gain when they sell their shares because it would be sold at a premium. Same is the case with the Allahabad Bank-led insurance venture with Sompo, which also has Indian Overseas Bank, Karnataka Bank and the Burman group as its partners. Here, the MoU stipulates that Allahabad Bank and IOB will jointly hold at least 26% in the venture while Sompo will be allowed to raise its stake to 49%. At present, Allahabad Bank holds 30%, IOB has 19%, Karnataka Bank has 15% and Burman group has 10% with Sompo holding 26%. The MoU is slightly different in case of Bank of India led insurance venture where the bank has 51% stake, Union Bank has 23% and Dai-chi has 26%. Here, the MoU says that only the foreign partners will be allowed to raise their equity stake as and when the regulations permits, but even Union Bank will hike its stake to the critical level at 26%. BoI will bring down its stake to 30% and Dai-chi will hold 44%. The MoU will also allow Union Bank to raise its stake at par while the foreign partner will have to pay a premium based on the valuation arrived at that time. This clause is also aimed at protecting Union Bank interest as minority shareholder. It may be recalled that Andhra Bank had earlier walked out of the insurance deal with BoI because it was not happy holding less than 26% stake in the company. Sources said that HSBC, the foreign partner, in the case of the Canara Bank-led insurance venture would be allowed to raise it stake to 49% while Canara Bank will continue to hold 26% at all point of time. At present, Canara Bank holds 51% while Oriental Bank of Commerce has 23% in the tie-up. Meanwhile, Bank of Baroda, which recently tied up with Legal & General, has to yet finalise its third partner for the venture.

Source: The Economic Times, 6th June '07 (Sangita Mehta)