Thursday, July 26, 2007

IRDA balking at migration to new solvency norms

Bangalore, July 19 Implementation of Solvency II guidelines prescribed by the International Association of Insurance Supervisors (IAIS) is likely to be delayed in the country.
The Insurance Regulatory and Development Authority (IRDA) made it clear that it was no hurry to implement Solvency II guidelines.
Its Chairman, Mr C.S. Rao, said: “We are in no hurry to immediately implement the guidelines.”
The IAIS final guidelines released in February this year address material risks that insurers face — underwriting risk, market risk, credit risk and operational risk.
Solvency margin is the excess of the value of assets and capital that non-life insurers have to maintain over the insured liabilities. Solvency regime
Under the current solvency regime, insurers are expected to maintain a 150 per cent margin over the insured liabilities. Solvency II however, does not imply any change in the margin. The new guidelines make the solvency margins dynamic.
But according to industry sources, the regulator’s balking at migration to Solvency II guidelines has more to do with the ground situation in the country. This implies that some of the insurers are simply not ready for migration. The situation is somewhat identical to the situation faced by the banking sector’s migration to the Basel II capital standards. Solvency II is the insurer’s equivalent of the Basel II.Step-by-step approach
Instead, the insurance regulator has opted for step-by-step approach. As the first step, life insurers are now expected to file their audited reports on solvency compliance on a quarterly basis effective from this financial year. For the non-life sector, the IRDA has indicated that the reporting would be done on a half-yearly basis, though this is likely to begin only after the completion of tariff deregulation.
However, the public sector Oriental Insurance Company Chairman and Managing Director, Mr M. Ramadoss, said: “We are ready for moving into half-yearly reporting. This is not an issue. It is up the regulator to decide the timeframe.”Complete transition
The migration though would still be short of a complete transition to Solvency II. This is because the asset valuation is currently done on a year-end basis. A half-yearly solvency regime would imply that the asset valuations would also have to be on similar terms.
“Yes valuation of investments would have to be done on a half-yearly basis. Equities could be done on a half-yearly basis. For Government securities we need a regulatory direction,” Mr Ramadoss said.
Government securities are still valued on a book value basis by the insurers.
Moreover, some of the western countries that have implemented advanced management information solutions (MIS) are also yet to fully accept the IAIS guidelines, the sources added.
The absence of such MIS in the Indian insurance industry is a major stumbling block for migration to new solvency guidelines.
Only the private sector is in readiness for the migration, though they account for only about 30 per cent of the domestic market.
source:Business Line

Saudi Minister of Commerce Dr Hashim Yamani has approved the establishment of a Saudi-Indian cooperative insurance company.

Saudi Minister of Commerce Dr Hashim Yamani has approved the establishment of a Saudi-Indian cooperative insurance company.
The joint stock company is being floated with a base capital of 100 million Saudi riyals.
The founders of the Riyadh-based company have so far subscribed for 6 million shares. It will be managed by a nine-member board of directors, appointed by the company's general assembly.
The approval of the establishment of the company comes in line with the state's policy which aims at broadening the economic base and enabling the private sector to positively contribute to the process of economic development in the country
source:Financial Express

Insurers face valuation hurdles

Kolkata: Call it the ‘real value’. Even as politics dogs the opening up of the insurance sector, the issue of valuation - that will determine the buying or selling of strategic stakes - is proving to be contentious.

This is more so since none of the insurance companies in the country are listed.

Increasing the foreign direct investment (FDI) cap in insurance from 26 per cent to 49 per cent is slated to infuse additional capital of around Rs 4,000 crore, either by buying out the Indian promoter’s stake or inducing fresh capital.

But as the frustration builds up, with the government yet to take a call and insurance companies not being listed, a latent discontent among different shareholders on the valuation of their respective businesses cannot be ruled out.

With most insurers, particularly life companies, exhibiting phenomenal growth in recent times, valuation is likely to emerge as perhaps the most critical aspect in unfolding the real value of the company and the relationship among the shareholders.

“Valuations for insurers are increasing rapidly and this will have an impact on the capital required to buy a stake in the future and on existing JV arrangements.

There could be disputes on valuations as different shareholders would cite different valuations,” Bert Paterson, CEO, India and Sri Lanka, Aviva said.

“We are all strategic investors and are betting big business from life - hence getting the best returns for exiting or giving up some stake is very important.

While it is early to predict what will happen, there could be arguments over the price of shares if the company is not listed.

The buyer may feel that the valuation is much lower, whereas, we as one of the Indian partners would feel the opposite,” said a strategic investor with one of the insurance companies, who did not wish to be named.

Almost echoing the same feeling, T V Ramanathan, managing director and chief executive officer, Exide Industries, which holds a 50per cent stake in ING Vysya Life Insurance, said: “If the sector sees an increase in FDI cap, there is no compulsion to sell off our stake. Valuations are very important”.

“Valuation of a life insurer essentially takes into account the embedded value, which is a combination of the NAV or book value and the in-force value along with the goodwill of a company.

In-force value is subjective and takes into account discounting of future cash flows that the current portfolio would receive,” Jean Francois Izac, director, mergers and acquisitions, Aviva said.

While most companies point out that the underlying agreement will spell the later course of action, it is for time to tell whether things will remain as they are now.

According to Merrill Lynch, the best valuation of Indian companies is assessing them on the basis of a multiple to their new business achieved profit (NBAP), which apparently is the only valuation tool that can be applied to Indian insurance companies.

NBAP is the present value of the profits arising from new business during the year.

“Although the embedded and appraised value methods are probably the best traditional measures of valuing life insurers over their life cycle, these measures cannot be applied to Indian insurers at this stage as most of them are at an early stage of their life cycle and even more importantly are still exhibiting exceptionally strong growth rates,” a Merrill Lynch report said.

Source: DNA Money

‘Insurance industry will be hot bed for M&A deals’

Hyderabad: In a development that can impact the consolidation aspects of Indian life insurance industry, the valuation of industry players is increasing rapidly and will impact the capital requirement of stake holders in the existing joint venture arrangements, according to Jean Francois Izac, Director (Mergers & Acquisitions), Aviva Plc.

“Going by the current trends, Indian insurance industry will be hot bed for M&A deals once the upper ceasing on foreign direct investment is relaxed or removed,” Izac told Business Line in Prague recently.

Basic parameters

The four basic parameters of insurance value chain - distribution, risk management, administration and asset management were strong in India taking up the valuations of different companies, he said.

“Though the methodologies of valuation are not uniform, globally fundamental analysis (of discounted dividends, qualitative issues, and embedded value/appraisal value including actuarial analysis) and reality check (of comparables, competition, precedent transactions and ROI) are being taken up. The fact is that the Indian industry is staging impressive growth,” he said.

Citing a Merrill Lynch source, Izac said by FY09, the valuation of ICICI Prudential was currently at $7.2 billion, Bajaj Allianz at $3.6 billion, SBI Life at $2.3 billion HDFC Standard at $2.2 billion and Max New York Life at $1.3 million.

“While the figures are more indicative, they give a hint of what is in store for the industry ahead,” he observed.

FDI norms

Elaborating further, he said on the expected re-jig of FDI norms by the Government soon, the companies were focusing more on valuation procedures.

In countries such as the UK, the valuation was increasingly done in the embedded value method and there would be lot of action in India on this front, he added.

On Aviva’s M&A plans, Iazc said the company had been adopting joint venture and acquisition route globally.

“We are open to acquisitions in Europe,” he added.

Source: Business Line

Why do ULIPs have such a high upfront charge?

Mumbai: Jignesh Mehta paid a premium of Rs 20,000 to invest in a unit-linked insurance plan (ULIP) in October 2005. At the end of one year, when he received the policy statement, he was surprised to see that the total value of his investment was just Rs 9,075. He wondered where the balance Rs 10,925 had gone.

ULIPs are insurance policies which club insurance and investment. Usually, an individual taking a ULIP has 4-6 choices, ranging from funds investing 100 per cent in equity to those investing 100 per cent in debt securities.

Other than this, the policy-holder gets an insurance cover as well, for which the insurance company levies a monthly charge.

What Mehta did not know is that the entire Rs 20,000 he had invested would not be invested.

There were expenses to be paid. In the first year of his ULIP policy, the insurance company had made an allocation charge of 25 per cent of the premium paid. What this meant was that of the Rs 20,000 he had paid, only Rs 15,000 was invested.

Other outgoes, like policy administration charge, and fund management charge, had ensured that instead of his money growing in value, it had shrunk.

The premium allocation charge in the first year of the policy varies from 15 per cent to 71 per cent of the premium paid, depending on the ULIPs chosen. So, why do ULIPs have such a high upfront charge?

“Historically, insurance commissions have always been high. The insurance industry tends to justify this practice, using the defence that selling insurance is tougher than selling other financial products.

While this itself is arguable, in any case, since these commissions are deducted from the investment, it is the investor who suffers,” says Sandeep Shanbhag, an investment consultant.

Financial planner Amar Pandit adds: “It’s a question of who bells the cat, and if an insurance company comes up with a low-cost product, they fear losing out on business.”

Investment experts complain it’s not easy to choose the best ULIP. “When I need to advise a client on which mutual fund to invest, I can check websites to know the best-performing schemes over three to five years.

But there is nothing like that available for ULIPs,” says a relationship manager with a private sector bank.

“Also, since the expense structure of each ULIP is different, any comparison between the performances of different Ulips is not possible,” says Shanbhag.

So, why do people invest in ULIPs? Last year more than Rs 31,000 crore came into ULIPs, which now account for around 56 per cent of the total new premia coming into insurance policies.

“The idea of a packaged product that offers both equity returns and insurance seduces investors,” says Shanbhag.

“The primary reason why people buy ULIPs is because of mis-selling. Agents tell people they have the option of paying a premium for only three years, when the actual term of most ULIPs is at least 10 years. It works as a good selling point,” says an investment advisor who did not wish to be identified.

Most ULIPs have a cover continuance option, which essentially ensures that even if the individual is not able to continue paying premia anytime after the first three years, the policy continues.

The insurance agents, though, have turned this into a selling point, giving an impression to investors that they have an option to stop paying premia after three years, which is really not the case.

An investor who decides to stop paying premia after three years hardly benefits; after three years, the expenses are less and more of the premium gets invested.

With a lower amount being invested, a lower initial corpus can have a huge impact on the corpus that the investor ultimately accumulates.

But there’s another reason why insurance agents tell their clients that they can stop paying premia after three years: they can sell another ULIP to them after three years and hope to make a greater commission.

If a client stays on with his/her ULIP, the agents make a much lower commission of around 5 per cent of the premium,” says an investment advisor.

“But companies are trying to curb mis-selling of this sort,” says R. Krishnamurthy, managing director of Watson Wyatt Insurance Consulting.

“One of the players has made it mandatory for the investor to sign a document, stating that he intends to invest for a longer term. However, this practice is not widely prevalent.”

Also, getting out of an ULIP, if it has not been performing well, can be a costly affair. If your tax- saving mutual fund is not performing, you can simply stop investing and move onto another scheme.

In case of ULIP, if you want to stop investing after three years and move onto another scheme, you will have to bear the high premium allocation charge of the new Ulip in the first three years.

To the detractors of ULIP, insurance companies keep pointing out that their expense structure over a longer period of 10-15 years works out to be much lower than that of a mutual fund. Hence over that period, ULIPs are more likely to perform better than mutual funds.

“In single premium products, which comprise 50 per cent of ULIPs sold, the commission is just 2 per cent. However, the cost is a little higher in regular premium products. But, it would even out in 8-10 years.

Investors need to understand that Ulips are for longer-term periods,” says SV Mony, secretary of the Life Insurance Council. But investment experts don’t seem to agree.

“Lower expenses have to match up with performance. The basic assumption that insurance companies make is that ULIPs and mutual funds will give similar returns. Actually, mutual funds have outperformed an average ULIP by a huge margin, and there is no way they can catch up in 10-15 years,” says Pandit.

“It is too early to compare the ULIP returns with mutual funds as Ulips have been launched only for 3-4 years now. Though we would not like to comment on the industry performance, our unit-linked funds have performed extremely well and are in-line with the performance of mutual funds, says Sanjay Tripathy, head marketing at HDFC Standard Life Insurance.

So what is the way out? It would be ideal to separate your insurance and investment decisions.

Investors desiring both insurance and investment should buy each product individually and avoid any combination thereof. Whenever insurance is combined with investment, it produces sub-opitmal results. So one should always buy term insurance and invest the rest of the funds in a pure investment product of choice," says Shanbhag.

Source: DNA Money

Life Insurance Corp raises stake in IPCL

Mumbai, July 9: Indian Petrochemicals Corp. Ltd. said on Monday Life Insurance Corp. of India has acquired a further 2.03 percent stake in the company to raise its holdings to 13.39 percent.
Shares in IPCL were trading down 0.3 percent at 340 rupees in the Mumbai market.

Source: Financial Express

Skymet bets big on weather insurance for air travellers

At Rs 250/year, travellers can get Rs 4,000 refund for delays of over 10 mins.

More biz from commodities, power, weather derivatives.

Insurance may be on offer in Yatra, TravelGuru travel portals.


Skymet is betting big on weather forecast, and is expecting traders and travellers to celebrate both sunny and gloomy weather days.

Here’s some cheer for stranded travellers: the country’s first private sector weather forecasting cell is in talks with major credit card companies, including ABN-Amro, American Express and SBI to offer weather insurance policy for air travellers.

For a premium of Rs 250 per annum, a traveller could get a refund of Rs 4,000 for delays of more than 10 minutes due to weather parameters. A Rs 1,000 premium will cover travellers completely. According to Mr Jatin Singh, Managing Director, Skymet, issues of travel delays due to fog and rain are exaggerated by the media.

The insurance could soon be available on travel portals such as Yatra and TravelGuru as a retail insurance product. Skymet is also working with Weather Risk Management Services to create a weather insurance policy for New Delhi Power Ltd (NDPL).

Derivatives

With revenues Rs 1.26 crore annually, and growing at 80 per cent year on year since it started operationsin 2003, Skymet is also optimistic about weather derivatives.

“The Forward Markets Commission is considering allowing trading of weather derivatives, and when that happens we believe it will open up huge opportunities for us,” said Mr Singh. Weather derivatives, or the concept of weather as a tradeable commodity, covers for change in demand, say for example for energy companies which would be affected by reduced consumption from a warmer-than-usual winter.

Noida facility

With a team that includes 10 weather forecasters, The company’s Noida facility has been equipped with Weather Research Forecast (WRF) Model, capable of generating forecasts for resolutions as low as 3 km, providing forecasts for three days and general weather outlook for the next seven days.

Inaugurating the new outfit, Dr Jagadish Shukla, Distinguished Professor, Climate Dynamics, George Mason University, US and President, Institute of Global Environment and Society, said there were more than 450 companies in the US affiliated with the national weather service.

Skymet, however, does not have the support of the Indian Meteorological Department and Dr Shukla suggests, in the company release, that the Government create infrastructure and allow the private sector to customise and distribute forecast.

Already providing weather forecasts to Reliance Energy for its power distribution, Skymet expects more business to come from commodities, power, and weather derivatives.

Client base

The parent company, BK Consimpex Pvt Ltd, a technology provider of instrumentation, radars and their maintenance, has clients like the Indian Meteorological Department, the Indian Air Force, and Indian Space Research Organization amongst others.

The company now hopes to be a global player in weather software development and integration of world class instrumentation. The company is also looking to expand its business of flight briefing system offered to major international airports and all Air Force stations in India.

Source: The Hindu Business Line