Companies in this sector have seen good premium collections and rather in the down market are increasing their exposure in the equity market at regular intervals. Rahul Jain and Rajesh Naidu of The Financial Express discussed the contra-action and other issues with Bryce Johns, chief investment officer and development actuary of Kotak Life Insurance. Excerpts are: In the first quarter of the current fiscal, insurance companies are estimated to have pumped in at least Rs 15,000 crore or four times what was invested a year ago. What is your take on this?
Currently insurance industry is seeing a growth of 87%. Insurance products being tax exempted, the inflow of premium mainly comes in the last quarter of every financial year i.e., from January to March. Also considering the way market has reacted from October 2007, since then the number of policies distributed has gone up. If one looks at the product portfolio of our company the equity proportion is on the higher side.
The proportion of equity and debt could be 80-20 termed as aggressive fund, 70-30 being and 50-50 as balanced one. So, due to this huge inflow of premiums and majority investors opting for equity products, it is obligatory to invest in equity. We have invested in the range of 1,300 crore to 1,500 crore and a large chunk has come in the last quarter. On the other side as an insurance company we can keep higher cash levels but in a highly inflationary economy keeping cash is not feasible.
Have you seen some action from the investor’s side like redemption or slow down in the number of policies after the crash in the equity market?
Unlike in the case of mutual fund where one can redeem any time, insurance products are much more complex and for long-term like 10 to 20 years. Hence, investors who have invested cannot redeem due to lock-in period of three years in the case of ULIP and longer period for other non-market linked products. We have not seen any surrender or switching off investment from equity to debt or balanced type. On a yearly basis switching off, however, is done on a lower side at around 5% from the total number of unit holders. One more thing to note is our investment in large-cap has helped to protect the asset size or net asset value than investment in mid-cap or small-cap.
Do you see the... current equity market situation improving?
As far as equity market is concerned there would be short-term breaks. Finance and real estate companies have boon the maximum impact. We are seeing more negative news than positive. Negative news like high oil prices due to geo-political factors and speculation in the market is driving the oil prices to an all-time high. In the domestic market, high fiscal deficit in the economy and political uncertainty are major cause of concerns. Other than this the major impact is due to high inflation and interest rates. At this point fixed deposit rates look attractive due to high interest rate environment.
All these factors result in increase risk aversion among the investors and so we do not expect a v-shaped recovery. However, if one looks at a long-term perspective nothing has changed structurally and inflows would remain positive. India’s growth story is intact and would continue in the future.
We don’t see market movement affecting the incremental inflows in premium collections. One of the advantages of ULIP product is that it can be invested on monthly, quarterly and yearly basis. Systematic investment in this market works better by taking the advantage of volatility in the market and averages the cost of investment over a period of policy term.
Can you tell which one is better, ULIP or mutual fund with term insurance?
It depends upon the investor’s time horizon to achieve its goal. If one is looking for a three to five year period then mutual fund investments are effective than ULIP and attracts much lower entry load than insurance products. And due to negative sentiment and risk aversion one can look at term insurance as one time premium paid is much lower on a yearly basis for the sum insured. But one should take caution while dealing with two advisors for two different products.
Investors looking at saving for children and retirement purpose which are for 15 to 20 years, insurance products are better-off than mutual funds as they are tailor-made to fulfill investor’s long-term objective.
What kind of new and innovative products you plan to launch in the market?
We have annuity products which has guaranteed or fixed component if the market goes down or turns negative. At Kotak Life we offer products like Kotak Dynamic fund which are similar to annuity products and has fixed interest component. There is an additional feature wherein... if market goes up the equity exposure is reduced to booked profit and when market is down equity exposure is increased at lower levels.
We also have capital protection scheme which suits better in this type of market. It has capital protection feature with insurance component also. We have seen good interest in ULIP products. They constitute majority of our portfolio compared to non-market linked and term insurance products. One can use the switch feature and can convert the units from equity to debt if market goes down and vice-versa if market goes up....
Source: The Financial Express
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