Tuesday, August 26, 2008

NEW NORMS TO DIVERSIFY INSURANCE COS RISK

Hyderabad/Mumbai: Insurers investing in initial public offerings (IPO) of private sector companies will enjoy more freedom that could help policy holders garner higher returns from equities post-listing.
They can also invest in fixed-income instruments such as mortgage-backed securities (MBS) and bonds floated by developers of SEZs. Insurers will get greater leeway in their investments in mutual funds and venture funds as well.
Insurance regulator Irda on Friday notified major changes in the investment norms for insurers that will help companies diversify risks and lower the strain on capital. For policy holders, it would also mean higher yield on investments.
“The new regulations provide more flexibility to insurers that will help generate better returns. The control framework has also been tightened as a result of which risk management will be more robust,” ICICI Prudential Life Insurance chief investment officer Puneet Nanda said. The control framework includes exposure limits that are more conservative than those applicable to mutual funds.
Currently, insurers can invest in an IPO of a private sector company if the minimum issue size is Rs 500 crore. The amount is significantly lower at Rs 100 crore for investment in IPOs of public sector companies. The regulator has now fixed a uniform minimum issue size of Rs 200 crore.
However, safeguards are in place to ensure that companies maintain their solvency margins and are able to pay claims to consumers. The investment in equity shares will have to comply with the prudential and exposure norms . Insurance companies can invest up to 10% of the face value of the company or 10% of their fund size as application money. In a choppy market, the changes will ensure that investments are made only in good quality paper,” CIO of a private insurance company said.
The investment basket for insurers has also been widened to include MBS-structured loan instruments where cash flows from home loans are pooled together and converted into marketable securities. MBS will qualify as investments under the housing sector, but subject to industry exposure norms. This means insurance companies can only invest up to 10% of their portfolio in MBS under the approved investment category.
They can also invest in bonds of SEZ developers, with Irda aligning the definition of infrastructure with that of the banking regulator. The regulations will make investments for life insurers, who have Rs 8,00,000 crore assets under management. The housing finance and infrastructure finance industry will also benefit from the regulations that allow for investments in securitised paper from these sectors.
The insurers’ investment in liquid mutual funds will fall under approved investments. However, the instruments should not be used as long-term investments. They can be a maximum 5% of their investment portfolio in liquid mutual funds. The fund size is Rs 50,000 crore for a life company and Rs 2,000 crore for a nonlife company. “The new norms provide more clarity on investments in mutual funds,” a senior insurance industry official said.
It has also aligned the exposure norms of public and private sector insurers. This means LIC can invest only 10% of its portfolio in a single company against 30% earlier. For the first time, exposure norms have been made mandatory for unit-linked insurance plans (Ulip), which are akin to mutual funds in design and have an added insurance cover. The move is aimed at mitigating the risks arising from investments in a few companies.
The investment norms for insurers are stipulated in the insurance legislation. Now, an overhaul has been undertaken without taking recourse to legislative amendments.
At present, life insurance companies are allowed to invest 50% of their investible assets in government and other approved securities. Additionally, they can invest at least 15% in infrastructure instruments that qualify as approved instruments.

Source: The Economic Times

HSBC TO MANAGE UP TO 33% OF EPFO MONEY

New Delhi: The Employees’ Provident Fund Organisation finalised the fund allocation to the four successful bidders in an order that is inversely proportional to their financial bids. The lowest bidder HSBC will get the highest amount to manage followed by ICICI Prudential AMC and then Reliance Capital AMC and State bank of India.

“We have taken a decision on who will manage which fund and accordingly the funds will be allocated,” said a government official close to the development. The annual incremental accretion amounts approximately to Rs 30,000 crore. It is divided into two funds — the pension money and the provident fund money.

The management has decided to give the full pension money amounting between Rs 9,000 crore and Rs 10,000 crore to HSBC, said the official. ICICI Prudential AMC will get 40 per cent of the balance Rs 20,000 crore in the provident fund and 30 per cent each will go to Reliance Capital AMC and State Bank of India.

The funds will be allocated to the fund houses by September 1, he added.
Earlier, HSBC offered to manage the fund at a fee of 0.0063 per cent followed by ICICI Prudential AMC’s quote of 0.0075 per cent. Reliance Capital and SBI quoted their bids at 0.01 per cent.
Source: Hindustan Times

INSURANCE SCHEMES ARE NOT IN THE PINK OF HEALTH

New Delhi: How do you provide health care to handloom weavers, who occupy among the poorest segments in the unorganised sector? There are 6.5 million of them scattered across the country and are not always fixed in their occupation.

For the textile ministry that oversees their welfare, the answer was insurance cover — with a private company underwriting the risk. It was seen as a daring move when the scheme was launched three years ago, and has since become something of a trendsetter.
The Health Insurance Scheme for Weavers, launched in 2005, has a number of firsts to its credit. It provides medical assistance for a wide range of common ailments, which means Out Patient Department (OPD) is covered, and also allows beneficiaries to use alternative systems of medicine.

According to an official of ICICI Lombard, which put in the winning bid, the scheme is path-breaking and not just because of its geographical spread. Says Sanjay Pande, head of the insurance firm Financial Inclusion Solutions Group, which deals with government schemes: “There were so many firsts in the scheme that we were petrified.”

Progress, however, has been slow. So far 1.77 million weavers have been covered, but, given the challenges, it is “a hugely successful scheme”, claims Meenu Kumar, chief enforcement officer with the Handloom Development Commissioner’s office, who oversees the project. Among the tougher challenges: selling the scheme to the weavers and putting together a network of rural clinics and hospitals to meet the requirements of the scheme where 70 per cent of the treatment is cashless.

Because of malpractices and shortcomings, close to half of the 3,500 hospitals and clinics that were empanelled have been de-listed. A more controversial issue though is the amount of the insurance cover: beneficiaries are entitled to treatment amounting to just Rs 15,000, a pittance compared to what other government schemes offer. Textile ministry officials tend to bristle at such criticism, with one ministry functionary claiming that “the amount may seem very little but is in fact a big improvement for weavers”. A comparative analysis of health insurance schemes shows that the premium is by far the highest in the weavers’ scheme compared to the benefits offered.

Yeshasvini, the pioneering scheme launched in 2003 for cooperative farmers in Karnataka, charges just Rs 120 annually for insurance cover of Rs 1,00,000. Farmers are entitled to treatment for everyday problems in the rural areas, such as snake bites, electric shocks and farm accidents, and for sophisticated heart surgeries at the best cardiac hospitals in the state. S R Naik, CEO of the Yeshasvini Cooperative Farmers Healthcare Trust, claims with some justification that “there is no such scheme in the whole world”.

For one, it does not have an insurance company underwriting the risk and, for another, it does not use a single rupee from the premium for establishment costs. A small room with just a couple of tables and cupboards is the office of the trust where Naik, a retired official of the department of cooperatives, runs the show, backed by the machinery of the department and a third party administrator (TPA), Family Health Plan Ltd, which implements the scheme.

The TPA is paid a flat sum of Rs 50 lakh a year. But the fact is that the scheme cannot run without government support. The subsidy has been increasing sharply and this year the Karnataka government’s contribution (Rs 40 crore) has outstripped the premium collected so far (Rs 33.45 crore).

Numbers are crucial for health insurance schemes to remain viable. Pande maintains that ICICI Lombard is yet to make money on the weavers’ scheme but hopes to do so when it reaches critical mass. Fortunately for the company, it was able to clinch the subsequent tender (2007-09) also, and the higher volumes are expected to provide profits in the fourth year of operations.

Companies though are willing to pay a price for their learning experience. ICICI Lombard claims it lost heavily on other projects, such as the one for Punjab cooperative farmers (premium collected Rs 5.2 crore, claims paid Rs 28 crore) and in Jammu & Kashmir (premium income Rs 7.2 crore, pay-outs Rs 41 crore). Yet, it is, like other companies in the business of health insurance, jockeying hard for a piece of the action. Most of the contracts for government schemes are said to be hard-fought battles with very narrow differences in the bids.

Says R Sasi Ganapathy, chief operating officer of Star Health and Allied Insurance Co, which covers the risk for AP’s Rajiv Aarogyasri: “There are no big profits in this business just now. In Aarogyasri, we make very little money even though it’s the largest of its kind in the world. For us, it is a stepping stone because the experience is helping us to gain a foothold in other states.”

Star Health, India’s first stand-alone health insurance firm, has invested around Rs 14 crore in Aarogyasri. This may seem a large investment for a small firm but is small beer compared to the business it is expected to garner. The company has won the health insurance tender for three million state government employees in Tamil Nadu and is expecting more business from neighbouring states.

“The brand equity of Aarogyasri is very high and our costing will be tough for other companies to match,” asserts Ganapathy. All the same, it may not be a cakewalk in other states, where the lack of data could make risk-profiling difficult. The big battles will be over the labour ministry’s Rashtriya Swasthya Bima Yojana (RSBY). This is being put to tender on a pilot basis, and so far just three states have awarded contracts for some districts. There is big business in the offing as 16 other states are preparing to seek bids.

Source: Business Standard

IDBI FORTIS BRANCH IN VIJAYAWADA

Hyderabad: IDBI Fortis Life Insurance Co Ltd has opened its second branch in Andhra Pradesh in Vijayawada in addition to its branch in the State Capital. It is also planning to open four more new branches in the State during the year, Ms R.M. Vishakha, President – Bancassurance, IDBI Fortis Life Insurance Co Ltd, said after inaugurating the branch, according to a release.

Source: The Hindu Business Line

MAKEOVER TIME AT BAJAJ ALLIANZ

Kolkata: Having suffered a severe downslide in growth in premium during the first quarter of the current fiscal, Bajaj Allianz Life Insurance is going in for a rejig of its operations.

It is devising a new range of unit-linked policies to compensate for the chunk of premium that came from a category of products that were discontinued since last year. It is also looking at controlling expenses.

Bajaj Allianz grew 13% in the first quarter of the current year, one of the lowest in the industry. Although the company has the second highest market share of 12.20% in the private life space, the growth has been low compared to most of the other players in the industry.

Kamesh Goyal, CEO, Bajaj Allianz told DNA Money, “Yes, there has been a low growth, mainly on account of some categories of businesses that we have almost stopped. We are not doing single premium and hardly doing group business plans. Moreover, we have discontinued the clutch of actuarially funded products. All this contributed 40-50% of the portfolio.”

Bajaj Allianz, which has one of the largest geographical spread in the industry, may not go in for much expansion in the current year. “The greatest challenge will be to manage costs while building a market share. Currently, we are well positioned, with costs comprising 14-15% of the gross written premium. But this has to be lower in a few years. This will be done by increasing market share and increasing productivity per employee,” Goyal said.

As part of its thrust on new policies, the insurer just introduced a new unit linked plan - Fortune Plus. The company also recently launched a family floater as part of its health insurance initiatives.

Commenting on the company’s growth, Rajeev Varma, analyst with Merrill Lynch said in a recent report, “Bajaj Life’s slowdown a worry. While a concern, it is too early to take a call. We expect the growth to bounce back as it scales up distribution in the coming months.”

Enam India Research analysts Punit Srivastava and Sumit Agarwal, point out, “The company has seen a moderating growth after a high growth phase. Market share of the company has seen substantial improvement.”

Source: DNA

BUY YOURSELF A REAL INSURANCE COVER

Mumbai: A popular life insurance advertisement shows a husband asking his wife, “Mere bina jee paogi tum?” when she wants him to sign papers subscribing to a life insurance policy.

The wife, taken aback, replies: “Nahin.” “What will you do with all the money you will get from the life insurance in case I die?” he asks again. She then makes him understand that his signing the papers would guarantee their daughter’s education, his retirement and their overall future. “Sab guarantee matlab no tension aur tension ke bina aadmi zyaada jeeta hai na? Toh apni lambi umar ke liye... ...sign kar do,” she says. The husband signs the papers with an ironic remark: “Yaani ki lambi umar tak jhelna padega tumhe.”

The underlying theme in most life insurance advertisements is more or less similar.
As Tyler Cowen, an economist at George Mason university in the US, writes in the book, Discover your Inner Economist - Use Incentives to Fall in Love, Survive Your Next Meeting and Motivate Your Dentist, “Often, buying insurance is about investing in a story about who we are and what we care about; insurance salesmen have long recognised this fact and built their pitches around it.”

A recent insurance advertisement, which is very different from the typical life insurance advertisements, has the ‘thinking’ woman’s sex symbol, talking about people suffering from - K.I.L.B or kam insurance lene ki bimari. Never before has an insurance advertisement talked about the real problem so directly.

Most of us do not have the right level of life insurance cover. And who is to be blamed for this? To some extent our ignorance and to a large extent, life insurance companies and their agents, who are more interested in selling investment products masquerading as insurance as these fetch higher margins.

That explains why pure insurance covers (or term insurance as it is popularly known) forms a very minuscule percentage of the total amount of life insurance being sold in the country.

The first financial decision that any working professional who has a dependant family should take is get himself is a term insurance policy. In a term insurance policy, in case of death of the policyholder during the term of the policy, the nominee gets the ‘sum assured’ (or the life cover). But if the policyholder survives the period of the policy, he does not get anything.

One reason people don’t like term insurance is the fact that if they were to survive the term of the policy, they feel, the premium paid is wasted. However, what they don’t realise is that they are ‘insuring’ themselves by paying a premium and not investing. Term plans have the lowest premium among all the different insurance plans. And as we shall see, if the individual calculates the right amount of insurance cover and opts for it, the cheapest way to get it is by buying a term insurance cover.

So, how is the right amount of insurance cover calculated?

A thumb rule going is that the insurance cover of an individual should be at least 5-7 times his annual income. Going by this, if a 30-year-old earns Rs 6 lakh per annum, he should have an insurance cover of Rs 42 lakh. But this approach, though better than having no insurance cover at all, is not the only or the best way to approach the problem.

Another way to calculate the right amount of insurance cover is the human life approach. Under this, someone earning Rs 6 lakh per year is taken to be earning Rs 50,000 per month. Assume that his own expenditure per month is at Rs 10,000. The remaining Rs 40,000 goes towards meeting the family expenditure and savings. If something were to happen to him, his family, which is dependant on him, would need Rs 40,000 per month to maintain a similar standard of living. Now, to earn an income of Rs 40,000 per month at a rate of return of 8% per year, he would require an investment of Rs 60 lakh, which is the amount of insurance cover he should have. Thus, had he followed the thumb rule, he would have been underinsured.

The human life approach to calculating the amount of insurance cover is also not perfect. It does not take into account the rate of inflation. A term insurance cover of Rs 60 lakh for a period of 35 years for a 30-year-old would involve a premium of around Rs 23,000 per year. On the other hand, an endowment policy with a similar cover would require a premium payment of nearly Rs 1.6 lakh per annum, which is seven times that and clearly beyond the means of someone who earns Rs 6 lakh per year.

The other thing to keep in mind is to get a term cover for as long as possible. If in the example taken above the individual had taken a policy for 25 years, he would have needed another policy once this policy expired. At 55, he would have found it very difficult to get an insurance cover and even if he did, he would have to pay an exorbitant premium for it.

Source: DNA

HIGH INSURANCE LOADING DESPITE IRDA DIRECTIVE

How effective is the Insurance Regulatory and Development Authority (IRDA) directive over loading (increase) of premium during health insurance policy renewal? Despite the March 2008 instructions to public sector general insurance companies to cap loading at 75% of previous year's rates and to set up a grievance cell for the category, complaints from senior citizens continue to pour in. A high-ranking insurance official, who does not wish to be identified, says "these half-hearted measures don't work" as the regulation was issued more in the form of an advisory than a notification. In March again, P N Ojha of Mumbai-who has held a family health policy with New India Assurance Company for 19 years without making a single claim-was in for a shock when his policy went up for renewal. He was asked to pay a premium of Rs 29,401, which amounted to an over 100% loading over the previous year's Rs 14,485. New India Assurance CMD B Chakrabarti, though, says this lapse could be the result of "some operational problem" and asks the consumer to write in to get it rectified. Ojha's grouse, though, does not end here. "I received the renewal letter just days before the policy's expiry, so there was no room for discussion or negotiation. Since I am 74, I had to accept the terms. If I were to approach another insurer, they would not have accepted my application." (The insurance official says insurance companies are "very careful" with applicants who have crossed 65 years of age. An industry observer had earlier noted in this column that insurance agents are also discouraged from bringing in senior citizens). Kirti Bhatt, director, legal, at Ahmedabad's Consumer Education & Research Centre, thus emphasises that seniors cannot afford to remain without a policy. He advises them to pay the premium and only then dispute the loading. "If there is a break, an insurer will consider the new application as a fresh policy and exclude existing diseases under the pre-existing diseases clause." That is, if the insurer accepts the application in the first place. Ojha, who paid the renewal premium, has a bigger grouse with IRDA itself. He had written to the regulator's cell, which attends to senior citizens' grievances, with his case details. "Four months passed without a reply." When contacted, the new IRDA chairman Jandhyala Harinarayan asks the consumer to write in again. "We are here to help out," he assures. In another interesting twist to this case, a few days ago, Ojha received an envelope from the insurer. It contained a premium refund intimation voucher of Rs 4,028, saying "it is hereby agreed and decided to refund excess premium to insured persons above 60 years who have renewed their policies between August 16, 2007 and April 9, 2008". Ojha adds that even with this discount, the loading on his premium remains slightly above 75%. Meanwhile, K S (Kaka) Samant, general secretary at the General Insurance Pensioners' Association (western zone), advises senior citizens, whose complaints continue to languish at the IRDA, to approach the ministry of finance.

Source: The Times of India
Hyderabad: The Insurance Regulatory and Development Authority (IRDA) has constituted a committee to examine the requirements for International Financial Reporting Standards (IFRS) compliance by the insurance industry.

The 12-member panel is headed by Dr R. Kannan, Member (Actuary), IRDA. It would examine the requirements of IFRS, current availability of various requirements including accounting standards, identify gaps and suggest various measures required to fill the gaps to enable the industry move towards IFRS compliance by 2011. The panel would submit its report by March 31, 2009.

The Institute of Chartered Accountants of India had earlier announced that the accounting practice should move towards IFRS by 2011. “The accelerated globalisation of business and the internationalisation of capital markets have lent greater urgency to the drive towards more standardised reporting system. One of the important developments in the financial sector is the preparation for moving towards IFRS compliance,” IRDA said in a release.

Source: The Hindu Business Line

IRDA LOOKS AT BANKING NORMS TO CLASSIFY INVESTMENT PORTFOLIOS

New Delhi: The insurance regulator will set up a committee to draw up guidelines to classify the investment portfolios of insurance companies, a move that could require them to value their investments and make necessary provisions according to prevailing market conditions.

Life insurers are allowed to link policyholders’ funds to market prices, such as in the case of unit-linked policies (Ulips), but they can’t do so with the funds they are mandated by law to maintain to meet potential liabilities.

Currently, they invest such funds in debt securities and record the investment at book value, or the price at which they were bought. This method does not require the firms to provide for the loss if the value of investment falls, or makes a profit if the market prices rise.

The Insurance Regulatory and Development Authority, or Irda, plans to implement the norms in line with those for banks. The Reserve Bank of India, allows classification of investments in three categories—held to maturity (HTM), held for trading (HFT) and available for sale (AFS).

Under HTM, debt securities are held till maturity. These are recorded at the initial cost and are not affected by market movements. HFT securities are subjected to active trading for the purpose of profit taking, while AFS securities are not traded or held till maturity but are recorded at market value.

“The proposal for classifying investments of insurance companies into different components would help in developing well-understood guidelines of valuation and provisioning requirements for the investments made by the insurers,” said C.R. Muralidharan, the regulator’s member for finance.

Irda usually requires the government to effect changes in insurance laws through Parliament. In this case, Muralidharan said, the regulatory and operational issues involved would be examined shortly through Irda’s standing committee on accounting issues, which could meet sometime in early September. “Regulatory changes required would be examined only thereafter.” Irda is yet to decide on the composition of the panel that would work on the guidelines.

Last week, in the absence of any classification guidelines, Irda deferred its decision that required all companies to value their debt securities, set aside for the purpose of com putation of solvency margins, at the lower of the acquisition cost and the market value.

Currently, the entire investment portfolio of non-life companies is treated as HTM, said Sanjeev Chanana, director and general manager, Oriental Insurance Co. Ltd.

“The classification of investment portfolio into held to maturity, held for trading and available for sale categories will have far-reaching implications for the insurance companies,” he said. “If the classification comes into effect, in case of debt portfolio, there will be greater incentive to invest in tradeable securities.

Thus the insurance companies will be able to earn a better yield from their debt portfolio—not only from interest income but also from sale of such securities,” he added.
“As far as the tax implication goes, in the first year when this classification comes into effect due to mark to market, we will need to pay about 35% tax at the current tax levels. Further we will be taxed for short-term capital gain.” Mark to market is a term to account for investments based on prevailing market prices.

Under this, companies will have to record a mark-to-market gain or loss depending on the changes in the market value of their investments.

Source: Mint