POLICY TRADING IS FINE, BUT REGULATE IT

A recent Bombay High Court ruling lets you sell a life insurance policy to anyone you want. Previously, it could only be to an entity that had some insurable interest in you — like a bank you took a loan from. For you, it’s a shot of liquidity, as you can sell a life insurance policy in case of an emergency, even get something more for lapsed policies than what insurers offer. For insurers, the development of a secondary market means servicing lapsed policies, translating into lower profits. Sam Ghosh, chief executive officer, Bajaj Allianz Life Insurance says the issue is not more payouts, but the absence of regulations that will prevent misrepresentation and fraud. In an interview to Deepti Bhaskaran, Ghosh talks about how policy trading is useful for policyholders and what needs to be done to make it safe. Even before the court ruling came in, there wasn’t any law that prohibited policy trading. So then, why did life insurers discourage it?It wasn’t insurers, but LIC (Life Insurance Corporation), which was the sole life insurer till a few years ago. LIC insisted on the presence of the principle of insurable interest policyholders could assign a policy only to entities that had an insurable interest in them. When a policyholder sells a policy, his rights in the policy get transferred to the buyer. So, if the policyholder dies, his death benefit goes to the buyer, instead of the beneficiary. Free trading goes against the principle of insurable interest, and that’s why LIC didn’t allow policy trading. The insurance regulator also agreed with LIC’s argument. So, when the life insurance sector was opened to private players, we took this as the norm. Of late, the number of lapsed policies has increased, and policyholders are the losers — they paid premiums for some part of the policy tenure, but they forfeited the entire gains due to them. Trading will help such policyholders get some money for their policies. Also, by giving liquidity during the tenure, it enables policyholders to review their reasons for buying the policy. Yes, it does. As a policyholder, when you can’t afford to pay premiums, you either accept the surrender value being offered by the insurer or the policy lapses. The policy has acquired some value. If the policy can be sold and a higher amount realised, it is good for you. Even the buyer can manage higher returns. We are not opposed to trading in life insurance policies. But we would like to see rules in place before it begins However, the problem with policy trading is that it could lead to moral hazards. Since the policy benefits get transferred to the buyer, the unscrupulous could buy a policy and then kill the seller to get the sum assured. Having said that, chances of such incidents are rare. The other problem for insurers is that, in the absence of an insurable interest, it is difficult for us to keep a track of the policy once it reaches the secondary market. When does it make sense for policyholders to sell their policy? Only in one case: if you are facing a severe cash crunch and can no longer service your policy. For you, trading is helpful, as it helps you get some value for your policy, and it is only fair that you do. If you took a policy that you now think is inappropriate for you, a secondary market offers an exit route. The flip side to this is that if this becomes the overriding principle, the secondary market will be all over the place. Take Ulips. With every fall in the market, policyholders will try to sell off their Ulips, and vice versa. Are you suggesting only some kinds of policies be traded?No. Since trading happens during hardships, there’s no reason why any policy shouldn’t be traded if it is not being serviced. More than the type of the policy, what is more important is the reason behind selling the policy. How important do you think will the intermediaries be who help people buy and sell policies? Once the secondary market picks up, we need a pricing mechanism that ensures fairness to both policyholders and buyers. Intermediaries will do the pricing. But how that pricing will be done, what conditions will enable selling, what will be the commissions of the intermediaries need to be decided. Right now, there is nothing in the regulations that can ensure fairness. Once the secondary market picks up, the regulator will introduce guidelines on selling. In developed countries, there’s an active secondary market in insurance policies. Some of those insurers are in India and they are opposed to introducing it here. Isn’t that double standards?That’s not true. Overseas markets are active, but there are guidelines in place for brokers and policyholders. Once guidelines are introduced for trading in India, the skepticism will go. But is the reservation only about guidelines? Or, is it also because insurers will now have to pay for policies they had thought had died?Well, this is a very small issue. Moreover, the way we look at business, it is profitable for us if premiums come to our books and a policy stays alive for its entire tenure. Any lapse is seen as bad. So, revival is really not an issue with us. The only problem is when it is traded carelessly. What about tax laws? Will the same tax laws apply to the secondary market as in the primary market?That still needs to be decided. A meeting of the Life Insurance Council shortly will touch on these issues.

Source: Express Money, April 10, 2007

WE HAVE JUST TAPPED 40% OF SBI NETWORK

SBI Life MD and CEO wants the company to be market leader in 3 years. Uday Sankar Roy, the new managing director and CEO of SBI Life Insurance Company, has set an ambitious target of making the subsidiary of State Bank of India (SBI) the largest player among new players within five years. In an interview to Business Standard, Roy sounded confident that the strength and reach of SBI will catapult SBI Life to the position of an undisputed leader after LIC. Roy has taken charge at SBI Life after serving at the parent bank for 36 years at various senior positions. Excerpts from the interview: How different is insurance from banking? Banking products are bought by customers whereas insurance products are sold to customers. To sell insurance, one has to reach out to people and convince them. This requires a high degree of selling skills. Also there has been a major shift in the way the young generation thinks about future planning. Youngsters today do not see themselves working till 60 years of age. So there is a need to convince young people to use insurance to meet their financial needs after their planned working life. Where do you see SBI Life say a few years from now? We want SBI Life to be the market leader (after Life Insurance Corporation) in the next three to five years. We want to be the undisputed leader among new life insurers, with the gap between SBI Life and other private sector life insurers large enough for us to be described as the “undisputed” leader just behind LIC. The aim is to take SBI Life to a position where SBI is. How will you achieve it? SBI is our strength. We have till now tapped only 40 per cent of the 14,000-strong branch network of SBI and its associate banks. Unlike competitors, we do not have to set up large number of offices as we can achieve the intended reach through SBI group’s network. As we move towards our goal of becoming the market leader, we would have tapped about 80 per cent of the branch network of SBI group. We will also be increasing the number of agents (from 15,000 now to 20,000 by next year), but our primary channel will remain SBI branches. SBI hasn’t done as well as it should have considering the fact that the SBI brand is synonymous with trust. Some other private players are doing well despite not having the backing of a strong institutional brand. Why? We have 3 to 4 per cent market share at present and you can say that we are going through a warming up period. We can’t follow the model of other life insurers as we already have SBI branches. An insurance company spends Rs 20 to 30 lakh on a branch besides additional management expenses. We have to train people at the bank. Since we follow the bancassurance model more diligently, our bank employee is a financial advisor-cum-insurance seller. Besides, protecting the SBI brand is also important. Is there any plan to create more brand awareness about SBI Life? We do have plans. We are talking to market research firms for getting to know the market perception of our company and also advertisement agencies for a brand campaign to get visibility at the mass level. In another six months time we should be finalising a campaign.

Source: Business Standard, April 8, 2007

GENERAL INSURERS MAY CUT SHARE OF TPA BUSINESS

With big names in the insurance industry buying equity interest in third party administrators (TPAs), general insurance companies are planning to withdraw their business from them. This could blow a Rs 500-700 crore hole in revenues of TPAs like Paramount, Family Health Plan and Medi Assist say experts. A third party administrator works on behalf of an insurance company to manage claims and customers. Sources said United India and National Insurance have sent out circulars to these TPAs informing them of their decision. Others like New India Assurance, Oriental Insurance and private players like ICICI Lombard and Iffco Tokio are also expected to follow suit. At present, TPAs earn over 75% of their business from the public sector companies, with the balance coming from private players. These TPAs are being viewed as competitors in health insurance space since their parent firms have active interests in same space, says a source close to the development. When contacted APV Reddy, CEO, Family Health Plan, declined to comment. These developments follow consolidation in the health insurance business. Last year, for instance, the Anil Ambani group acquired a major stake in Bangalore-based Medi Assist India to make it a captive TPA for its own health insurance business. Similarly, the Apollo group, which owns Family Health Plan is tying up with a Munich Re company DKV to set up a standalone health insurance company. Additionally, Munich Re owns a 26% stake in Paramount and the remaining 74% is likely to be sold to an Apollo group nominee. However, there may be an exception for Bangalore-based TTK Healthcare, now a part of Swiss Re. Says Girish Rao, managing director, TTK Healthcare, "We have been talking to the chairmen and heads of the insurance companies clarifying that neither TTK nor Swiss Re have any intentions to get into health insurance directly. Globally too, Swiss Re is a reinsurance company and has no direct health insurance business." While this is bad news for these three TPAs, it means more business for the remaining 23 TPAs in the country.

Source: Times of India, April 8, 2007

Insurance Bill fate hangs in balance
by Mahua Venkatesh

NEW DELHI, APR 6: The group of ministers on insurance may not be able to come up with its final recommendations within the current Budget Session of Parliament. Official sources said that the GoM, headed by external affairs minister Pranab Mukherjee, was likely to take a few more sittings before it draws its conclusions. The GoM has todate, only met twice. The Bill for a comprehensive amendment of the insurance sector was slated to be taken up during the Budget Session.
The primary objective of the GoM now is to convince the Left parties on the need to raise the foreign direct investment in the sector to 49% from the current 26%. In fact, in the last meeting the GoM tried to garner support of the Left allies.

“We are now expecting the Left parties to get back with their observations and queries on the FDI issue, which would be then taken up for discussions during the next couple of meetings,” a source said.
The uncertainty on the issue of hiking FDI has become a cause of concern for the insurance companies. Sources within the industry said that the insurance business is capital intensive and fresh capital would required for further expansion and to break even.
Besides the amendment to the Insurance Act, other reforms in the financial sector relating to raising the voting rights of foreign stakeholders in private banks, pension Bill among others are also pending.

Source: The Financial Express April 07, 2007

Reinsurance cover by GIC cut to 15% from April

Bangalore March 12 As part of the second phase of the insurance sector reforms, the statutory share of the national reinsurer, the General Insurance Corporation of India (GIC), is to be reduced to 15 per cent from April.
Under current regulations, the domestic non-life insurers — both public and private sector — are expected to mandatorily cede 20 per cent of their insurance risks to GIC. The mandatory cession would be further reduced to 10 per cent from April 2008, onwards.
GIC confirmed the reduction in the mandatory cession. GIC's General Manager, Mr R. Chandrasekaran, said, "This is an after effect of deregulation of the insurance markets in the country." GIC also favoured the reduction since it would reduce its liabilities in an environment of intense competition and falling premiums. This is despite the fact that 76 per cent of GIC's gross premium income came from within the country.
Till March 2006, gross premiums were a little over Rs 4,800 crore. Of this, around 82 per cent was from obligatory cessions. GIC is unfazed by the changed market situation. Mr Chandrasekaran said, "We have a global reinsurance experience of about 15 years. The reduction in cession will make little difference to our revenues."
Global presence
Besides, GIC has also expanded its global presence accepting inward reinsurance premiums. Last year, GIC had earned about Rs 400 crore by way of reinsurance. With focus on Eastern Europe, West and East Asia, GIC's global premium income is expected to be well over Rs 1,500 crore this year, the sources said
Private sector insurers
They said that the reduction in cession would now give greater flexibility in fixing tariffs for reinsurance support to domestic insurers in a deregulated environment. In fact, almost the entire private sector, despite the low capitalisation has been growing on the back of the reinsurance support provided by the statutory and global reinsurance since private sector's retention capacity limited by its net worth. For the first 10 months of the current year (April to January 07-08), private sector insurers earned premium income of Rs 7,329 crore. The combined capital of all the 8 per cent private sector insurers is barely Rs 3,000 crore.
Low retention capacity
Consequently, about 80 per cent of the business would still have to be reinsured, given the low retention capacity. As a result, GIC's premium income was expected to sustain the momentum in tandem with the growth in the industry. The industry has grown by 24 per cent this year over the corresponding period of the last year.
Moreover with the global reinsurers closing ranks, GIC, the sources said, would actually benefit in the deregulated environment. This was because even without reduction in tariffs, insurers would still have to take recourse to GIC for meeting their capacity requirements. The four public sector insurers have a much larger capital base of close to Rs 14,000 crore that gave them adequate retention capacity on their own.

Source: The Hindu Business Line (C. Shivkumar )