FDI TO BOOST INSURANCE

Mumbai: With the hopes raised that the government will increase the cap for foreign direct investment in the insurance industry to 49 per cent from the present 26 per cent, the public sector companies could face tougher competition from the private sector.

Moody’s Icra outlook for the Indian general insurance industry observes that the capacities of the domestic partners would no longer constrain capital levels for joint ventures.

Today, despite all the constraints, the market share of the private sector is catching up and the two will likely to converge over the medium term. The market share of the public sector has come down to around 65 per cent in 2006-07 while that of the private sector has gone up to around 35 per cent in the same period from a little less than 30 per cent in the previous year.

The study says that in the past, private insurers had aggressively targeted the more profitable (and tariffed) corporate fire and engineering businesses by combining with discounted offers on de-tariffed products like personal accident and health and marine cargo and hulls.

The report said that the inherent operational flexibility of the private players, such as aggressive pricing, has allowed them to capture a greater share of large corporate accounts.

But such strong penetration of large corporate clients makes future growth in this segment more difficult. Mr Rahul Agarwal, CEO and managing director, Optima Insurance, agrees that competition for the public sector will go up if the joint venture cap is increased.

He said a lot of foreign companies will come and the Indian companies’ joint venture partners will pump in more money as they are cash starved. The JV partners feel that with just 26 per cent, they are only giving intellectual property. They would bring in more technology if the cap is raised. However, Mr Agarwal said, "market share should not be seen in isolation. Everyone grows. It happened in the case of Maruti and LIC."

The Moody’s report says further that the public entities lack the operational flexibility enjoyed by the private players. Their limited capacity to innovate has impacted their ability to tailor and aggressively price products for large corporations.

Source: Asian Age, Deccan Chronicle

‘YOU SHOULDN’T BUY A ULIP FOR INVESTMENT AND A MUTUAL FUND FOR INSURANCE’: ZANKHANA SHAH, MONEY PLANNER

Two mutual fund houses recently launched insurance features in their respective equity schemes. Rahul Jain of The Financial Express discussed the benefits and the caveats of the same with Zankhana Shah of Money Planner. Excerpts:

What could be the prime objective for adding the insurance feature in an equity mutual fund scheme, considering the current equity market situation?

There is no link between the negative sentiment in the market and providing an insurance benefit. The insurance benefit provided in an equity mutual fund scheme is a type of risk management and also gives personal cover. This feature is a very cost effective way of getting insurance with no extra cost to the investor. It is lucrative for the person who is going to take a cover for first time.

Do you think addition of the insurance component in a mutual fund scheme is actually beneficial to investors? How?

Not really because it is not substituting insurance. Insurance feature could be different in each fund house. In case of Reliance MF the insurance ceases to exist after tenure completion. Term insurance would be better for the ones who are going for a higher amount. The objective of going for investment and insurance cover is always different. You shouldn't buy a unit-linked insurance product for investment and a mutual fund product for insurance. Investors should not go for a mutual fund scheme because it has an insurance benefit.

The insurance feature in the mutual fund is limiting to switch or redeem the units because if one does so before three years, then the insurance cover expires. Your cover is related to your investment. The same is true with ULIP, where if the investment is reduced, there would be a proportionate reduction in the insurance cover.

Does this feature make the product better than ULIP and can it replace ULIP, considering the high cost structure?

Yes, it can replace/substitute a ULIP product. In ULIP there are allocation and mortality charges, which are comparatively on a higher side. If a person wants a 10-lakh cover for a tenure of 20 years, one can invest Rs 10,000 per month to get that insurance cover. However, there is a limit of Rs 15 lakh or 20 lakh insurance cover provided, unlike in ULIP where you can take Rs 50 lakh insurance as well. ULIP is being sold on the basis of insurance benefit and not investment because people go for insurance first. But if you go just for insurance, your investment needs are not fulfilled and subsequently your goals cannot be achieved. One should go for investment first and then insurance but practically it is opposite in the market.

This insurance featured product is more beneficial to the ones who are new and would like to have relatively less cover due to income limitation. Hence, one can get insurance by not paying any extra amount. This investment is less attractive for high net worth individuals (HNIs), whose insurance cover can go above 20 lakh.

Does this feature have any hidden charges other than load expenses and will that make any difference in the returns parameter?

There are no hidden charges and also it is better on the returns parameter, considering the cost involved in ULIP. A mutual fund is much more regulated and so the fund house cannot charge more than the prescribed limit unlike insurance, which comes under Irda regulation.

According to you, which one is better, if one excludes insurance benefit, mutual fund plus term insurance or ULIP? Why?

If one excludes the feature or not, mutual fund plus term insurance is much better than ULIP. The most important, as I said above, is cost effectiveness and the other is the choice of more than one fund manager. Because you can buy more than one mutual fund scheme and get the benefit of various fund managers. In ULIP if you buy more than one scheme then your total cost of insurance increases, which is nil in case of a mutual fund.

How many fund houses have introduced this feature/benefit? Do you think more will come in the near future, considering more redemption due to the downward and volatile trend?

As of date, only two fund houses have come out with the insurance feature. We could see others coming into this fray to garner more inflows. This additional feature product is also important in financial planning for any person. One more thing to note here is if all the fund houses came out with insurance, then the investor can get a higher amount of insurance with no extra cost to be borne.

Source: Financial Express

LIFE INSURERS – THE ROAD AHEAD

The insurance industry in India appears full of life. Having grown at double-digit rates in the last couple of years, it is no surprise that new players are still queuing up to enter the market.
But despite the huge untapped market potential that India has to offer, players may have to brace themselves for a slight dip in growth momentum, given the industry’s high reliance on market-linked insurance products. The unit-linked insurance policies, whose sales peaked in the last few years due to the bull run in the equity market, now make up as much as 85-90 per cent of the total insurance sales.

Slowdown – not yet
Would the recent downtrend in the equity market and the sector’s dependence on market-linked products pose challenges? The growth in premium collections during recent months provides no cause for concern. For FY08, while the industry grew by about 31 per cent, private players grew by 83 per cent; LIC registered a flat growth. However, the growth numbers for March 2008 were not as rosy. For private players, the growth in new business premium slowed down to 54 per cent in March.

The slowdown was sharper for LIC, which saw a 16 per cent decline in new business premium for the month. There, however, has been a rebound in the sector’s growth since then. Private players witnessed a 72 per cent year-on-year growth in new business sales in May 2008. This has also been on the back of a reshuffle in market shares between private players and the LIC, whose market share reduced to 38 per cent in May; it was about 48 per cent in FY08.

Players also hold the view that blips in the equity market would not materially impact collections, as ULIPs, as a product, target long-term investments. Mr Kamesh Goyal, CEO, Bajaj Allianz Life, feels, “Since the ULIP portfolio is managed with a long-term perspective, the hindrance of short-term swings in the market is countered to a great extent.” Will the growth continue if the equity markets fail to recover from their recent setbacks? The industry is not too sure of that. “The industry growth will definitely moderate. But that will be driven by both a high base effect and waning appetite for equity markets,” says Mr N.S. Kannan, Executive Director, ICICI Prudential Life Insurance Company. ” Despite that, the private sector is likely to manage a good 40 per cent growth this year”.

Most players are agreed that for long-term sustenance, there is a need for a greater understanding of equity-linked products. Any uninformed buying on the part of the policy holders or mis-selling by the insurance agents can bring the growth story to a halt in the long run. “Mis-selling will definitely impact the market badly,” says Mr Gary Bennett, Managing Director and CEO, Max New York Life. While currently there are not many genres of insurance products in India, Mr Bennett feels that India will, in a few years, see a host of new products getting introduced in the market. “ULIPs are a fantastic product, but they are not the only product. There is much more to come in India.”

Distribution holds the key
Product innovation apart, distribution looks to be a key ingredient for driving growth in the sector. “Insurance is still a push product in our country. So distribution is extremely critical,” feels Mr Kannan. “Agents need to create the need for insurance, especially in emerging markets like India, where research shows that life insurance is the last thing in the list of future purchases for the emerging middle class,” says Mr Goyal. So, while the industry’s fate may depend on the evolution of the need-based insurance products , the growth of individual companies would hinge on their distribution reach.
Mr Bennett says, “Distribution relationship is critical to the business as products can be replicated in no time.”

In a market that is quite homogenous, as far as insurance products are concerned, relationships with clients may be the only differentiating factor. Distribution capabilities and network cannot be easily replicated by competition; whereas, popular insurance products that manage to stir interest are easily imitable and can be offered by other players almost immediately.

“Production innovation can give a lead time of only six months before the product is replicated in the market. So that is the only short-term positive,” feels Mr Kannan. “For long-term growth, we need to look at continuous innovation in both products and distribution channels.”

Share of challenges
Expansion of the distribution network, however, has its share of challenges. Insurance companies with a direct distribution presence or the ones having distribution tie-ups with the promoter group’s bank (bancassurance) may have an edge over competition, given the IRDA’s regulation, which allows banks to sell policies of only one insurance company.

Insurers, who depend on other banks to cross-sell their products, may face challenges due to consolidation between banks. Higher dependence on banks that are potential acquisition targets maycall for the insurance company to periodically re-look its distribution tie-ups. The merger of Centurion Bank of Punjab and HDFC Bank is a case in point. Aviva Life, which sells its insurance products through Centurion Bank of Punjab, may have to find another bancassurance partner because after the merger, the bank may not be able to sell Aviva’s insurance policies. HDFC Bank already sells HDFC Standard Life’s insurance products.

More room for growth
, India however continues to be counted among the fastest growing insurance markets. “The Indian life insurance market has significant potential on account of low insurance penetration combined with low expenditure on life insurance,” says Mr Goyal. Even today, only about one-third of the addressable population in the country is covered under insurance. And the ones who are covered are under-covered, as over the last ten years income levels have shot up significantly. “Premium-to-GDP ratio in India is around 4.5 per cent. In UK, which is also a service economy, this ratio is 13 per cent. So, I think we are still under penetrated as far insurance is concerned,” says Mr Kannan. “Even if we consider the sum assured to GDP ratio, India is at 45 per cent, which is still below other Asian markets such as Singapore.”

It is perhaps this under-penetration that has enticed many newer players to enter our insurance market. HSBC, Fortis and Aegon are among the recent foreign players who have tied up with Indian companies to jointly float new insurance companies. The entry of new players would not only peg up the level of competition in this industry, it will also call for higher investments on distribution and infrastructure network by existing players.

Challenges galore for new players
New players, however, may find it more difficult as they will have much more to grapple with. Besides the higher capital expenditure, they can also have a tough time finding the right bancassurance partner. So, it is little wonder that some of the new insurance ventures have been floated with either domestic banks or with players who enjoy a high retail presence. For instance, IDBI Fortis Life Insurance Co Ltd, a joint venture between IDBI Bank, Federal Bank and Fortis will vend its policies through both the banks’ branches. On similar lines, HSBC’s insurance venture may ride on its branch network. “The reason for some of the private sector banks entering the life insurance sector can be to leverage on their customer base and branch network,” feels Mr Kannan.

“But new players should be willing to commit huge amount of investments for long term growth in this industry.” Among other companies that have entered the life insurance arena are Future Generali and Religare-Aegon. While they do not have any obvious bancassurance tie-ups in place, it bears attention that the Indian partners in both these ventures have a significant retail presence.

Source: Srividhya Sivakumar, (The Hindu Business Line)

ICICI LOMBARD EYES 20% SHARE

Mumbai: Largest private sector player in the motor insurance business, ICICI Lombard said it aims to increase its market share to 20% by 2010 from around 14% now. “We have around 12% market share in the country’s motor insurance business. By bringing new products, maintaining relationship with customers and offering better customer services, we hope to catch up 20% market share by 2010,” Eswaranatarajan, Head, Motor Insurance, ICICI Lombard told PTI.

New India Insurance is the largest motor insurer in the country controlling around 35% of the total market, which is pegged at 12,800 crore. The industry is growing by 20% year on year, he said.

Eswaranatarajan said that the company has opened ‘claim shops´ in various parts of the country aiming at reaching nearer to the customer and pay their claims fast. ICICI Lombard has a base of 25 lakh customers comprising 10 lakh two-wheeler owners, seven lakh car owners and eight lakh commercial vehicle owners.

“We receive around 1,75,000 fresh policies each month,” Eswaranatarajan claimed. However, he declined to share the number of products ICICI Lombard plans to come out in the near future.

The company targets new vehicles as well as renewals through dealers, garages and tie-ups with vehicle manufacturers. It has alliances with Hyundai, Ford, General Motors, Hero Honda and Eicher. ICICI Lombard had opened 120 offices last fiscal taking the tally to 340.

Source: The Hindu Business Line, PTI

RING IN NEW PENSION SCHEME

After winning the trust vote, finance minister P Chidambaram had said the government would push ahead with financial sector reforms. Presumably, this would include key economic legislation encompassing insurance and pensions. On the PFRDA Bill, the government has covered a lot of ground having incorporated some suggestions put forward by a parliamentary committee.

That should address the concerns of lawmakers. Yet, there are issues that must be addressed or at least debated before the legislation is approved. All subscribers to the New Pension Scheme, now mandatory for central government employees who joined service on or after January 1, 2004, have to reckon with a differential tax treatment. In the current tax regime, while contributions to the pensions scheme and earnings are tax exempt, the proceeds are taxed at the applicable personal income tax rate. In vogue in many other mature economies, this is also in line with the exempt exempt tax (EET) method advocated by an expert committee.
This may be a desirable approach. But it overlooks some facts. Comparable long-term social security schemes such as the Employees Provident Fund, Public Provident Fund and the General Provident Fund enjoy a beneficial tax treatment — contribution, earnings and maturity proceeds are tax exempt. It seems discriminatory as it is skewed in favour of the organised sector.

The NPS is designed to bring into its fold not just government staff but lakhs of workers including the self-employed. While providing retirement incomes to a large section of the population is the goal of the scheme, there is the promise of savings flows, which once the NPS gains traction, could fuel the capital needs of industry and infrastructure providers.

It is well known tax treatment drives the behaviour of investors and other financial product providers. In an environment where stocks held for just one year are exempt from long-term capital gains tax, it would be harsh to penalise those trying to build an egg nest. The government has two choices: ensure parity of tax treatment for all long-term social security schemes, or introduce EET across savings products.

Source: The Economic Times