Turbulent times for a sunrise sector

20-Dec-2011
Source : Business Standard

Low margins and cash crunch have resulted in job cuts and a decline in the insurance industry. A policy roadblock is making it worse.
The timing could not have been worse. With the Parliamentary Standing committee rejecting the proposed amendments in the Insurance Bill, the insurance sector faces a very serious reality check regarding its future. Whether it concerns the new norms on unit-linked policies for life insurers or third party motor pool losses for the non-life sector, the fact is the India insurance story is desperately seeking some life-giving sustenance. Crippled with regulatory issues, low margins and lack of a policy road map, the industry today is reeling from negative growth and job losses. This has meant a further delay in break-even periods and lower returns for promoters.
No surprise then that domestic promoters have reached the end of their tether and are trying to encash whatever investments they had made over a period of time. Bharti Group, Dabur Group, Future Group, DLF, Sundaram Group, Reliance ADAG to name a few, are either trying to sell their entire stake in the respective joint-ventures or trying to monetise a part of their investment. The results, however, have been somewhat mixed, with some insurers like MetLife and Reliance Life succeeding in diluting a part of their stake and roping in new investors, while others have not been that lucky. In fact, players like Bharti, and Sundaram Group have been unlucky enough to see their deals fall though after initial headways.
A dismal year for Life
To say that the last year has been a rough one for the life insurance industry is an understatement. The new regulations that kicked in around September, 2010 effectively took the wind out of the sails of life insurance in the country thanks to the Insurance Regulatory Development Authority (Irda), capping commissions and other charges on unit-linked products. Similarly, the regulator also increased the lock-in period for unit-linked products from the existing three years to five years. The numbers say it all.
During April-October period, life insurance industry sold close to 19.6 million policies, 15.31 per cent lower, compared to 23.14 million policies sold in the same period last year. As a result the first year premium collection of the life insurance industry, was down by 20.04 per cent to Rs 55,737.84 crore as against Rs 69,707.92 crore in the corresponding period last year.
The result was obvious. As sales dried up, companies had no option but to begin reducing the number of employees, branches and agency force. Consequently, there was a sharp drop in sales of unit-linked plans which constituted more than 90 per cent of the sales of life insurance companies.
From a people’s perspective, the results were disastrous. During 2010-11, one out of four people employed in the private life insurance sector lost their jobs in the country. For instance, total number of people employed by the top five life insurance companies as on March 31, 2011 stood at 60,215 as against 81,507 in the corresponding period last year. Also, these life insurers closed down more than 900 branches, and more than 1,74,000 agents suddenly found themselves out of a job.
To some, the culprit for this was clear. “Changes by Irda in September 2010 to the pension plans in terms of a minimum guarantee, was a step backwards. It is difficult, if not impossible, for life insurance companies to apply that kind of guarantee on very long term commitments,” Dean A Connor, President Sun Life, told Business Standard during an interview.
To make things worse, considering the choppy equity market and the high inflationary scenario, the sales of Ulips are unlikely to pick up in the current financial year and the experts fears that the growth of the life insurance industry is likely to remain subdued over the next 6-12 months. In other words, expect no improvement in the next six months.
Meanwhile, the regulator’s efforts to come out with guidelines for an initial public offering (IPO) is unlikely to have any immediate impact on the life insurance industry. According to a recent report by rating agency Moody’s, with the Insurance Bill rejected—which means no immediate chance of increasing the FDI limit to 49 per cent from present 26 per cent.
The effects of this are not hard to imagine. “Life insurers that have more than 10 years of operations in India include HDFC Standard Life Insurance, ICICI Prudential Life Insurance, Max New York Life Insurance, Reliance Life Insurance, and SBI Life Insurance. All of these are joint ventures with both domestic and foreign partners. However, the Insurance Act of India caps foreign ownership of insurance ventures at 26%, and while Parliament has a bill to raise the cap to 49%, it has not yet acted on it. Therefore, we expect foreign partners of these in insurance ventures will oppose an IPO until their ownership increases to avoid additional share dilution following an IPO,” Moody’s said.
If all of this doesn’t spell doom for an already beleaguered industry another important statistic will make foreign insurers think twice about heading towards Indian shores. “If you look at 15 different markets in Asia where we are present, the lowest margins of all markets is in India,” said Mark Tucker Group Chief Executive and President, AIA, in a recent interview with Business Standard.
According to a latest study by McKinsey, the returns and profit margins in India is one of the lowest in the region. The study shows, return on reserves from the life insurance sector in India is the lowest, at -27 basis points, whereas it is 110 basis points in China. Similarly, the profit margins or the new business adjusted profit (NBAP) margins in India is at 18 per cent, faring poorly with China, where the NBAP in the same period stood at 30-60 per cent. “In the past decade, ending 2010-11, the total capital invested by private sector life insurers was over $7.5 billion, of which 50 per cent or close to $4 billion was invested to fund accumulated losses, which have largely been incurred to create distribution capacity,” the report said.
“A lot of this investment were made with an underlying understanding that the sector will be opened up to the foreign players. However, it has been 8 years, since the issue of raising the FDI cap to 49 per cent is pending with the parliament. Foreign promoters will not invest any further if there is no policy road map ahead of them,” said an analyst.
Whether it is the life business, or non-life, what the insurance industry is urgently in need of is capital. But without a clear roadmap regarding important policy issues such as boosting the FDI limit domestic promoters will run out of both patience and options, and foreign players, who remain the most likely source of additional capital, will remain unconvinced about the industry’s viability. This doesn’t bode well for an industry already on the ropes.

LIC earned Rs 6,542 cr profit from stock market in April-Oct

17-Dec-2011
Source : PTI


Country’s largest insurer, Life Insurance Corporation, earned Rs 6,542.72 crore profit from investments in stock market in the first seven months of the current fiscal, Parliament was informed.
LIC had invested Rs 21,294.80 crore in the equity market during April-October period of 2011, Minister of State for Finance Namo Narain Meena said in a written reply to the Lok Sabha.
The profit booked from the investments in equity market stood at Rs 17,055.36 crore in the last fiscal as compared to Rs 9,432.25 crore in 2009-10, Meena said.

NHB, CorpBank & LIC to finalise new reverse mortgage plan

15-Dec-2011
Source : Financial Chronicle
By Sagar Sen,
The National Housing Bank (NHB) will resume talks this week with government-owned Corporation Bank for introducing a reverse mortgage product. NHB has already teamed up with Life Insurance Corporation of India (LIC) for developing a reverse mortgage product.
NHB, Corporation Bank and LIC are set to become three-way partners through a pact for development, marketing and distribution of reverse mortgages. Corporation Bank’s role in this tie-up is yet to be decided.
“We were already in talks with Corporation Bank and LIC for sometime. However, talks with Corporation Bank were put on hold due to some changes at the top management level. We expect the MoU (memorandum of understanding) to be signed very soon after which the product can be launched,” said R V Verma, chairman and managing director of National Housing Bank.
In a reverse mortgage product, legal heirs of the reverse mortgage holder are given the option to pay off the loan and take ownership of property. However, if legal heirs do not intend to pay the outstanding mortgage amount, the property is sold off and the proceeds are used to recover the loan and the rest is passed on to family members. In case there is an insurance element in a reverse mortgage, the final payment is settled as per premiums/annuities paid on the product.
Predominantly, banks provide reverse mortgage products. However, Star Union Dai-ichi Life Insurance is the only life insurance company that had launched a reverse mortgage product in December 2009.
At present, about 10 banks and four housing finance institutions are selling reverse mortgage products.
Star Union Dai-ichi’s product was also formulated by NHB that is being backed by loans from Central Bank of India and Union Bank of India. The insurer has managed to garner Rs 36 crore premium money and has sold 103 reverse mortgage policies since it launched the product.
Interestingly, the housing finance arm of LIC, LIC Housing Finance already has a reverse mortgage product. Reverse mortgage products from insurers have an insurance component and provides regular payment throughout policyholder’s life by mortgaging his or her house with the bank with whom the insurer has a tie-up.
However, products sold by banks generally pay monthly cash with cut off limit for 20 years. The quantum of monthly payment (annuity) paid by an insurance company is also significantly higher.
The loan quantum depends on factors like market value of the house, borrower’s age and interest rates. However, the bank that is disbursing the loan has the final right to decide on the loan amount. For life insurance company products also, banks provide a loan on which insurer pays annuities to the policyholder.
In the three-way tie up of NHB, LIC and Corporation Bank, NHB will create awareness about the product, create a necessary framework and provide documentation assistance. NHB will also coordinate with various government bodies.
Reverse mortgage products are witnessing growth in specific zones, particularly in the southern, western and parts of northern India. Although, people are still a little reluctant to mortgage their property in small towns, people in big cities, especially, senior citizens are looking forward to a product that assures them a steady source of funds.
These products particularly suit people who are above 60 years old, living alone and do not have any alternate source of income. NHB says as soon as LIC steps into the reverse mortgage segment, other insurers will also follow suit and come up with similar products.

IRDA working to put life policies in electronic form

16-Dec-2011
Source : Zee News

Insurance Regulatory Development Authority (IRDA) has been working on the idea to put life insurance policies in electronic format by April 2012, a top official of insurance brokers’ association said on Friday.
    
"Stock Holding Corporation, Central Depository Services Ltd, NSDL, Karvy Computers and Computer Age Management Services are already working with the insures and the regulator to put in place the procedure," Insurance Brokers Association of India President Sohanlal Kadel said.
    
He said such system for general insurance policies will also be introduced later where motor policies are likely to be taken up first followed by health.
    
Insurance in electronics format will allow policies in electronic form and an e-insurance account will reduce hassles for buyers for the need for multiple numbers of proofs like age and address every time a policy is bought.
    
It will also save insurers money used to print and dispatch policies.

Don’t process cheques over three months old, urban coop banks told

04-Dec-2011
Source : Financial Express

The Reserve Bank of India on Friday directed primary urban cooperative banks not to make payments on cheques and other financial instruments that are over three months old, with effect from April next year.
“RBI directs that with effect from April 1, 2012, banks should not make payment of cheques/drafts/pay orders/banker’s cheques bearing that date or any subsequent date if they are presented beyond the period of three months from the date of such instrument," the Reserve Bank (RBI) said in a circular to all primary urban cooperative banks.
The directive comes a few weeks after the central bank issued similar directions to scheduled commercial banks and regional rural banks stating that such instruments will not be valid if they are over three months old.
“In India, it has been the usual practice among bankers to make payment of only such cheques and drafts as are presented for payment within a period of six months from the date of the instrument,” the circular said.
“RBI is satisfied that in public interest and in the interest of the banking policy, it is necessary to reduce the period within which cheques, drafts, pay orders or banker’s cheques are presented for payment from six months to three months from the date of such instrument,” it said.

Can Irda’s new rules prevent mis-selling?

05-Dec-2011
Source : Economic Times

If you belong to the growing tribe of Indians that is buying insurance online, there is some bad news for you. The Insurance Regulatory and Development Authority (Irda) has proposed stiff guidelines for Web aggregators, which help buyers compare policies. Aggregators say the guidelines are so restrictive that they will have to shut shop or change their business models.
The regulator believes that these portals influence buyers’ choices and push products for which they are paid by insurance companies. It has, therefore, proposed caps on the remuneration that these Websites can receive from insurers and banned them from rating or reviewing policies. Web aggregator portals rake in big money from advertisements and by recommending policies.
Policybazaar.com, for instance, earns Rs 1 lakh a month for every policy it recommends. Under the new guidelines, which come into effect from 1 February 2012, it will only receive Rs 1 lakh a year per product it lists on its Website. "The guidelines restrict free flow of information to the consumer and are designed to stamp out insurance comparison on the Web as an option," says Deepak Yohannan, founder of myinsuranceclub.com.
What aggregators find particularly galling is the Rs 10 cap on income per lead given by them to insurance companies. When you visit an insurance aggregator site in search of a policy and give your contact details, the information is passed on to companies for amounts ranging from Rs 90 to Rs 150. Irda says the portals cannot receive more than Rs 10 per lead from insurers. "These guidelines are senseless. Nobody will stay in business," bristles Gurtej Singh, CEO of Delhi-based Big Insurance, which attracts the Internet traffic through ads on Google. His company pays Rs 30-35 per click to Google and then passes on the contact details to insurance companies for Rs 80-90 per lead.
The restrictions don’t end here. If a lead generated by a Web aggregator converts to a sale, the portal will be paid only 25% of the commission otherwise payable to an agent. Aggregators are also not allowed to display ads. To prevent companies from circumventing these rules, Irda has explicitly mentioned that an insurer cannot pay an aggregator in any other way than this. "The new guidelines from Irda are slightly myopic," says Akshay Mehrotra, chief marketing officer of Policybazaar.com. "If aggregators shut shop, it will have an impact on the industry as well," he adds. Mehrotra points out that Policybazaar accounts for almost 70% of all term insurance plans sold online.
Insurers’ stance
While insurance aggregators see these new rules as the beginning of the end, insurance companies are not overly worried by the development. "Aggregators may say that this is not feasible, but the fact remains that Irda has given them an opportunity to earn a flat fee of Rs 1 lakh a year for every product they list," says Suresh Agarwal, executive vice-president and head of strategic initiatives at Kotak Life Insurance. He says it is a reasonable move, which will ensure that the aggregation and selling functions are kept at an arm’s length.