P Nandagopal, managing director and chief executive of IndiaFirst Life Insurance Company, says capital will not be a constraint for Indian insurers to grow their businesses. This is despite the government delaying its decision on increasing the foreign direct investment limit in Indian insurance joint ventures, he tells Somasroy Chakraborty in an interview. Edited excerpts:
The last financial year was challenging for Indian insurers. What is your outlook for 2012-13?
I think this year is also going to be difficult for the insurance industry. But we are optimistic about a positive growth. The cloud of uncertainty around global economies is getting lifted. In India, the inflation rate is expected to fall now. That will lead to a reversal of the high interest rate cycle. Once the macro-economic environment improves, insurance companies will be able to demonstrate their ability to withstand the rigorous regulatory regime better. But 2012-13 is not going to be a year where we will see high growth rate. Hopefully, it will be better than last year.
Is the indecision to increase the cap on FDI investment in Indian insurance joint ventures affecting your business plans?
I don’t think FDI (foreign direct investment) is a big issue. The main issue is utilisation of capital. If Indian insurers use their capital in an efficient manner, then they don’t need much of FDI. Of course, additional capital is always welcome. But FDI is not the only route. The government is working on a number of things to ensure adequate capital for insurance companies. For instance, IPO (initial public offer) can be one of the options for raising capital. But even if you get capital, you still need to find ways and means to use it in an efficient manner. If you are using all the capital in setting up inefficient distribution system, then it will become a problem. I think the industry is realising it and taking steps to address this issue.
Sale of ULIPs (unit-linked insurance plans) has been declining. Do you feel the weak investor sentiment and volatility in Indian share market are partly responsible for it?
I don’t think so because ULIPs also invest in debt instruments. Even now, we are predominantly selling ULIPs and doing reasonably well. If you explain to your customers the risks associated with ULIPs, I think these products are definitely superior than the traditional plans. They are more transparent and fairly priced. A customer who believes in long-term investments will benefit more if he invests in ULIPs instead of traditional plans.
But the product mix is shifting in favour of traditional plans.
It is because of distribution dynamics and not due to customer preferences. Currently, ULIPs are priced cheaper than traditional plans. Hence, the demand should be more towards ULIPs. But this is not happening because the distributors enjoy higher commissions for selling traditional plans. If we can address this distribution issue, I think demand for ULIPs will pick up.
Do you think the guidelines on pension products are discouraging insurers to come out with pension plans?
The regulations have some glitches. But Irda (Insurance Regulatory and Development Authority) is looking to sort these issues. Pension is an important product, and is probably one of the unfulfilled needs of the financial services sector customers. Today, people are living longer than before and hence pension schemes are needed to fulfil their old age needs. We have plans to launch pension plans once the regulations are sorted.