Insurance companies have played a key role in steadying the bourses during the downturn.
With unit linked insurance plans (Ulips) gaining popularity over the last few years, life insurers have become the largest domestic investors in the equity markets since 2007-08. This was partly due to the economic slowdown, which resulted in foreign institutional investors (FIIs) pulling out from the markets. Also, with low participation by mutual funds, life insurance companies emerged as the saviour of the Indian equity markets.
Ulips are investment linked insurance products which have a risk cover attached to them. Unlike traditional plans, investments under this product are not regulated by the Insurance Regulatory & Development Authority (Irda). Policyholders have the flexibility to choose their investment option. Around 80 per cent of products sold by insurers today are Ulips.
According to data from the Life Insurance Council (a forum that connects the various stakeholders of the life insurance sector, and which coordinates all discussions between the government, the regulator and the public), the industry invested Rs 48,184 crore in the capital markets in April-December 2009. Insurers say that unlike FII flows, which tend to be lumpy, insurance investments have been quite steady and stable. The insurance sector is playing a key role in driving up the overall equity ownership of Indian retail households, which historically has been quite low. Compared to FIIs, who turned sellers during the downturn, insurance companies played a key role in steadying the market.
Insurers buy even during downturns, given the steady flows that they have and the long-term nature of the money that they manage.
“By default, insurance products have become systematic insurance plans. Policyholders pay premiums mostly on a half-yearly basis or annually. There is a risk cover attached to it, which differentiates it from other financial instruments available in the market,” said Shashi Krishnan, chief investment officer at Bajaj Allianz General Insurance.
During the first nine months of the current financial year (April-December 2009), the renewal premium of the industry increased by 22 per cent to Rs 96,917 crore, from Rs 79,168 crore in the corresponding period of last year. Moreover, in the case of Ulips, the renewal premium increased by 41 per cent, from Rs 26,638 crore to Rs 37,543 crore. This was mainly driven by the surge in equity markets and the higher risk appetite of consumers due to positive economic conditions.
“One main reason for the huge flow of money in equity from insurance is the long-term nature of the products and the renewal premium. The investment horizon is long-term and we are not looking at the value of investments in 3-4 years from now. The insurance industry has cash, with new business growing and a large existing customer base,” said Abhjit Gulanikar, chief finance officer at SBI Life.
While the industry saw a marginal shift from Ulips to traditional products during the year, the amount of money flowing into this segment is still very high. The downturn in the equity markets had forced insurance companies to launch products with guarantees. Insurers had offered guarantees even this year, but did not delink them from the capital market. The trend seen this year was towards guaranteed net asset value (NAV) of at least seven years.
Going forward, insurers see further product innovation to support growth, and, consequently, an increase in equity investments.
“Increase in renewal premium collection will augment investment in equity. Insurers’ participation in equity has been steady and it has the potential to go up, as products become more innovative,” said Prasun Gajri, chief investment officer at HDFC Standard Life.
The industry typically mobilises 40 per cent of its premiums in the last quarter of a financial year. Partly due to an increase in the value of investments and partly due to fresh investments made in equity, the stock portfolio of life insurance companies went up by 76 per cent to Rs 415,094 crore in the 12 months to December 2009.
Over the past few years, insurers have been investing $10-12 billion annually in the equity market. State-owned insurer Life Insurance Corporation of India (LIC) has been the largest contributor, pumping about Rs 50,000 crore annually into the stock market for the past few years.
“Thanks to the insurance companies’ strong brand franchise and distribution, they have been able to mobilize retail investors’ money and channel their savings into both equity and debt assets. It is estimated that in the last two years, insurance companies would have invested almost $10-12 billion every year in the Indian equity markets. This compares favorably with the aggregate FII flows that the country has got in the last two years,” said Manish Kumar, chief investment officer at ICICI Prudential Life Insurance.
With the introduction of a cap on Ulip charges, insurers did see a reduction in sales of policies in January, but February was a good month and insurers earned Rs 75,347 crore during April-January 2010, compared with Rs 65,337 crore earned during the same period last year.
The turn of the century saw deregulation of the industry and subsequent liberalisation of foreign investment norms. This, in turn, paved the way for the entry of a plethora of private players, which resulted in widening the reach of life insurance, improved customer service and product innovation.
Insurers said they would benefit from Irda’s decision to allow insurance companies to invest in derivatives. It would enable them to hedge their portfolios in uncertain times, thereby protecting the returns that the fund would have generated. Irda will initially allow insurers to only invest in simple derivatives like currency derivatives. This is expected to help insurers to reap the benefit of arbitrage and offer structured products.
“It may also be possible to enhance the returns to policy holders by participating in option writing,” said Kumar.
According to a report by Morgan Stanley, net investments by insurers stood at $8.276 billion during the period April-February 2009-10.
“Private insurance players in India are at an advantage compared with banks and mutual funds… as they have virtually no restriction on network expansion and can pay (and recover) high distribution commissions. Absence of organised pension and health insurance products offer further opportunities. Owing to their massive distribution efforts, insurers have become prime gatherers of long-term savings and also a conduit for equity penetration,” Edelweiss said in a report.
For the big daddy of the industry, LIC, the mix between between Ulips and traditional products has come down to 65:35 from around 75:25 during the last financial year. Similarly, Ulips account for 80-85 per cent of private players’ total portfolio.
With a modest growth of close to 15 per cent in estimated new business income in the current financial year, insurers are expected to continue being leading players in the investment space.
