New IRDA norms to build level playing field: ICICI Pru Life

Q: You would say that insurance companies are mature enough not to be misusing any of these freedoms (not intentionally) - is there enough maturity to handle, for instance, investments in Special Economic Zones (SEZ) - a lot of freedom has been given. You don't see any possible excesses there?

A: Most of these things have already been in place. So there is no question of insurance companies not knowing how to do it. The new regulations have given more freedom to decide. Maybe in certain cases, exposure norms have been changed a little bit, in certain cases sizes have been defined and overall you mentioned about SEZs on infrastructure - the definition was a little bit hazy. So now IRDA has just aligned it with whatever the Reserve Bank of India (RBI) definition is of infrastructure and hence SEZ comes in place. So there is nothing new frankly in terms of taking exposure to these kinds of things. Insurance companies have been doing this for a very long time and I guess will continue to do so.

Q: What is the kind of opinion that insurance companies would have in terms of the kind of preference they would really have across asset classes for investment of their corpus?

A: Depends on the nature of underlying business. The two broad lines of business are unit-linked and the traditional part. In unit-linked, typically the customer chooses what should be the asset allocation; insurance companies simply follow the mandate.

On the traditional side, it's more some sort of guarantees and hence the flexibility of choosing asset allocation lies on insurance (company). Different insurance have their own strategies and typically it will always be some kind of a balance portfolio - the amount of equity exposure will depend on what strategy the insurance company uses. On the traditional side, there is a defined liability on the nature and the duration of the liability. Based on that also, insurance companies will choose what they want to do.

Q: The reforms were also intended to perhaps level the playing field between the private insurers and Life Insurance Corporation of India (LIC). Do you think that they have very much achieved that?

A: No, I think to give credit where it is due, IRDA has been talking about and in fact acting on creating a level playing field for a while and this is another step in that direction. The regulatory process is an evolving process - as markets change the regulations will also keep evolving. So this is another step in that direction and there are some specifics where IRDA has spoken about; especially where it comes to IPO norms and those kind of things.

Q: Do you see them also moving in terms of slightly larger reforms; in terms of insurance companies selling mutual funds, mutual funds selling insurance products? Do you see any kind of evolving game plan over there, roadmap? 

A: That's a very complex subject. It's a subject  that has been debated many times in many countries across the world. The fact is insurance, by nature tends to be a very long-term instrument from a consumer's point of view. There are a lot of very stiff regulations governing insurance - for example, the capital norms that are required for insurance companies.  This is primarily because their long-term norms are very stringent; there are a lot of norms governing exposure, which are far more conservative than say for mutual funds. The licensing and the examination process for individuals selling these kind of instruments is very different and very stringent. So I don't think it's a step in the direction that you are speaking about because fundamentally they are very different products and to my mind complementary products. So it's a matter for regulators to decide.  

Q: The other aspect is the review of these regulations comes at a time though when the government is really pushing in for amendments on foreign investment into this sector or hiking the limit. What is your sense of where could both entities find common ground and when these guidelines or these new norms can be implemented?

A: That's the matter for the Parliament to decide really. It's nothing that we can discuss amongst us and take a call. I guess given the political scenario after the new political equations, there is hope that something on this front will happen within the next session of the Parliament and we wait for the same.

Q: What is the percentage increase you are expecting, the entire industry to garner in the current year? What kind of growth are you anticipating and given that kind of growth and perhaps interest in ULIP products as well, would you say the insurance sector will pretty much beef up any serious falls in the markets. Do you think it is providing a bottom for the market?

A: These are two separate questions. First question is how much growth is expected in insurance companies? If you look at Q1; the growth has been slightly muted to about in single-digit but that is primarily because LIC has been having a slightly lean quarter whereas the private sector grew by about 50-60%. For the year as a whole, we still believe the growth will be quite significant given that typically the second half of the year tends to be a much stronger one for insurance companies. So the final growth for the industry for the year, could well be anywhere between 20-30% depending on how things pan out.

In terms of whether insurance companies are in a position to beef up the markets when they are falling, we have to look at data - the Q1 data that is available; foreign institutional investors had sold about USD 3-3.5 billion. Against that, life insurance companies alone had bought about USD 4 billion or perhaps more than that. So that is the kind of data that we are seeing.

I think depending on how the markets pan out, this will change. But it is very clear that insurance companies with the kind of distribution reach that they have built and with the kind of product structure that they have - in a sense long-term product structures are clearly one of the big beneficiaries of liberalisation in recent times and insurance companies in turn are providing a big stabilizing factor to Indian capital markets