LIC to get time to offload stakes in companies

NEW DELHI: Insurance Regulatory and Development Authority (IRDA) will provide "reasonable time" to the state-owned Life Insurance Corp (LIC) to bring down its stake in various companies to the prescribed 10 per cent level, a senior official said on Friday. "We want to give reasonable time so that the transition is smooth and LIC does not get lower returns on account of hurried sale of shares," R Kannan, member of the IRDA, told reporters on the sidelines of a business meet. Kannan said the IRDA is in talks with the LIC and will give it due consideration, he said. Last month, the IRDA issued investment guidelines that restrict the insurer from investing more than 10 per cent in a company. LIC holds over 10 per cent in various blue chip companies that include Corporation Bank, Cipla, Mahindra and Mahindra, Maruti Suzuki, Mahanagar Telephone Nigam Ltd, Tata Motors, Hindustan Petroleum Corp, Ranbaxy Labs, Oriental Bank, Dr Reddy's Labs, Tata Steel and Reliance Infrastructure.

Kannan also said the IRDA would by March 2009 come out with norms for risk-based capital - the minimum amount of capital an insurance company needs to support its overall business operations. Responding to a question on what action was contemplated for private insurer Tata AIG after AIG nearly went into bankruptcy before being bailed out by the US government, Kannan said the IRDA has not asked for any solvency report from the company and there was no need for pressing panic button in the Indian context. "Indian insurance sector is insulated from the global financial turmoil on account of the strict regulatory mechanism that govern the industry. Yet, the government is monitoring every development that is taking place to ward off any adverse eventualities in the future," he added.

IRDA message reposes faith in local insurance cos

HYDERABAD: Barely two days after the Federal Reserve rescued US insurer AIG, the Insurance Regulatory and Development Authority (IRDA) made it clear that the turmoil in the international markets would have no bearing on the financial health of domestic insurance companies. A specific reference was made to private insurance companies. AIG was on the brink of bankruptcy due to the strain caused by the subprime mortgage crisis in the US. The Fed decided to provide a $85-billion emergency loan to help AIG meet its obligations. In return, the US government would get a 79.9% stake in AIG. The US insurer holds a 26% stake each in Tata AIG Life and Tata AIG General Insurance companies. An obvious question was whether Tata Sons, which holds a majority stake in the two ventures, would buy out AIG’s equity stake. “As a matter of policy, we do not respond to speculative enquiries or comment on partnership/joint venture matters. All that we would like to say is that the Tata AIG Life and General Insurance companies are well capitalised and subject to stringent regulatory requirements,” a Tata Sons spokesperson told ET. IRDA’s first quarter analysis of the solvency margins of these two companies showed that the solvency ratio was comfortable for both Tata AIG Life and Tata AIG General Insurance. Solvency refers to the excess of assets over liabilities that an insurer maintains as a prudential measure in the interest of policyholders. The analysis came in handy to assure policyholders that their investments were safe. IRDA chairman J Harinarayan followed the normal procedure of seeking a status-report from these companies on the business implications, if any, here of AIG’s move to access the Fed’s borrowing window. Many policyholders had become jittery following rumours that it was perhaps unsafe to invest in products sold by private insurers. As IRDA was keen on setting the record straight, Member actuary R Kannan sent out a message (press release) saying the solvency margins for all companies, including private ones, were adequate and above the prescribed minimum of 150%. He also clarified that no insurance company had invested money overseas and that their investments were in sync with the norms. IRDA’s investment regulations debar domestic insurance companies from having any exposure in international credit rating instruments. Domestic insurers also set aside reserves to meet future claims as per prudential norms. The regulatory body reckoned that the mathematical reserves were adequate to take care of future liabilities. This press release was circulated to CEOs of all insurance companies. A regulator’s mandate is to ensure financial stability of the sector and also assure policyholders about the safety of their investments. Such an assurance gives comfort, particularly for the poor and the middle class, who buy insurance products. And more so, in turbulent times as now. The IRDA did its job well.

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'You shouldn’t buy a ULIP for investment and a mutual fund for insurance'

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.