New ULIP Norms : Private Insurance Cos. will be affected

New ULIP norms of IRDA will come to effect from 1.9.2010. Analysts say that this will affect Private Life Insurance Companies and not LIC! Excerpts from a story in marketwatch.com:

"We believe these new pricing norms would have adverse effects on medium-term growth outlook, as well as new-business margins of private-sector insurance companies," brokerage India Infoline wrote in a note to clients recently.

It said new-business premium income for private insurers would unlikely show any growth in fiscal 2011, given the high dependence on ULIPs (some private players get up to 90% of their business from ULIPs).

"We forecast negative to zero growth in new-business premium income for [fiscal 2011]. We expect growth outlook to remain modest in [fiscal 2012] as well."

However, the changes are expected to deal a much softer blow to state-owned Life Insurance Corp. of India. With $238 billion in assets, LIC is the country's largest insurance company, holding 70% of the life-insurance market by premiums and number of policies. Its huge base, along with a valuation surplus -- a company measure of profitability -- of about $4 billion, make it better prepared to weather this storm.

Also, LIC's army of about 1.4 million insurance agents gives it an unmatched reach. At the same time, its dependence on ULIPs is much lower than for private players, as it continues to offer a host of plain- vanilla insurance products.

Source: Marketwatch

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Splendid Performance of LIC in 2009-10

LIC roars back on market share

When it comes to insurance, there’s no unseating the Life Insurance Corporation (LIC) of India from the top. Or so the behemoth has proved, yet again.

At the end of June, LIC’s market share, based on first premium income, stood at an awe-inspiring 73.43%.

That’s a gain of nearly 13% from the career low of 60.79% the state-owned company had seen at the end of March, 2009, having consistently bled market share to private insurers.

Doomsayers be damned,
the king still has his den.

TS Vijayan, chairman and managing director of LIC, attributes the growth to his 15 lakh strong army of agents, each of whom garners an average of 37 policies and who together account for nearly 95% of the company’s business. This army is expected to grow by 20% this year, which means an addition of 3 lakh agents, said Vijayan.

A major jump in the insurer’s market share came in the quarter ended March when the company collected a premium of Rs 18,740.41 crore, selling 72.26% of the total policies issued by the industry.

“Up to July, 75% of the business came from Ulips,” Vijayan said, adding that 86% of the policies sold were from the traditional products basket.

In the June quarter, the firm parked Rs 10,000 crore in equity markets out of its total investment of Rs 39,000 crore.

Vijayan attributes the company’s success to its “proven track record in prompt settlement of claims and efficient servicing.” The insurer paid Rs 46,921.22 crore as claims in 2009-10 to 205,17,870 policyholders, whose policies matured. Claims raised on account of death were lower at Rs 7,033.89 crore, given to nominees of 664,619 policyholders.

Inspite of such huge claims, LIC generated surplus income, meaning profits from running the business, of Rs 23,478 crore in last fiscal. Over Rs 1,000 crore of this was paid to the central government as dividend, apart from paying a hefty income tax amounting to 12.7%.

Thus LIC contributed approximately Rs.4,500 crore to government coffers during last fiscal.

Source: DNA

(Published: Saturday, Aug 7, 2010, 3:00 IST By Khyati Dharamsi | Place: Mumbai | Agency: DNA)

LIC plans Rs 5,000cr infra bonds

LIC will raise around Rs 5,000 crore under the newest tax-saving instrument approved in this year’s budget— infrastructure bonds. 

The insurer has been allotted this size of fundraising after being notified as one of the entities to raise infrastructure bonds.

“We are working out the details and awaiting more clarity. We also need permissions from the Insurance Regulatory & Development Authority (Irda),” Vijayan said.

Under infrastructure bonds, an individual can invest as much as Rs 20,000 and claim additional tax benefit apart from the Rs 1 lakh permitted under section 80 (C). This was approved as section 80 CCF as part of the finance bill 2011.

Source: DNA

(Published: Saturday, Aug 7, 2010, 3:35 IST
By Khyati Dharamsi | Place: Mumbai | Agency: DNA)    

LIC's total income for 2009-10 is Rs 2,98,721 Crore

           MUMBAI: State-owned Life Insurance Corporation of India (LIC) has emerged much stronger in the months following the uncertainty over unit-linked insurance plans (Ulips). The corporation has seen its market share spike to 73.4% by end-June ’10, from 60.79% during end-March ’09.

In the first quarter of the current fiscal, LIC has managed to grow its market share in new businesses by recording the first-year premium of Rs 18,740 crore — an increase of 107% over the corresponding quarter last year. As against this, the new business premium for the rest of the industry was Rs 12,884 crore. However, all private life insurance companies put together could generate a new business premium of only Rs 7,126 crore — an increase of 28% over the year-ago period.

Most of the premium came from single premium Ulips. Some of the corporation’s key Ulips are slated to close in August, as all insurance companies are expected to file new products that are compliant with the new guidelines.

These numbers were divulged by TS Vijayan, chairman, LIC on Friday while announcing business results for 2009-2010, following a board meeting on Thursday. For 2009-2010, the corporation recorded a total income of Rs 2,98,721 crore — an increase of 49.2% over the previous year. This included premium income of Rs 1,85,985 crore, which was 18.3% higher than last year.

“Since we are the lowest cost operator in the market, we have some advantage,” said Mr Vijayan. He said that the corporation was in better position today, because the focus has been on increasing returns for policyholders by curtailing expenses and not on profits.

According to Mr Vijayan, the corporation would have to only tweak some of its Ulips to bring the charge structure in line with the new regulations prescribed by the regulator. He said that most of the charges were within the limits. However, LIC would need to do some restructuring to reduce the impact of charges on those who exit their policy after five years.

At the end of the first quarter, LIC had made investments amounting to Rs 39,000 crore. Of which, an investment of Rs 10,000 crore was pumped into equities. Mr Vijayan said that the corporation was targeting investments to the tune of Rs 2 lakh crore during the current year. “The investment pattern would depend on how much money will be raised through unit-linked insurance plans. Our experience is

that sales of Ulips rise whenever the equity market is doing well and traditional policies do well whenever interest rates rise,” said Mr Vijayan.

Source: Economic Times

Irda slaps Rs 10 lakh fine on SBI Life

The Insurance Regulatory and Development Authority (Irda) has slapped a Rs 10 lakh fine on private sector life insurer SBI Life for violating the file-and-use guidelines. The insurer has been asked to pay up within 30 days from the date of the receipt of the order.

The regulator had issued two notices to SBI Life, in September and December. SBI Life responded to the first notice in October 2009 and to the second in January this year. Irda issued the order under Section 102 of the Insurance Act. The insurer was accused of deviating from the approved product through the file-and-use procedure.

The regulator said SBI Life inserted two clauses in the policy document ‘Super Suraksha’ after getting Irda’s clearance.

Source: Business Standard

BS Reporter / Mumbai August 7, 2010, 0:58 IST

PFRDA wants to increase incentive for NPS

Dear Friends,

The Chairman of PFRDA is the person created the controversy by stating that insurance agents are paid much and he recommended in his report to stop commissions.

Now, PFRDA itself feels the heat.  It understands that NPS will never take off without incentives and now formed a committee to recommend about incentive scheme (as desired by it!).

Please, go through the news item!

-Arivukkadal

NPS: world's cheapest pension scheme set to turn dearer

Within 15 months of the launch of the New Pension System (NPS), the Pension Fund Regulatory and Development Authority (PFRDA) has decided to restructure the scheme because it is not moving forward.

The poor response for the scheme among employees of private firms and the unorganised sector and its weak incentive structure for fund managers to push the product has prompted the regulator to overhaul the scheme.

"The fee structure for pension fund managers is so low, it's almost like free. For every account, they make losses at current levels," PFRDA's Chairman Yogesh Agarwal told Hindustan Times.

The regulator has set up a committee headed by G.N.Bajpai, former chairman of the Securities Exchange Board of India (SEBI) and the Life Insurance Corporation (LIC) to suggest ways to improve the reach of NPS in its intended segments.

 "Unless we address these issues change the NPS from a bought product to a sold product and provide people enough incentives to go out and sell it, it is not likely to take off," he said.

The total NPS corpus is at present just Rs 20 crore and each pension fund manager has a corpus of Rs 1 crore to Rs 2 crore, he said.

Agarwal, who took over as PFRDA chairman last June, said the idea of NPS being a better financial product because of its low fee structure had not helped push the sales.

 "Beyond a point, the low fee structure becomes counter productive. You may call it a low fee product, but it is not selling at all," Agarwal said.

NPS expenses are as low as 0.0009 per cent a year, and its fund management charges are the lowest in the market when compared to mutual funds and insurance schemes.

"Obviously the incentives have to go up from the current levels (but) they need not become as expensive as other products," Agarwal said.

 "The current status is not desirable, and the other extreme is also not desirable. The committee will suggest the optimal solution. I would expect the committee to submit its report in a month or two," Agarwal said.

NPS started off as defined contributory scheme for new government employees in 2004. It was later extended to the private sector in May 2009.

"In making the scheme applicable to the non-government sector, not enough thought has been given to selling and making people aware of the product," Agarwal said.

Source: Hindustan Times

Insurers expect workforce to shrink 20% on revised norms

             MUMBAI: A change in regulations is forcing life insurance companies to give marching orders to thousands of agency managers. The industry expects a 20% shrinkage in workforce following the new Ulip guidelines which force insurance companies to work with margins that are a fraction of what they are today.

The decision to cut costs overnight follows a July 20 meeting with the Insurance Regulatory & Development Authority (Irda), where the regulator refused to give companies more time to meet the new guidelines. According to those present at the meeting, a senior Irda official is understood to have told the companies: “Every party comes to an end and your party is over”.

The private life insurance industry has on its rolls around 3 million agents. As in end-December, private life insurance companies had 1,52,874 employees. Over three-fourths of these are executives involved in sales. Insurers estimate that a million agents will drop out. This will lead to a proportionate drop in the number of agency managers.

In HDFC Standard Life, there are talks of large layoffs, particularly in sales. In response to a query, HDFC Standard Life said, “In the run-up to meet the September 1 deadline of the new Ulip guidelines rolled out by Irda, we are currently assessing its impact on our product range, cost structure and incentives/commissions.

So far, we have not undertaken any step on rationalising our workforce. As an organisation, we continue to monitor under-performers/poor performers, which is a regular exercise carried out by the organisation, irrespective of the market condition”.

“The recent Irda circular would not lead to an incremental change but to a fundamental change in the way we do business. Overall, I see a 20% workforce reduction in the insurance market over the next 6-10 months,” said Rajesh Relan, managing director, Metlife India. He adds that while the customer is the clear winner, insurance companies will have to cut operating expenses drastically to be able to provide for the stipulated yield to the customer.

“This would require companies to cut costs at all levels, including investments for growth. Current sales models would need to be reoriented. It will also lead to dramatic reduction in commissions and put many small agents out of business. The new Ulip regulations go against the grain of financial inclusion as they restrict insurers from selling lower ticket size Ulips,” said Mr Relan.

The math is simple. The new norms require that insurance provide policyholders whatever returns their investments earn even if the policies are surrendered early. The maximum margin that an insurer can charge is a deduction of up to four percentage points from the percentage returns earned. “At this point of time, besides the LIC and SBI Life Insurance none of the life insurance companies would be able to continue with their present cost structure,” said the head of a private life insurance company.

Some companies will have to rationalise staff far less than others because they had discharged thousands of employees immediately after the financial crisis in 2009. The companies that had reduced headcount earlier include the likes of ICICI Prudential, Bajaj Allianz and Aviva. In some cases the headcount is coming down because of a freeze in recruitment. Insurance companies are also closing down branches. However, this is not an easy proposition is small centres because the regulator insists that companies cannot shut offices in places where they have sold policies without making arrangements to service policyholders.

Insurance companies have two options, bring down agency commissions to single-digit levels or bear a portion of the commission expense from shareholder funds. In both cases they will be forced to curb expenses. Reducing agency commissions would lead to increased dropouts from the agency force as selling insurance would cease to be viable for many.

Also, now there is far less incentive for shareholders to bring in money given the sharp reduction in margins. According to a research report by India Infoline, “Our analysis shows that new business margin would decline from 18-20% to negative or low single digits assuming no change to key operating metrics.”

India Infoline has revised its recommendation to reduce for Max India, Bajaj Finserv, Reliance Capital and ICICI Bank because of the lower valuations of their insurance arms. The company is reviewing its recommendation for Aditya Birla Nuvo and has recommended a buy for SBI Life Insurance. HDFC continues to be an ‘Add’. However, insurance is a much smaller portion for ICICI Banks’ and HDFC’s valuation.           

Source: ET