Irda Allows Overseas Operations of Life Insurance Companies

But keeps hands cuffed from full fledged operations

Irda (Insurance Regulatory & Development Authority) has set new guidelines for opening up of overseas liaison offices by insurance companies. Only those companies, which will meet the guidelines such as solvency rate of 1.5, good financial condition and more, will be allowed to open such liaison offices.

But, Irda has laid many restrictions on insurance companies. Such companies are prohibited from contracting any liability overseas, no agent would be permitted for conducting business hence no such commission would be allowed. Further, such companies would be required to provide information pertaining to their liaison offices, details of complaints and any expenditure incurred, regularly on quarterly basis.

Though Irda has allowed Indian insurance companies to open offices overseas but it has not fulfilled the wishes of insurance companies which were more interested in increasing their presence globally and to raise funds for their companies.

LIC to bolster Indian Equity Market with its Investment Plan

India’s largest life insurer and also the largest domestic investment institution, Life Insurance Corporation of India (LIC) plans to invest Rs 31,000 cr in equities and corporate bonds in the next four months. Out of the total amount, LIC would invest Rs 11,000 cr in stocks and Rs 20,000 cr in non-convertible debentures. LIC could bolster the equity markets, especially at a time when FIIs are selling off causing huge declines in the market. Even the insurer has been affected by the slump in the equity markets, with it seeing a fall in unit-linked policies, even though traditional policies such as endowment policies appear to be staging a comeback. LIC may invest a total of Rs 40,000 cr in equities during the current fiscal, although it is still awaiting a reply from IRDA on its request to hike the cap on investment in an individual company.

The company plans to use mobilisation from its new scheme, Jeevan Aastha, which guarantees benefits on maturity and death, to invest in debt instruments as returns are guaranteed. Of the Rs 25,000 cr it has targeted from the new scheme, 50% will be invested in government bonds while the balance will be invested in other debt instruments. The company this year has seen a definite increase in the number of corporates approaching it for investment especially in NCDs and rated papers.

Until, November this year, LIC has invested Rs 1,02,476 cr compared with Rs 97,738 cr a year ago. This break-up includes Rs 36,311 cr in government bonds, Rs 23,190 cr in debentures and bonds, Rs 12,372 cr in infrastructure, Rs 1,342 cr as project loans, Rs 164 cr in IPOs ( a relatively small amount reflection the mood of the IPO market in the country) and Rs 29,000 cr in equities (secondary market).

R-ADAG looks to buy AIG’s life insurance business in Asia

R-ADAG has set its eyes on acquiring the life insurance business of AIG in Asia (ex-India); this comes close after Group Company Reliance Money acquiring 15% stake in Hong Kong Mercantile Exchange, which came on the back of a partnership with local firm Goldride Securities, for distributing financial products and services. Rumors have it that Citibank, acting on behalf of AIA, has approached ADAG to buy out AIA. ADAG is likely to be one of several bidders looking to buy these AIG businesses The AIG deal if goes through, could well be the second-largest overseas buyout by an Indian firm pegged at an asking price of around $10 bn, ADAG however is valuing between $5-6 bn. This deal would also make Reliance the largest life insurer in South-East Asia.

AIG has been going through tough times in recent times, last month, the US nationalised AIG, which was on the brink of collapse by acquiring 80% in the insurance giant with an $85 bn loan and restructured its top management. AIG, which had assets in excess of $1 trillion in 2007, has been looking to sell parts of its businesses and assets and focus on the core general insurance business. Globally, AIG operates majorly as AIA while in some markets like Australia and New Zealand, it functions as AIG. AIG’s move to sell AIA is at variance with its earlier statement to retain a continuing ownership interest in its foreign life insurance operations. Life insurance and retirement services business is the largest revenue generator for AIG. Out of the total revenues of $110 b in 2007, life insurance generated $53.6 bon and general insurance $51.7 bn. Asset management and other financial services are comparatively smaller business areas of AIG globally.

Meanwhile R-ADAG already has a life insurance company venture in India, viz Reliance Life Insurance. It is an associate company of Reliance Capital, the flagship financial services firm of the group, which has interests in asset management, stock broking, insurance, proprietary investments, private equity and other activities in financial services. In India, AIG has a 24:76 life insurance JV. This business is unlikely to be part of the proposed deal with Reliance-ADAG, as the Tatas may have a right of first refusal in any sale by AIG.

IRDA Committee to set new norms for IPO and diversifying risk

The Insurance Regulatory Development Authority (IRDA) has set up a committee for working out guidelines for valuation of insurer companies and the likely initial public offer (IPO) price. The committee will look at four major aspects viz, mechanism to value the surplus that will be generated over time; the acquisition costs that consists of the commission expenses and the initial expenses for a product; will the IPO will take into account the initial expenses, the investment income, the future mortality risk, claims ratio, lapsation experience of the insurance company and, accordingly, work out the surplus or the deficit and the discount it to the present value of the business.

The formation of the committee has been staged at the right time, with major life insurance companies planning to list next year. According to the present regulations, an insurance company has to list within 10 years of operations. SBI Life and HDFC Standard Life have made their plans clear, while the largest private player ICICI Prudential, may list in 2010-11.

IRDA also notified major changes in the investment norms for insurers that will help companies diversify risks and lower the strain on capital. For policy holders, it would also mean higher yield on investments. Insurers investing in IPOs of private sector companies will enjoy more freedom that could help policy holders garner higher returns from equities post-listing. They can also invest in fixed-income instruments such as mortgage-backed securities (MBS) and bonds floated by developers of SEZs. Insurers will get greater leeway in their investments in mutual funds and venture funds as well.

IRDA also made changes in the quantum of investments that insurers can in IPOs. At present, insurers can invest in an IPO of a private sector company if the minimum issue size is Rs 500 cr, while the amount is significantly lower at Rs 100 cr for investment in IPOs of public sector companies. The regulator has now fixed a uniform minimum issue size of Rs 200 cr.

Among other changes made by IRDA, it has created a level playing field between private players and Life Insurance Corporation (LIC). The biggest impact of these guidelines will be on LIC. Earlier LIC was allowed to hold up to 30% of stake in any company but now it may be able hold only up to 10%. It may have to dilute stake in companies where holding is more than 10%. LIC currently holds more than 10% in companies such as Ranbaxy, Mahindra, L&T.

IRDA Defers MTM Rules for Insurers, Mulls Benchmarks & Disclosures to value Insurance Companies

Giving a huge reprieve to the insurance industry and saving it from losing several hundred cr this financial year, the Insurance Regulatory and Development Authority (IRDA) has postponed making it mandatory for insurers to mark-to-market (MTM) their portfolio in gilts from this fiscal. IRDA had issued a circular in March 2008 asking insurance companies to value gilts at the lower of the amortised cost and the market value to compute the solvency margin from this fiscal. But, the plan has been deferred now as the regulator is yet to finalise guidelines on segregating the investment portfolio.

The MTM rules would have hit the solvency margins of insurers if it would have been implemented from this year. Solvency is the ability of an insurer to pay claims. Solvency margin is the excess of assets over liabilities that an insurer maintains as a prudential measure in the interest of policyholders. It is similar to the capital adequacy ratio (CAR) for banks. The solvency margin guidelines are structured in such a way that insurers have to bring in more capital as their business goes up. With businesses having grown sharply, insurers are feeling the pressure of maintaining solvency margins at 1.5% of the statutory requirements. If the companies were to mark-to-market all debt capital available for meeting solvency margin requirement would take a hit.

The banking industry too has been already been hit hard by the rise in the yields on government securities. However, they have been protected to some extent as the regulator allows them to classify most of their debt investments as ‘held-to-maturity’. Such a classification shields these securities from the mark-to-market requirement. Insurance companies have been demanding a similar HTM category.

IRDA has deferred the MTM requirements to help companies adhere to their solvency requirements. Else, the margins would have taken a knock in a volatile market where interest rates are moving up. Hence, companies will continue to follow the book value method for computing the value of debt they hold for solvency margins.

IRDA is also on track to develop commonly-accepted benchmarks and disclosures to value insurance companies as this would be crucial when Indian partners dilute their shareholding. The present regulation requires Indian promoters with a majority shareholding to dilute their stakes through an initial public offering (IPO) at the end of the tenth year of operations.

Valuation of companies is generally based on the price-earning (PE) multiple, a high PE multiple suggests that investors expect higher earnings growth in the future. But this exercise is much more complex for insurers. Once an insurance company receives the premium from the policy holder, there are various things that the money goes into before getting invested such as the money for commission and other marketing expenses. The balance is invested in debt and equities and interest is added to the original investment. Then, on the date of valuation the solvency margins and mathematical reserves are deducted from this corpus.

The balance amount in the corpus is used to pay claims and the net money that is available is the profit. If the insurance product is a participating product eligible for bonus only 10% of the profit belongs to the shareholder. The balance is used to declare bonus and belongs to the policy holder. If it is a non-participating product, the entire profit belongs to the shareholder. Hence, the profit can vary widely as the actual experience may differ from what has been assumed in pricing cost, claims experience, investment yield and so on. In the worst-case scenario, the projected profit will be much lower than what has been assumed in the pricing. Valuation of insurers, hence, hinges on the assumptions and hidden profit which can fluctuate wildly.

Internationally, this issue has gained prominence with professional bodies setting valuation norms. Rating agencies event comment on these norms. Further such issues are expected to take the centre stage, when the industry consolidates through mergers and acquisitions. Currently, the new business achieved profit, which reflects the value of a company’s earnings potential under a set of assumptions is used for the valuation of insurers. Another method is the embedded value method or the value of the existing business in the books of the company.

Figures - India’s insurance sector accounts for around 5% of the GDP and has the largest number of life insurance policies in force in the world.