What has a staid, stable business like insurance got to do with the stock market? Plenty, and what’s more, increasing insurance penetration may well bring some much-needed depth and maturity to the stock market. Insurance works by collecting small amounts of money (premium) from a large group of people with some similarity in the “risk” that they want to “insure”. As the number of insured grows, the laws of statistics make the total risk pretty predictable.
The laws of large numbers ensure that there are roughly three fires per 5,000 households every year, or 12 deaths per 1,000 people and so on. Barring, of course, the occasional tsunami or terrorist attack.
Quite simply, this leads to sums of money (net of claims and overheads) being saved by insurers. The risk hangs as a contingent liability for another year. It’s like the “safety” money that your grandpa put aside in case of a bad patch.
The insurer would not need to dip into this money unless something went drastically wrong. By now, you can figure out that this annual surplus needs to be put away in a safe, solid investment with very little appetite for short-term thrills.
Prudential ICICI, Bajaj Allianz, Max New York, Tata AIG, Reliance and more are pushing to grow the insurance industry like never before. All this new-fangled sales effort may help LIC and the four GIC subsidiaries indirectly. But it sure grows the pie, and keeps surpluses flowing into the kitty.
Unlike retail investors, and mutual funds whose managers are under short-term performance pressure, this money is patient and seeks solid, long-term themes.
Plenty of these themes have panned out in India, provided you look through the lens of patience. Like Bharti Airtel at Rs 40, if you’d recognised that mobile telephony had a long way to go. Or like Bhel at Rs 300, if you were willing to bet on the capex cycle. Or L&T, ACC and BEML if infrastructure caught your focus.
The under-insured status of India’s people, their cars and bikes, their homes and their businesses is what is seductive for global insurance companies. They’re cuddling up to local partners as we see the first signs of regulatory belts being loosened.
As this industry grows and mobilises more stable surpluses, it will look seriously at long-term investment opportunities. Insurance surplus is quality money, not ammunition for trigger-happy punters.
And it can be big time money. In fact it already is. In 2005, LIC and the four GIC companies collectively gathered over Rs 10,000 crore in underwriting surpluses.
Pension plans and venture capital are the other types of money that waits patiently for investments to hatch. But neither has the size and growth potential of insurance. If insurance takes off, which is inevitable, it will bring sane, patient money into the markets. That’s one more reason why there’s so much hope brewing in Indian stocks.
(By Dipen Sheth, Head of Research, Wealth Management Advisory Services)
