Insuring a safety net

The policyholders have nothing to worry. While LIC enjoys sovereign guarantee, the private players are governed by strict regulations, says Narayan Krishnamurthy.

Narayan Krishnamurthy        Print Edition: November 13, 2008

Insure and be secure, say the advertisements. Mostly, they are right. Whether it’s an accident or an illness, we trust that insurance will cover the cost, and if we are adequately insured, our financial dependants will not suffer. When you buy insurance, the insurance company asks you about the state of your health and general finances so that you can take the right cover. But nobody has ever bothered to question the state of the insurance company’s well-being. Till now. After the fall of the mighty AIG, people are desperately seeking information. They want to know if their insurance firm will go under and whether they can terminate their policies.

The Insurance Regulatory and Development Authority (Irda) has acted swiftly to assuage the policyholders’ fears. On 18 September, Irda chairman J. Hari Narayan sought status reports from Tata AIG Life Insurance and Tata AIG General Insurance, in which AIG holds 26% stake each. “I do not anticipate AIG selling stakes in the two insurance companies in India,” says Narayan.

So how safe are our insurance companies? Very safe (see Why your insurance policy is safe). At present, the worries centre on the private players as LIC still enjoys sovereign guarantee. This ensures an LIC policyholder full indemnity in case of an eventuality. R. Krishnamurthy, managing director, distribution consulting, Watson Wyatt Insurance Consulting, says, “The solvency margin of 150% was frowned upon by many foreign players when the sector was being opened, but the discipline ensures that the companies don’t fail.”

In fact, most insurers have a solvency margin that is way beyond 150%. Till end-August, Tata AIG Life had a solvency margin of 300%, indicating a high level of security for its existing policyholders. “The appointed actuary of the company has to send a regular report to Irda every year,” adds Vishal Gupta, associate director, marketing, Aviva India.

Insurers on firm ground

The 20 private insurers in India have a combined paid-up capital of Rs 1,68,648 crore. With the 26% ceiling on foreign players, their stake in this pie is Rs 5,221 crore.

Insurance companyPaid-up capital (Rs crore)
ICICI Prudential4,272
Reliance Life2,000
Max New York Life1,400
Tata AIG1,300
Next 555,500
The other 101,02,827
Data as on 30 September 2008

The policyholders are nervous, but not as scared as they were four years ago, when AMP-Sanmar Life Insurance went under. “The Australian insurer (AMP) had suffered huge losses in Australia and the UK, and decided to get out of the insurance business to concentrate on its home ground,” says Krishnamurthy. The Indian partner in the venture, Chennai-based Sanmar group, also exited the business to focus on its core interests. It sold the business to Reliance Capital, and Reliance Life Insurance Company was formed.

“All the policyholders of AMP Sanmar continue to enjoy the services that they were promised in their policies,” adds Krishnamurthy. Just as insurance is a hedge against most eventualities, the insurers use a mix of risk to hedge or insure against heavy losses and payouts. “With the insurers spreading across all kinds of target audience, there is no concentrated risk that is insured by them,” adds Krishnamurthy. This is different from the way they function in developed economies, where some insurers focus on a single factor: age group, gender or regionspecific policies.

All this has helped reassure the policy holders about the safety of their life covers. But what about those who take insurance more as an investment, as in the case of Ulips? The insurance companies have more than Rs 1,00,000 crore in the equity market. But you would be justified in questioning the safety of this money after the crash of the world markets. “The strict regulation acts as a good check on the quality of investments by the Ulip funds,” says N.S. Kannan, executive director, ICICI Prudential Life Insurance. With controls on the amount of exposure that the Ulips can have in a particular company and the investments in instruments being based on their ratings, the policyholders can rest assured about the quality of instruments in which their money is parked.

So even though the value of your Ulip fund might be in the red now, the long-term nature of insurance plans offers averaging benefits over market cycles. This ensures that your returns beat other asset classes. “At times likes these, the thrift that is inherent to insurance and its long-term nature make people continue with their policies, not exit,” says Krishnamurthy. With Ulip options that are based on automatic asset allocation, the policyholders can benefit from the pre-set debt-equity mix that can absorb market volatility in the short term, yet gain from long-term equity exposure. “There are multiple fund variants that the insurers offer to invest in and mitigate the risk from one particular investment class,” adds Gupta.

As the regulator, insurers and policyholders wait for the proposed FDI hike in insurance companies from the current 26% to 49%, the recent developments can infuse confidence about the inherent safety of the insurance business in India. As for general insurance policies, there is little to worry about, as these policies are annual contracts that can be renewed or changed.

Why your insurance policy is safe

• An insurance company must have at least Rs 100 crore capital to get started.

• Irda vets all new policies—cover, cost and utility—before they are launched.

• Insurance companies require a solvency margin of 150%.

• The investments by insurance companies are regulated.

N.S. Kannan
“The regulatory framework for insurance firms is stringent. It protects the policyholders at every level.”

N.S. Kannan, Executive Director, ICICI Prudential Life Insurance


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