Insurers make hay while markets drop

They are buying into equities as key indices drop, following Brexit

Insurance companies made most of the volatility in the Indian stock markets which saw a fall due to Britain's decision to exit the European Union.

The Sensex ended 605 points lower at 26,397, marking its second-biggest fall of this year. The Nifty settled at 8,089, down 182 points, after slumping to 7,927 at day's low.

"Bond Markets reacted negatively in the morning trades and yields rose by 3 to 4 bps. However the RBI Governor's comments and good cut-off levels in Government Securities auctions provided relief to the market and yields eased in the afternoon. Overall the disruption in the bond market was minimal," S P Prabhu, Head of Fixed Income, IDBI Federal Life Insurance said.

Insurance companies are long-term players in the equity market and debt market due to the long term nature of the insurance contracts especially in life insurance which range from five years to even 30 years.

Hence, life insurers may look at an average tenure of 10-15 years, general insurers would prefer shorter tenures of one to two years. This is because according to the Insurance Regulatory and Development Authority of India (Irdai) rules, life insurers cannot focus too much on short-term and very short-term durations as part of their asset liability management.

Mihir Vora, Director and Chief Investment Officer, Max Life Insurance explained that insurers have cash surplus all the time and when the markets go down suddenly they make use of it by buying stocks.

"We are buying as markets are falling. Globally, equity markets, bond markets, currency markets and commodity markets were not positioned for this event and it came as a surprise. Hence, volatility in the markets is expected to continue," said Vora.

However, with respect to bond markets he said in the normal course of buying we are always there since there are monthly inflows and that continous buying is there.

Vora said that Indian bond market is relatively insulated since local institutions are quite strong.

Overall, equity markets saw increased activity from insurance companies according to chief investment officers. Both public sector and private sector insurers engaged in heavy buying, though officials said that this was restricted to stocks of blue-chip companies.