New Ulip rules rob market of insurance

With flows for Ulips drying, life insurance companies invest just a fraction of what they did last year.

Indian bulls are missing their earlier close allies in the fight against the latest bear onslaught. Domestic life insurance companies, which had acted as a counterweight to fleeing foreign investors in the past, do not have enough dry powder now, as inflows into unit-linked insurance plans (Ulips) have fallen sharply.

Ulips, which used to account for 80 per cent of industry sales, have sunk since September 2010, when the Insurance Regulatory and Development Authority’s new rules made the selling of these hybrid plans less lucrative for both life companies and agents.
 

SHRINKING FLOWS Net investments by domestic institutions other than mutual funds
(Sep to Aug)	DII*	MF#	Difference
2006-07	18,683.03	6,884.50	11,798.53
2007-08	55,566.48	13,134.70	42,431.78
2008-09	47,806.61	8,373.00	39,433.61
2009-10	4,576.28	-26,067.50	30,643.78
2010-11	-128.93	-5,744.40	5,615.47
Figures in Rscrore                                                                              # Source SEBI Data Compiled by BS Research Bureau                                    * Source Exchanges

Lack of support from insurance companies adds to the woes of equities battered by foreign institutional investors (FIIs), say experts. Gaurav Dua, head of research, Sharekhan, said: “Insurance flows have slowed. This has impacted to the extent that there is no domestic support to absorb the selling by FIIs.”

FIIs have net-sold stock worth Rs 11,000 crore since the end of July. The BSE Sensex has lost a fifth of its value since January. According to the Business Standard Research Bureau, investments by life insurance companies in equities are down by 80 per cent since the Irda move. In the period between September 1, 2010 and August 31, 2011, net investment by the life companies was Rs 5,616 crore. That is a fall of 81 per cent from the Rs 30,642 crore deployed by these companies in the one-year period before the move.

Since there are no direct numbers in the public domain, this figure was derived by deducting the investments by mutual funds reported by the Securities and Exchange Board of India from the aggregate of domestic institutional investors reported on the exchanges. Domestic institutional investors refers to banks and financial institutions, but insurance companies constitute a major portion.

Insurance officials say equity inflows have fallen as the sales mix has shifted in favour of traditional policies. Unlike Ulips, where up to 95 per cent of the funds can be deployed in equity, traditional plans cap equity exposure at 25 per cent. After the new guidelines came into force, the traditional plans, which earn a relatively higher commission, have gained the attention of sellers. The mix between Ulips and traditional policies, which used to be 80:20, has, therefore, reversed. During April-July this year, life insurance companies collected Rs 26,794 crore by writing new policies and traditional plans accounted for nearly 80 per cent of these.

“Equity investments depend on various parameters like premium collection, sales of unit-linked plans, term plans and interest income, among other things. Across the industry, the premium collection has been down so far in the current financial year, largely due to the dip in sales in unit-linked plans. Looking at the present trend, it is highly unlikely that we would be able to match last year's investment figures during 2011-12,” said a senior official from Life Insurance Corporation (LIC).

Not surprisingly, LIC, the largest institutional investor, has revised its equity investment plan for 2011-12. It expects to invest Rs 35,000-40,000 crore in the equity markets, as against an earlier target of Rs 60,000 crore. Equity investments by the insurance behemoth during 2010-11 shrunk 30 per cent to Rs 43,000 crore, compared to Rs 61,500 crore in the previous year. However,the official added, since prices are low, investors are able to shore up their stock portfolios by spending lower amounts of money.

“The measures taken by the regulator have changed the focus of insurers towards traditional plans. Though it is a temporary aberration, the slowdown in the sales of unit-linked plans has impacted the equity investments of all life insurance companies,” said Saravana Kumar, chief investment officer at Tata AIG Life.

“Also, in a high interest rate scenario, people tend to shift more to non-unit linked products. Hence, the equity investment tends to be lower,” an official added.