Customers goad life insurers to riskier investments

Life insurance companies are moving away from investment in government securities and are increasing their exposure to equity and corporate debt.

As product demand has shifted towards unit-linked plans, the choice of investment portfolio is now being decided by the customer, said Krishna Sanghavi, vice president investment, Kotak Mahindra Old Mutual Life Insurance Company.

The overall investment in government securities has fallen to 59 per cent in 2003-04 for the industry as a whole from the previous 65 per cent in 2002-03 as per the Insurance Regulatory & Development Authority (Irda) data.

About 50 per cent of new business sold falls under the unit-linked umbrella, and a greater percentage of customers are opting for balanced and growth options under the various schemes.

This said senior investment gurus at the new life insurance companies, has pushed the need for investment in market securities.

The Irda mandates insurance companies to invest 50 per cent in government securities, but this does not pertain to unit-linked plans, whose investment guidelines are dictated by customer preference.

In stark contrast, non-life insurance companies have increased their investment in government securities from 36 per cent to 39 per cent as on March 31, 2004.

The private insurance players have been more cautious investing almost 50 per cent in government paper, against the prescribed Irda norm of 30 per cent.

The players have also reduced their exposure to market securities from 47 per cent to 43 per cent in the case of state-owned insurance companies and about 26 per cent for private insurers. Non-life players are relying greater on steady investment returns as opposed to volatility in market securities as they face a one-year business cycle where claims can be severe.

Finance management has never been of greater importance than today as insurance players see the need to generate adequate returns to shareholders and at the same time inspire confidence in customers of insurance companies' ability to pay future claims, stated Irda in its journal.

Bulk of the Life Insurance Corporation of India's investible increased funds of Rs 44,000 crore went into market securities, raising its share from 23 per cent last year to 30 per cent as on March 31, 2004. The country's largest insurer at the same time, brought down its exposure to government paper from 65 per cent to 59 per cent, though quantum-wise, the sum grew by Rs 33,300 crore.

The quantum of funds deployed in central government paper of private insurance companies "" the likes of Max New York Life, Kotak Mahindra Old Mutual, AMP Sanmar and ING Vysya "" stand sizeably reduced.

"Returns from equity over the long term is better than that from government paper by five to six per cent. While this is quite a lot, there is also a big risk involved," said Nick Taket, general manager finance & appointed actuary, HDFC Standard Life.

A number of customers have shown preference to invest 100 per cent in equity, thereby pushing insurance companies to increase their exposure in stock markets.