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Traditional insurance products have been a favourite with most individuals as these are considered to be safe, guarantee returns and pay extra by way of bonuses.
However going forward, these products may become a riskier. Reason: These products can invest in private equity and venture capital funds.
The Insurance Regulatory and Development Authority (Irda) allowed insurers to invest in Category-I (venture capital funds, SME funds, social venture funds, infrastructure funds and other such AIFs ) and Category-II (private equity and debt funds) Alternative Investment Funds (AIFs).
Says Nirakar Pradhan, chief investment officer of Future Generali India Life Insurance, “Investing in private equity and venture capital funds will be relatively riskier but it will also boost returns from the products. Over a period of five to ten years the risk-return dynamics will favour investments.”
Insurers say returns from private equity funds could be at least 5% higher than returns from the equity market, say insurers. As per Venture Intelligence, a Chennai-based research firm which tracks PE and venture capital flows into India, there have been 102 exits in 2012, which have given 2.32% average return on investment. In 2013 (year-to-date), there have been 68 exits and the average return on investment has been 2.62%.
"These investments will typically be for a longer term and we will consider this investment route post evaluating the probable returns. While liquidity could be a challenge, it will however enable portfolio diversification. Life insurance companies are long term investors and this has opened another avenue for investments," says Manish Kumar, head of investments at ICICI Prudential Life Insurance.
Despite many insurers looking at small allocation towards AIFs (between five and ten%), withdrawing from the product may become difficult in tough times for investors.
This apart insurers say evaluating the performance of such investments may be another problem because the benchmark for judging performance of these funds could be different for different insurers. Each insurer may have its own benchmark for performance assessment decided internally. This will make it difficult to assess which traditional policy is doing better.
According to Aneesh Srivastava, chief investment officer at IDBI Life Insurance investors need not panic because their returns will continue to remain guaranteed despite insurance companies’ investing in private equity and venture capital funds. Srivastava adds that an insurer's decision to invest in private equity and venture capital fund will depend on the risk appetite of the company.
Under these guidelines, Irda has allowed insurers to invest only in those Category II AIFs which have at least 51% of funds invested in infrastructure entities, small and medium enterprise (SME) entities, venture capital undertakings or social venture entities.
This apart, the infrastructure sector depends on government spending, which has not taken off. Moreover, in gloomy economic conditions when interest rates are high, there is little to cheer for the sector. Experts advise staying away from it.
Private equity experts say that no investors have exited infrastructure entities in the last 12-18 months due to low single-digit returns as compared to expected levels of 20-25%.
Even SMEs are going through a rough patch, due to the slowdown. Additionally, private equity funds prefer bigger companies for lower risk. There have been no profitable exits. Plus there are information gaps about SMEs.
Many insurers try to compare investing in AIFs to investing funds from traditional policies in equities. But AIFs carry much more risk than equity.
