Mukesh Ambani led RIL looking to enter the Insurance industry

If newspaper reports are to be believed, Mukesh Ambani led Reliance Industries is looking to buy out Bharti's stake in Bharti Axa Life and General Insurance companies. Bharti has been looking to sell its stake in the insurance venture over the past year. Given the pedigree of the two partners- Bharti and Axa-it must be said that one would have expected these two insurance ventures to have generated more premium income. Bharti Axa Life has a market share of about 0.3% as far as new business premiums in the financial year 2010-11 are concerned. However, Bharti Axa Life is in the final shortlist of three companies for the Bancassurance tie up with Punjab National Bank, which can be a game changer.

On the other hand, Mukesh Ambani led Reliance Industries has been looking to enter the financial services space in a big way after its non compete with the ADAG group came to an end. It has partnered with DE Shaw and at one time was also looking at acquiring IL&FS. Buying Bharti's stake and entering the high potential insurance business in India makes perfect sense for Reliance's ambitions in the financial services area. In fat, Anil Ambani led ADAG had also entered the insurance space by buying out AMP Sanmar, which was a life insurance company. Currently, Reliance Life is ranked 6th among the private life insurance players in India with a new business premium of Rs 3035 crores in FY 2010-11 and has a 2.4% market share in the life insurance industry. Reliance Industries, which is known for the scale at which it operates, might look at acquiring a substantial market share in the insurance area in India through this particular transaction.

Whether the transaction goes through or not, time will tell. But prima facie, it seems a very good vehicle for Reliance to enter into the insurance industry without going through all the license related delays. If RIL does indeed join the insurance industry in India, even LIC will be forced to take notice and observe closely.

Impact of Direct Tax Code on Life Insurance

Come April 2012,  and the Direct Tax Code (DTC) will come into effect.

Let us look at the impact that it might have on life insurance policies.

Currently, insurance premiums paid (upto Rs 1 lakh) and insurance policy proceeds are tax exempt. Once the DTC comes into effect, insurance policy proceeds will be tax exempt if and only if the policy maturity term has been reached (or on death, whichever is earlier) and provided the sum insured is 20 times or more the annual premium paid.

Tax savings is one of the major drivers of life insurance sales in India, as both premiums and policy proceeds are tax exempt. This will have a major bearing on the sales of life insurance policies as most policies (except the pure term insurance covers) have a sum insured of less than 20 times the annual premium. Another feature of the life insurance market is that single premium policies (which are mostly an investment tool) are very popular. These single premium policies have a very low degree of cover. The new DTC will make single premium investments less attractive than earlier. Single premium currently accounts for more than 50% of the total insurance market in India. 

So we expect to see increased sales of pure term products and protection intensive life insurance policies from 2012. We feel that that is the way it should be. In India, life insurance has begun to have less with insurance and more with investment. Before the regulations of Sep 2010, most of the ULIPs were inefficient, expensive investment products masquerading as life insurance products. With IRDA mentioning a lock in of minimum of 5 years on insurance policies, and DTC ensuring higher insurance multiple, chances are that we will begin to see more long term protection policies.

IRDA commissioning study on cost of Regulation

The insurance regulator, IRDA, has mentioned that it will commission a study to analyse the cost of the regulations that it has enforced on insurers, and thus the impact on the cost of insurance policies. Over the last year, there has been a spate of regulations by IRDA and this study will provide quantitative evidence of the impact of the regulations and if the regulator has over-regulated.

This is indeed a bold move and the study will be quite complex as data would be required from every insurance company in India. There can be different elements of increased cost due to regulation: cost of needing to report more, cost of needing more manpower to ensure statutory compliance, sales team trainings, cost of reprinting marketing literature, the opportunity cost of certain business lines turning unprofitable etc . The study will be of more crucial import to the life insurance industry as sweeping regulations were brought into effect from Sep 1 2010. IRDA also mentioned that insurance companies have to prepare quarterly filings, which has its own cost.

Studies of this type are regularly undertaken in other countries, most notably Australia. It would be interesting to note the impact that this study has on more thought through regulation. While insurance companies would not admit it publicly for fear of incurring the wrath of the regulator, there is a feeling among the life insurance companies that they have been over-regulated. But one cannot blame the regulator for this: the horrendous stories of misselling that the industry was resorting to cried out for some really strong regulation. The life insurance industry, in the longer term, will come out stronger because of the course corrections undertaken. The only area where we feel that the regulation has gone a little wrong is on pensions as that category has been more or less killed, but IRDA is relooking at the pension regulation if media reports are to be believed.

Max New York Life on Stable Ground

Max New York Life, one of the leading private life insurance companies, expects to turn profitable in this financial year. The company which would have a total premium collection of approximately 5000 crores in this current fiscal has been relatively less affected by the new ULIP regulations as they have focussed on traditional products.  86% of their sales come from traditional products.  Max New York Life also has a high renewal premium to new premium ratio of about 2:1, whereas the overall industry ratio is almost 1.2:1. This is because they have a higher persistency/renewal ratio, and also because they have a lower component of single premium sales in their product mix. Max also has a strong distribution arrangement going with Axis Bank, wherein Axis Bank has picked up a stake in Max and offers Max's life insurance products to its customer base. 

Pensions: Hope lurks

The new regulations for ULIPs that came into force from Sep 2010 effectively killed sales of pension products. Out of the 23 life insurance companies in India, only four life insurance companies launched new pension plans- SBI, LIC, ICICI Prudential Life Insurance and Aegon Religare Life Insurance. Pension sales , which accounted for nearly 30% of the market, reduced to a trickle. In fact, reduced sales of pension products is one of the key reasons why the life insurance market will see flat or negative growth in FY 2011 over FY 2010. The private life insurance companies have seen a degrowth of over 30% between Sep 2010 and Feb 2011 compared to a year earlier. 

The key reason for reduced sales of Pensions by the different Life companies was that IRDA mandated that there has to be a minimum assured return of 4.5% per annum. This guaranteed return created two issues:

a. It is too low a return for the customer to be of any interest when he sees returns around 10% in some traditional long term savings schemes

b. This creates  a problem for  the life insurer as  there are no long term instruments with tenures of 25 years plus which the Life Insurance company can invest in to assure this return.

The life insurance companies, through the Life Insurance Council, had made a representation to IRDA wherein they had request for higher equity allocation in the pension product. In all probability, the 4.5% guaranteed return may not be mandatory for pension products but may be just one of the different pension products that a company can operate, with a particular part of the pensions portfolio being booked under the guaranteed product. Policyholders would also have the option to choose non guaranteed pension products with a risk cover. It is also expected that IRDA will relax the mandatory purchase of annuity with 2/3 of the pension proceeds to about 50%.

We expect IRDA to come out with the new guidelines in the next few weeks. Pensions are too important a component of the Indian life insurance market to be allowed to wither away the way they have in the last 6-7 months. We hope that the corrective measures mentioned above will infuse new life into the health of pensions.  

Health Insurance: A growing market

Health Insurance penetration in India is only 3% in India as compared to 10%+ in countries such as US, Korea, UK etc. Insurance per capita in India is an abysmal USD 1 whereas in the US , it is more than USD 2000. It is estimated that only about 3% of Indians are covered by any private insurance plan.

The current market for health insurance in India is about Rs 8000 crores and it is expected to increase at a CAGR of 20-25% over next 10 years. Some of the key drivers for the growth of this industry is as follows:

1. Increased healthcare costs in India, forcing people to take up health insurance
2. Rising affluence of the Indian middle class and thus being able to afford health insurance
3. Increasing trend of lifestyle related diseases such as diabetes, heart ailments forcing
4. Rise in number of people visiting India for medical treatment
5. Continued tax benefits for health insurance related premiums
6. Government initiatives to increase health insurance awareness
7. Specialised health insurance companies entering and growing the market

Over the next few years, we expect some hardening of rates for health insurance premiums as the current claims ratios (especially of the public general insurance companies) is way too high and they are making underwriting losses. We also expect the processes to get streamlined with captive TPAs being set up, standardization of rates for different procedures carried out by the hospitals and a greater degree of co-pay.

HDFC Life to defer IPO plans

IRDA would be coming out with the IPO norms for insurance companies in the next few days. Insurance companies which have completed 10 years of operation would be able to tap the equity markets for fund raising. HDFC Life , one of the earliest private entrants, would be eligible to tap the equity markets. 

In an obvious and expected move, the company has mentioned that it will defer the IPO plans till at least next year as the current valuations are not attractive at all. Profitability is under pressure and the life industry is set to record a degrowth this year. In the light of the new regulations on ULIPs with lower charges and lower commissions, the life insurance industry has been recording lower sales and the margins have come under intense pressure.

However, we feel that the current changes brought about will strengthen the life insurance industry in the long run, and it very well addresses the systemic flaws in the system. The industry will emerge the healthier for it in the long run, and ultimately will lead to higher valuations for the life insurance industry. The same cannot be said about the general insurance industry where the public insurance companies are operating at a combined ratio of 135! There are systemic problems there among the non life public sector companies which needs to be urgently addressed.

Edelweiss Tokio Life receives R2 approval from IRDA

Edelweiss Tokio Life, the 24th life insurance company in India which is a JV between Edelweiss and Tokio Life , has received the R2 licence from India. Before an insurance company can commence operations, it needs to go through a 3 stage licensing process- R1, R2 and R3. At the R1 stage, IRDA evaluates the promoters and at the R2 stage, evaluates the business model of the company. In a few months, Edelweiss Tokio Life should be in a position to write life insurance business.

As mentioned in an earlier blog, EdelWeiss Tokio Life is led by Deepak Mittal who was earlier the CFO of Edelweiss. It will be interesting to see the strategies of Edelweiss evolve in this reasonably competitive market where the annual premiums are expected to reach Rs 10 lakh crores from the current level of Rs 2 lakh crores in the next decade. The acquisition of Anagram Stock Broking by Edelweiss should give some degree of distribution presence to the life insurance venture.

Enhanced Gratuity Provisioning of Public Insurance Companies

IRDA, in a recent circular, has notified that pay revision of the employees of the Public Insurance Companies has been carried out and the maximum gratuity provisioning has been increased from the current Rs 3 lakhs to a maximum of Rs 10 lakhs. Gratuity is a payment made to employees who have served for more than 5 years in an organisation. Gratuity payment is calculated as 15/28 of monthly basic pay for every year of completed service, which is paid out when an employee retires or leaves the organisation. Gratuity liability calculation of a company involves detailed actuarial calculation, and every company must make provisioning for the gratuity liability. 

Earlier, the maximum gratuity limit was fixed at Rs 3 lakhs, but now it has been revised upwards to Rs 10 lakhs. Public Sector insurance companies, which have a significant number of employees who have served significant number of years in service, will have to make a far larger provisioning for their gratuity payouts. This will have a negative effect especially on the 4 public sector general insurance companies which are already reeling under significant accumulated losses and will put further strain on their solvency ratios, needing more capital infusion.

IRDA however has given a timeline of upto 5 years to make this increased provisioning @ 1/5 of the increased provisioning every year.

Third Party motor insurance premium set to increase by upto 65%

Your car insurance policy has two components : Own damage and third party.

Own damage , as the name implies, is when your car is insured for the damages that it might incur in an accident, or the insurance for your vehicle should it be lost etc.

Third Party: This is the crucial part of the insurance where you are protected for the damage that you or your car might cause to others. For example, if there is an accident involving your car where another car is damaged and there is a loss of life, you need to have protection to pay for the damages of the other car and also compensate for the financial loss of the other life. Not having this third party car insurance can be financially crippling.\

Third party motor insurance is compulsory by law. No individual is allowed to drive one's car without third party motor insurance. Third party motor insurance is also typically quite cheap. For example, for a private car, in most cases it is less than Rs 1000 per year. IRDA, the insurance regulator, still controls the pricing of third party motor insurance while it does not control the pricing of any other insurance risk. This is called tariff. The general insurance sector was detariffed in 2007 with the exception of motor insurance third party.

India is perhaps the only country in the world which has unlimited liability covered in third party motor insurance for unlimited periods of time. Thus an external party, in theory, can file for  a 100 cr compensation, even 20 years after an accident has happened! Third party claim amounts in recent years have been on the rise due to greater earning potential of individuals in general, and earnings being projected over a  longer life span.

General insurance companies in India have been bleeding because of the motor third party premiums being kept very low by the regulator. A third party motor pool has been created to pay for all the third party related claims and that has had a huge deficit . Insurance companies have been asked to provision for an additional 3500 crores to take care of this liability. And they might need to provision even more later. This pool has had such an impact that many insurers have needed to infuse additional capital to ensure that they maintain the solvency margins stipulated by IRDA. Motor third party has proved to be the curse of the general insurance industry in India.

However, IRDA has now announced new pricing for the motor third party insurance which has come as a welcome relief for all the general insurers. Effective 25th April, third party motor insurance rates will go up between 10% and 65% depending on the category of the vehicle.

The following are the basic features of this price increase effected by IRDA:

1. The increased rate for each class of vehicles has been decided after looking at the claims cost of that category of vehicles, claims experience and the cost inflation index determined by CBDT

2. Earlier the rates were reviewed every 4 years, but now the rates will be reviewed every year. This is a welcome move

3. IRDA has sternly warned the insurers that they should not shy away from writing third party motor insurance business and should make this available at their offices

The bigger increase has rightly been in the Commercial Vehicles segment which was the loss leader. While the insurance industry wanted almost a 80-90% increase, they have been allowed a 65% increase which is also quite substantial

Term Life Insurance premiums might come down further

Term Insurance, which is a pure protection plan without any savings component, might witness a further fall in premium rates in the coming months. While rates have fallen more than 50% in the last few years, these premium rates will be revised downwards soon. This is because IRDA is about to approve the new mortality rate tables based on the experience of the different life insurance companies between 2008-2010. The earlier rates used the LIC mortality table of 1994-96. Since then, the life expectancy has gone up leading to a drop in mortality rates. The private insurance companies, which were not in existence during 1994-96, started using LIC mortality tables as the base but with time started using their own mortality experience. Thus there was some revision in mortality rates, but with the new tables being formally accepted, we may see a further fall.

The new mortality tables  that are about to be adopted breaks the data up in terms of location, smoker vs non smoker, gender etc. This will allow the life insurance companies to fine tune their pricing approach, applying different rates depending on location,sex etc instead of a blunt, flat pricing leading to subsidisation of one segment by the other. Intense competition among the 22 life insurance companies will also ensure that the full benefits of the reduced rates will be passed on to the consumers.

Reliance Life Insurance's deal with Nippon Life may get delayed

Nippon Life, which announced a deal to pick up 26% stake in Reliance Life Insurance just around the time the Tsunami struck Japan might have to wait a bit longer before the deal goes through. As per local rules in India, a company needs to be in existence for 10 years before it can divest any stake. Reliance Life completes 10 years in January 2012, and if the deal is to be completed before that, it will need special approval from the regulator IRDA. Reliance Life came into existence by buying the erstwhile AMP Sanmar.

Nippon Life is to pay Rs 3062 crores for a 26% stake, valuing the company at around 12250 crores.

In our humble opinion, the valuation seems way too inflated given the scale of operations of Reliance Life. But then, the Japanese are well known for overpaying!

S&P downgrades Indian General Insurance outlook to negative

S&P, the global ratings agency, has downgraded the business outlook of India's general insurance companies from stable to negative. This is primarily because they believe that there will be significant downward pressure on the insurance companies' bottomline due to underwriting losses. Put simply, they feel that higher claims will affect profitability of the Indian general insurance companies. BCG, in a recent report, has mentioned that the accumulated underwriting losses of the Indian general insurance companies is in excess of Rs 30,000 crores. S&P, in their report, mentioned that the insurance companies were reporting profitability primarily because of investment income, which they believe is currently volatile and there can be some shocks  there.

This is not surprising- general insurance companies are bleeding because of the 3rd party motor insurance where there is a collective deficit in excess of Rs 5000 crores, and health claims where hospitals are massively exploiting the insurers by overcharging. The Indian customer will need to brace himself for increased premium rates very soon.

IRDA monitoring claims rejection parameters

IRDA is closing monitoring the grievances that it is receiving from customers, especially in terms of the claims rejected/reduced as that forms the bulk of the complaints that IRDA received. In 2009-10, IRDA received 2500 complaints against life insurance companies (against 1800 in 2008-09), and 2076 complaints (2200 in the previous year) against general insurance companies. The private life insurance companies had a claims rejection ratio of 7.6% (LIC was 1.21%) in 2009-10, and rejected claims in the region of around Rs 250 crores.

IRDA is widening the scope of its grievance cell. Instead of merely facilitating a dispute resolution between the customer and the insurance company, it is trying to examine if there are any patterns that evolve in the claims rejection against any particular insurance company. If they find that one insurance company is consistently resorting to one particular pattern for claim rejection. they would pull that company up. One grievance that one gets to hear for certain insurance companies is that they delay the claim payment if the insurance policy renewal is around the corner, and puts subtle pressure on the customer to renew the policy before the claims payment is made!!!

HDFC Life launches MID

In a welcome move to reduce the level of mis-selling in the life insurance industry, HDFC Life has started a new initiative called "Most Important Document" (MID). The MID is a one page document which contains questions on  the key elements of the life insurance policy that the customer is signing up for. The customer is supposed to fill up the details here (which demonstrates understanding of the policy features) and sign a declaration acknowledging that he (s) has understood the product features in detail.

In theory, this is a very good move. The only problem that we see happening is that the agent will be filling it up in most cases and the customer will only sign at the end. Key features document of life insurance policies have always been there, but most customers never bother to read it and set themselves up to be mis-sold. Our opinion is that insurance buyers are mostly  lazy and have  a resistance towards understanding their policies as they feel it is complicated, and this is something which the insurance sales force has exploited through the years.

We hope that this initiative actually helps in reducing mis-selling, and does not end up being just a news item that earns the company brownie points from the regulator.

Legal battle brewing on the TPA front

Third Party Administrators (TPAs) have been in the eye of the storm recently during the entire controversy of cashless claims for the health insurance industry. The four public sector general insurance companies have expressed their dissonance at the functioning of the TPAs, claiming that they have contributed directly to higher claims by not managing the claims process efficiently. On the other hand, the consumers are also not happy with the TPAs, claiming there have been inordinate delays in claims processing and claims have been summarily rejected or reduced.

The four public sector general insurance companies have now decided to set up a TPA wherein they have a substantial stake. They had invited expressions of interest from different quarters, and have finally arrived at a shortlist of 2 TPAS. The insurers argue that they will have far greater control on the claims process through this inhouse TPA.

The existing  TPAs have contested this saying that the insurers should not pick up stake as they are in interested party, and the process will lose its independence. The TPAs claim that they will lose more than 50% of their business, and will have to lay off over 10000 people. 

It seems that IRDA might have to intervene finally, else the matter will end up in the courts. The fact of the matter is that the industry is bleeding through excessive claims.

Distance Marketing Guidelines for Insurance

IRDA has come out with a set of guidelines to regulate the process of distance marketing of insurance policies through telephone or over the internet. The key points of this set of guidelines is as follows:

1. Telecallers engaged in selling insurance over the phone need to have mandatory training of 25 hours

2. Insurers and brokers have to get their telecalling sales scripts approved through IRDA before use

3. In the case of telecalling, the telecaller has to provide all the details regarding the product features and benefits and mention the risks and exclusions

4.Insurers and brokers have to listen to at least 5% of the calls live and 10% of the calls that lead to a sale, to ensure that the guidelines are being met

5.Single premium ULIPs can be sold only upto a premium of Rs 1 lakh. Regular premium ULIPs sold cannot exceed Rs 50000 of premium per year. 

6. Universal Life products cannot be sold through the distance marketing mode

These guidelines come into effect from 1st Oct, 2011.

Child Insurance Plans

Child Insurance Policies are very popular in India, and life insurance companies aggressively sell these policies in India. In this article, we will try and understand the concepts involved in a child insurance policy.

At its heart, a child insurance plan is essentially a endowment plan with a fixed term . It is more of a marketing story rather than an innovation in a life insurance policy. Insurance being essentially a rather dry, emotionless subject, a child insurance policy helps deliver an emotional connect for the life insurance company with the end consumer.

In a child insurance policy, the parent (s) is the sum insured and the beneficiary is the child. Typically, the child's age would need to be less than 18. The basic objective of the child insurance plan is that in case something happens to the parent, this policy ensures that the child's education, marriage etc does not suffer. In the happy situation that there is no untoward incident happening to the parent, this policy ensures that the parent has saved regularly for the child's better future.

One additional feature that has been built into many child insurance plans is waiver of premium and double sum insured. Double sum insured means that in the case of the parent's death, the sum insured is made payable to the child and another sum insured (or maturity value) is paid at the time of maturity of the policy. Waiver of premium means that after the parents death, no additional premiums need to be paid even though the policy continues and regular additions are made to the fund value by the life insurance company. These benefits (riders) of course come at a price but are extremely helpful to the child in case of the unfortunate death of the parent.

There are traditional child insurance plans (which link everything to sum insured and bonuses) and unit linked child insurance plans (ULIPs, which link everything to fund value). Under the present scenario where charges have been drastically reduced in ULIPs, and also because this is a long term savings instrument, one would recommend a Unit Linked child insurance plan over a traditional product. There are many child insurance plans in the market- Aviva's Young Scholar, Bharti Axa's Future Champs, HDFC Life's Young Star, Max New York Life's Shiksha Plus II etc.

Health Insurance Portability: Clarity Required

There still does not seem to be too much clarity on health insurance portability in India. As per industry sources, health insurance portability will come into effect from July 1. It is still anybody's guess as to how pre-existing diseases, which is at the heart of portability, will be treated by the new insurer. There is one concern that health insurance portability might lead to increased costs for the consumer desiring to port, as the new company can use increase pricing as a ploy to turn down underwriting which they think might not be profitable. One concern area for health insurance companies is that they dont have access to a centralised database which has the claims history and health records of every insured person. In the absence of that, it becomes difficult to price the risk

ULIP sales take a beating

Sales of Unit Linked Insurance Plans (ULIPs) have substantially declined in 2010-11 over the previous year. This was mentioned by the IRDA Chairman during a FICCI organised event in Delhi where he mentioned that ULIP sales have gone down by as much as 15% over the previous year. A public row between SEBI and IRDA brought in new regulations for ULIPs from September 1 wherein charges and commissions were dramatically reduced. We feel that this had made a very attractive product category for the end consumer, but the tragedy has been that the life insurance distribution force has been reluctant to sell it due to lower payouts. 

It would be interesting to see whether this 15% decline is for the full year, or whether it is from September 1 when the new regulations came into effect. In case the decline is at an annual level, the real decline would be much more as the new regulations were in force for only 6 months.

In the long term, however, we feel that the market will tide over this and the new regulations will be healthy for the market. The level of misselling leading to record lapse rates would come down through these new regulations. In the short term, we expect to see higher level of sales of traditional life insurance policies.

Indian Insurance market to be USD 400 BN by 2020!

A recent report by FICCI and BCG has suggested that the Indian Insurance market will grow to USD 350-400 BN by 2020, and will be the among the top three insurance markets in the heart. This sensational headline has warmed the hearts of many, and made everyone excited about the potential of the industry. It is worthwhile to bear in mind that the current market size is around Rs 3 lakh crores, which is USD 70 bn. So we are talking about a 5 times increase in the next 10 years. We feel this is too aggressive and is more a headline grabbing, stand out from the clutter, screaming for attention news item.

We would actually pay far more attention to some of the other items that the report mentions: 

1. Profitability is a huge issue for the Insurance industry in India, with the non life insurance industry having accumulated underwriting losses of Rs 30,000 crores and the life insurance industry have cumulative losses of Rs 16,000 crores

2. The agency model, the main distribution channel, is still proving to be unprofitable for the life and non life insurance sector

3.Insurance companies' obsession for topline growth has contributed to a inefficient, non sustainable operating model

4.Auto claims fraud, third party liability for motor and high level of claims for health insurance is crippling the general insurance industry in India

5. The recent tightening of charges for ULIPs has taken the wind out of the sails of the life insurance companies in India

IndiaFirst Life achieves sale of Rs 900 crores

IndiaFirst Life, which is a late entrant into the area of Life Insurance in India, has generated a creditable Rs 900 crores of premium in the first 500 days of its operation. IndiaFirst is a  joint venture between Legal and General, Andhra Bank and Bank of Baroda. It is headed by P Nandagopal, an industry veteran who was earlier the distribution head of Birla Sun Life and the CEO of Reliance Life. The team draws heavily from the  Reliance Life team, and it would be interesting to follow the progress made by this company in the coming months and years.

IPO norms by end of April 2011

The IRDA Chairman has announced that the IPO norms for insurance companies in India would be announced by the end of April 2011. Speaking at a conference in Delhi, the Chairman mentioned that a couple of private insurance companies would be completing 10 years of operation (HDFC Life and ICICI Prudential Life) by the end of April 2011, and the initial condition has been that private companies need to be in existence for 10 years before going public, thus norms need to be ready by then. 

It would be interesting to note which life insurance companies decide to tap the equity markets. While the markets have been on a roll, the regulations effective Sep 1 2010 for Unit Linked products (ULIPs) might depress valuations of the life insurance companies. While Bajaj, Max ,ICICI etc have their holding companies listed and the market has assigned an indirect value to the insurance companies, it would be nice to see how the market values a directly listed life or general insurance company. Insurance penetration which is at 5% of GDP and has a total market size of Rs 3 lakh crores still has a lot of potential to expand further in India, and that should keep the capital markets interested.

General Insurance Premiums to cost more

IRDA Chairman, J Harinarayan, has mentioned that premium rates for Motor Insurance, Health Insurance and other General Insurance products would see an increase very soon.

This is primarily driven by the fact that claims ratios of the GI companies have been higher than expected, and the insurance companies have needed to increase their provisioning. The key factor that has contributed to this higher provisioning is motor third party claims, where the premiums are ridiculously low. General Insurance companies have incurred a combined loss of Rs 3500 , primarily on account of motor claims.The third party motor insurance, which is a mandatory product, could see an increase by as much is 300-400%.

Because of higher provisioning, insurance companies might have lower capacity and that might lead to increased rates. However, the rise in rates is likely to be gradual instead of a steep one time hike.

PNB in final stages of selecting Bancassurance Partner for Life

Punjab National Bank, the second largest bank in the country, is in the final stages of selecting its life insurance partner. In a rigorous selection procedure, more than 40 companies  expressed their interest .Subsequently, PNB has arrived at the final list of 3 life insurance companies- Aviva Life, MetLife and Bharti Axa Life- and has dropped companies such as Birla Sun Life and Reliance Life from the list 

This deal is not a pure distribution arrangement but also an equity participation arrangement wherein PNB will acquire a substantial stake in the final insurance company that it selects. Axis Bank had entered into a similar sort of arrangement with Max New York Life where they had acquired about 5% stake in Max. In this case, the stake that the insurance company would need to offer would be significantly higher as all the three companies shortlisted would be having lower valuations than Max New York, and PNB is a larger bank with more branches, and thus brings more to the party. The other variable that has changed since the Max New York and Axis Bank is that life insurance valuations have got depressed since the new IRDA regulations effective since 1st Sep 2010.

This deal could be a potential game changer for the winning life insurance company as PNB has a huge branch network (5000 + branches). MetLife lost their largest partner Axis when Axis decided to tie up with Max after Shikha Sharma joined Axis. Aviva Life has also lost a few bank partners of late and Bharti Axa Life does not have any significant Bancassurance partner. We expect very aggressive bidding by all the three players left in the fray.

PNB is being advised by BCG, the consulting firm, through this selection process. Once PNB is done with this selection process, they would in all probabilities initiate the process for selecting the non-life partner.