Rao: New direction

Mumbai, Sept. 2: Insurers are looking to add more lustre to unit linked insurance plans (Ulips) — the industry’s best-selling product. Ulips account for almost 80 per cent of new premia collection at state-owned Life Insurance Corporation (LIC).

The insurers will shortly submit a proposal to the insurance regulator seeking permission to funnel a part of the money into equity derivatives.

The move is designed to crank up returns from Ulips. Equity derivatives are financial instruments that derive their value from one or more underlying equity-linked securities. Trading in equity derivatives not only holds out the prospect of higher returns but also mitigates certain credit risks associated with the security. Futures and options are the most common equity derivatives.

“Investment in equity derivatives is definitely a good option for Ulips as it would help maximise the returns. We are going to propose this to the Insurance Regulatory and Development Authority (IRDA). I believe the regulator will soon allow insurers to invest in such financial instruments,” S.V. Mony, secretary general at Life Insurance Council and a former chairman of the General Insurance Corporation, told The Telegraph.

Ulips are allowed to invest in 58 market-linked assets that include stocks, corporate bonds and government securities.

Anuj Agarwal, chief financial officer, SBI Life Insurance, said: “Ulips have picked up pace in the past year. If Ulips are allowed to invest in equity derivatives, we will compare better with mutual funds. We hope the proposal is accepted by the IRDA.”

IRDA chairman C.S. Rao was open to the idea. “Investment has become an integral part of insurance business today. All the options available for investment through insurance are categorically stated in Section 27 of the insurance law. If investment in equity derivatives is legally permitted, there should not be any problem for us to allow the insurers to do so. Once the proposal is placed on our desk, we will definitely look at the possibility of permitting investment in derivatives,” Rao said.

The life insurance industry has witnessed a tectonic shift in the last few years. Ulips have outsold plain vanilla plans by a huge margin.

In the case of some private insurers, Ulips accounted for 60 to 70 per cent of new business generated.

During 2006-07, India’s largest life insurance company, LIC, collected a premia of Rs 31,556.80 crore from Ulips, amounting to 79.8 per cent of the total new business premium generated during the fiscal.

“We have four types of Ulip products — bond fund Ulips, secured fund Ulips, balanced fund Ulips, and growth fund Ulips. We find that most customers tend to go for the growth fund Ulips where an investor is allowed to invest more than 40 per cent of the premium in equities,” LIC sources said.

SBI Life Insurance collected a premium of Rs 2,928.5 crore during the financial year ended March 31, 2007. Ulips accounted for almost 60 per cent of its collections. However, the insurance regulator sounded a note of caution.

“Before allowing any investment in equity derivatives, we have to check whether the insurers have sufficient capital to cover their risks. Although investment in equity derivatives could maximise returns on Ulips, we need to remember that derivatives are not backed by assets, unlike government securities,” Rao said.