The Hindu Business Line : `Let life insurers into derivatives markets'

WITH the derivatives market becoming active, there is a case for insurance companies to participate in it, according to Ms Shikha Sharma, Managing Director and CEO, ICICI Prudential Life Insurance. "When the derivatives market were just starting out, it was legitimate not to allow insurance companies to participate because we are large players and the markets could have gone into an illiquid situation. But now the markets are doing well and the volumes are increasing," she said in an interview to Business Line. Excerpts follow:

What is the impact of rising yields on government securities for insurance companies?

Broadly, we are likely to shorten the duration of our assets though our liabilities are long-term. However, for endowment funds, we try to match the duration of assets to that of liabilities.

Does a shorter duration mean higher risk?

Shorter duration does not mean higher risk because we are very particular about credit risks. We invest in bonds that are rated AAA. Besides, if they are of a shorter duration, there is less price risk and vice versa. Thus, if we think interest rates are going up and we choose bonds that are of shorter duration to mitigate price risk. With interest rates falling, our returns are bound to fall. But the equity markets have been doing well; therefore, on a balanced portfolio we continue to get double-digit returns. We have consistently outperformed BSE 100, the index that we have been using for equities. The good news is that consumers seem to be taking the right decisions. They have been shifting from predominantly debt funds to balanced funds in the last two years.

What are the returns you have been getting from each of your funds?

On the equity fund, the benchmark is 14.4 per cent and our return was 17 per cent. On debt, the benchmark was nearly nil and our return was nearly nil, because of the interest rate rise. On the balanced fund, the benchmark was 5.7 per cent and our return was 6.7 per cent.

Do you think there should be more flexibility in terms of the investment portfolio of insurance companies?

The regulator (Insurance Regulatory Development Authority) insists is that the endowment fund and the shareholder's fund should be invested in Government securities. In unit-linked plans (ULIPs), the investment is based on specific brackets; therefore, it gives us a fair degree of flexibility. But the derivatives market is becoming active and there is a case for allowing insurance companies to participate, an option which is currently closed. LIC has been asking for it for quite some time. We originally felt the need to ask for only the swaps.

The fringe benefit tax (FBT) on superannuation has come through. What do you think of the budgetary proposals for the insurance sector?

At one level, the Government has been saying that we need to encourage pensions since we don't have social security and have to think of ways to reach out pensions to the poor and the middle class. Superannuation is one way that people can build a pension kitty. We do have other pension products such as provident funds. People have been withdrawing from their provident fund well before they retire, for one reason or the other. Gratuity is also supposed to be a pension product, which when received in a lump sum could be completely spent. Superannuation is the only product that requires the compulsory purchase of an annuity and ensures, therefore, that you have an income stream for life. By taxing it, they are discouraging superannuation contributions. What has been perplexing about the last Budget, is that the sub-limits on the 80 c have been removed. But for 80 cc, the Finance Ministry has not removed the sub-limit of Rs 10,000. This is surprising because if you want to encourage pensions, then why do you want to keep a sub-limit for pension plans?

IRDA is soon going to come out with guidelines for ULIPs. What do you think about this?

There have been a lot of discussions at the industry level on the issue of restrictions on unit- linked policies. If IRDA is talking about restricting ULIPs, which are withdrawn in a short period, then it makes eminent sense. Life insurance premium and long term savings vehicles should not be attracting money for short periods -15 days, a year and so on. For most regular premium plans, a restriction of three to five times of sum assured also makes sense. But in the case of single premium products that are used to top up into a long term insurance policy, there is probably a case of looking of looking at it differently. This is what we have been talking to the regulator about.

If the restrictions are thought through well, it should be good for the industry.

What percentage of your business comes from bancassurance? What do you think of businesses that are based on the bancassurance model?

For the year ended March 2005, bancassurance contributed 18 per cent and corporate agents another 10 per cent. I think bancassurance is an interesting model. But insurance does need face-to-face selling. People expect explanations about what they are buying. They tend to do this with the family. To that extent, the agency is going to play an important role in insurance selling. Our strategy is to have multiple channels to service the customer.

Bancassurance is a strategy which banks are using to their advantage. They have the distribution network and some products; insurance can be one more kind of product to cater to customers. Then the insurance company becomes a pure product provider to bank customers. In this case, a bancassurance strategy works.

Would your partner Prudential like to hike the stake from 26 per cent to 49 per cent?

I am sure it would as and when it is allowed. If it gets delayed and the listing route opens up then, one does not know. If the hike happens this year then I am sure Prudential will increase its stake.

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`Let life insurers into derivatives markets'