Money & Banking

Industry takes a mixed view on Reliance-Nippon deal

| | Updated on: Mar 14, 2011
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Capital infusion in life insurance companies has come down in the past few years owing to a slowdown in expansion of branch network, product mix tilting towards Unit Linked Insurance Plan (ULIPs) and lower growth in new business premiums.

Given the backdrop of several life insurance companies either cutting down their sales force or branch networks, the 26 per cent stake sale by Reliance Capital will help Reliance Life expand its market share. According to an HSBC report as of November 2010, Reliance Life was the fourth largest private player with a 4 per cent market share.

Industry reaction to this stake sale has been mixed. A top official of a competing insurance company said that this stake sale appears to be more of a distress sale.

But Mr R. Ramakrishnan, former Chief Actuary of Life Insurance Corporation and consulting actuary now, has a positive view on the stake sale. He said, ?Nippon Life's conservative and balanced approach combined with the aggressive stand of Reliance will make this deal positive. There are some important changes under way in the industry with most of the private players trying to balance their basket with traditional products.?

Non-participating policies

He added, ?For an insurance company more profits are made from non-participating policies. In a non-participating policy, the policyholder will get the lump-sum irrespective of the performance of the insurance company. With most of the companies launching the non-participating policies, the Nippon tie-up will help Reliance Life. Currently, such an advantage is there only with LIC. I think the big money will help Reliance Life.?

He continued, ?Other companies may not be able to sell the stake to third parties because they already have another partner and run the risk of diluting their controlling stake. In the case of Reliance it has recovered whatever money it has put in the insurance venture. But it still has 74 per cent stake. Besides, if it dilutes its stake in an IPO that will be an added advantage. Only those companies with traditional (non-participating) policies can grow, not those with higher ULIPs in their basket. So this deal can be helpful for Reliance Life.?

Published on March 14, 2011

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