1. Investing in IPOs of life insurance companies? 7 top risks identified; what you must beware of

Investing in IPOs of life insurance companies? 7 top risks identified; what you must beware of

With life insurance companies looking at raising money from the primary market, here are some risks investors should look at before writing the IPO cheque.

By: | Published: September 18, 2017 4:52 AM
With life insurance companies looking at raising money from the primary market, here are some risks investors should look at before writing the IPO cheque.

With life insurance companies looking at raising money from the primary market, here are some risks investors should look at before writing the IPO cheque.

Financial market risk: Market risks arise from fluctuations in asset values, including equity prices, property prices and interest rates. These can significantly impact a company’s performance. Given the high contribution of private insurers, a large part of investment returns are from investments in the equity market. A sharp downturn in the equity market could hurt both unit-linked insurance plans sales and profitability due to lower revenue while a robust equity market could boost unit-linked insurance products’ growth and, consequently, total premium growth.\

Liquidity risk: Liquidity risk refers to the risk of not being able to make payments because of cash availability constraints. The relatively illiquid nature of insurance liabilities acts as a potential source of additional investment return by allowing the company to invest in higher yielding, but less liquid assets.

Mortality and morbidity risk: Mortality risk means fluctuations in the timing, frequency and severity of death of the insured relative to that expected at the time of underwriting (at the inception of the contract) while morbidity risk refers to fluctuations in the timing, frequency and severity of health claims, relative to that expected.

Persistency risk: The risk that poor persistency ratios may lead to fewer policies remaining on the books to defray future fixed expenses and reduce the future positive cash flows from the business written, potentially impacting company performance.

Expense risk: The risk that expenses incurred in acquiring new business are higher than expected at the time of pricing the product or expenses incurred in maintaining policies are higher relative to that expected earlier.

Operational risk: The risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment.

Changes in tax laws: Life insurance industry has tax benefits like lower tax rates, tax exemption in relation to pension income, tax deductions to individuals to aid investments in insurance products. Any adverse change in tax rates/ deductions could increase company tax burden as well as may lead to people shying away from buying life insurance products.

Extracted from UBS Investment
Research Report

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