New norms will lead to better returns

Recently the Insurance Regulatory and Development Authority (IRDA) announced new investment norms for insurance companies. It also issued guidelines for insurers on fund management and risk management practices. Vikram Kotak, chief investment officer, Birla Sun Life Insurance spoke to our correspondent on the ramifications of these new guidelines.

What is your take on the investment guidelines introduced by the insurance regulator?
The Insurance Regulatory and Development Authority (IRDA) has widened the ambit of ?approved investments? by including mutual funds and asset backed securities (ABS, related to housing and infrastructure) as approved investments.
With the corpus of insurance companies growing, allowing investment in housing and infrastructure-related asset backed securities will assist in development of the markets for these asset classes.
Definition of infrastructure investments has also been aligned with that of Reserve Bank of India (RBI). This has widened the scope of such investments. IRDA has also allowed investments in real estate and venture capital funds.
In the guidelines, IRDA has laid due emphasis on strong investment processes and risk management systems. This will ultimately ensure superior portfolio quality and lead to better returns on policyholders? investments over the long term. Bringing Ulip (Unit-linked insurance policy) funds under these exposure norms is in the interest of policyholders.
With the Indian markets becoming more and more globalised, resulting in increased volatility driven by external factors, we feel IRDA?s move of defining investment guidelines for Ulips and ensuring enhanced risk management practices in fund management is a move in the right direction.

According to the guidelines, insurers will now be able to invest in initial public offers (IPOs) with an issue size of Rs 200 crore, mortgage backed securities (MBS) and bonds floated by special economic zones (SEZs). What was the investment pattern followed by your company earlier, and how will these new norms help a life insurance company?
At present, Birla Sun Life Insurance (BSLI) invests in IPOs with issue size of Rs 500 crore and above as ?approved investments?. At BSLI, we focus on both quality and the size of the IPO. If a fundamentally strong company run by a transparent and visionary management comes out with an IPO of less than Rs 500 crore (and greater than Rs 200 crore), we would surely reap the benefit of relaxed guidelines and make such an investment.
With MBS and ABS with infrastructure assets as the underlying assets being classified as ?approved investments?, we would surely explore the opportunity of investing in these instruments and gain from the higher yields offered by them. While investing in these instruments, we will continue to remain focused on maintaining superior portfolio quality and invest only in the highest-rated instruments.

How will a consumer benefit from the changes in investment guidelines?
IRDA guidelines have paid adequate attention to policyholders? interest. Policyholders will benefit both directly and indirectly from these guidelines. Widening of the basket of ?approved investments? by including high-yielding asset classes and relaxing certain investment limits will directly enhance policyholders? wealth through higher returns. Further, by laying due emphasis on high asset quality through credit reviews and enhanced risk management policies and practices, IRDA has ensured that policyholders? money is invested in safer assets and is not exposed to undue risk. So, policyholders will indirectly derive long-term benefit from superior portfolio quality.

What is the size of asset managed by your company at present?
As on August 27, 2008, total asset under management (AUM) stood at Rs 7,642 crore. Of this, 42.5 per cent was invested in equity and the remaining in high-quality debt instruments.

Are you planning any new investment strategy to make best use of the revised norms?
A well-planned investment strategy is essential before making any investment decision. These do not undergo any material change due to changes in exposure norms. However, we will make necessary alterations to align our investment strategy with the new guidelines related to inclusion of new asset classes, as approved by the regulator.

What are the main challenges that the life insurance firms face today?
With the arrival of new players, products, and distribution channels, players in the industry face intensive competition. At present, there are 21 life insurance companies registered with IRDA. Three to four more companies are in various stages of getting incorporated.
Operational efficiency has assumed huge importance, given the long gestation period of the industry, and rising manpower and establishment costs. With huge expansion plans underway, maintaining operational efficiency is a challenge. On the back of expansion by most players and entry of new players, the industry faces a huge challenge in terms of retaining talent and availability of skilled manpower.
Further, with increasing number of players, customers? buying behaviour has undergone a change. Due to the availability of multiple choices, customer loyalty is getting diffused. Customers are becoming more and more demanding in terms of service levels and investment returns. Ensuring customer delight,identifying their needs, and providing the right solution at the right time will be the keys to success. Offering specialised, innovative products has also become essential for gaining an edge in this competitive market.
The penetration of life insurance is very low with premium as a percentage of GDP being merely 4.1 per cent (financial year 2008 figure). It is the responsibility of insurance players to develop the market further and increase penetration levels. In this context, customer education assumes prime importance.
Lastly, life insurers have been offering specialised, lower-premium products to capture the rural market. Since around 80 per cent of India?s population resides in rural areas, insurance players are aware of their social responsibility towards these segments. Penetration of suburban and rural areas also poses a challenge in terms of building efficient distribution reach and ensuring customer education.