The recent product design guidelines, announced by the insurance regulator, may pose reputational risks to insurance companies, while also increasing their costs and squeezing margins, says DK Mehrotra, chairman of Life Insurance Corporation. In an interview with Vishwanath Nair, he said that India?s largest insurer is willing to go above the 15% investment cap, if it gets the requisite government permissions in specific cases. Excerpts:
How is this year?s investment plan panning out? What are your plans going ahead?
We are a long-term player, we go by the strength of the market, our own research or the opportunities available. We don?t ear-mark any amount saying that this much investment has to be done. There is a very simple thumb-rule that we follow: whatever the investable fund, 10% of that goes into equity, leaving aside the ULIP products. If I get a good opportunity, or if something better comes our way, if there is a ULIP product that does very well, we may increase it a bit. Last year (FY12), the total investment was around R1.95 lakh crore, this year we are aiming to reach up to R2.1-2.15 lakh crore. Every year, we try to have an incremental growth of about 10-15%. So, for the year 2013-14, we should have a total investment target of, say, R2.25-2.3 lakh crore. Out of that, about 10% should go to equity. If something better comes, say, an IPO comes, we should raise it a bit. About R25,000-30,000 crore.
Irda and the finance ministry have had a literal war of words in recent times regarding LIC?s investment limits…
We have been there for the last 56 years and we have been investing; in certain cases, we had crossed the earlier cap of 10%. So, we had asked the regulator to give us a bit more of headroom, because if there is an opportunity, we shouldn?t miss out. After a lot of deliberation, Irda came out with guidelines in February stating that LIC can go up to 15%. Though we always had that 30% ceiling with us as per the LIC Act, we never went in too aggressively. We are a very compliant organisation, so we would not want to do anything that would violate the regulations laid down by the regulator or the ministry. In a number of cases, we have exceeded 15%, where we have some strategic holding. But we had gone to the government to get the permission. We always go to the owners, the government. We put before them our requirement and they have been good enough to give us clearance when it was required. I don?t think at any point of time there was a dispute on this. Even in the future, if I need to cross 15%, I think if we approach the owners we will get the clearance.
The recent product design guidelines put out by the regulator have created a huge flutter among the private players. Your thoughts?
Today, if I have to withdraw my products from the market, then (it will mean) there is something wrong. Is it that I have been selling the wrong products since 1956? Talking about LIC, the products that we have since 1956 have given reasonable returns to the policy holders, created a good corpus and have also given good returns to the government owners. I have been in discussion with the regulator earlier as well, that the guidelines which come in should be from a cut off-date, stating that all the products launched thereafter should abide by the guidelines. This way, the customer will have the opportunity to choose between both these kinds of products, where the prices and the benefits will be different. Then the less profitable products can be gradually phased down. But if you withdraw old products, it will have two issues. One is a reputational risk for the insurer and there can be a lot of litigations as well. Second, the cost involved in these things is very high. Today we are talking about transparency, which is a good thing, but ultimately we have to consider the insurer as well. We have to have certain amount of margin, only then can insurers be able to operate. If I?m going to squeeze the margins so much, it also becomes difficult for the insurance company to survive. Those things have to be addressed.
Mis-selling of insurance products has been on the mind of the regulator for some time now. Being the largest player in the market, what can the industry and regulator do to curb this issue, according to you?
First of all, I don?t understand what you mean by mis-selling. Insurance is a contract between two parties and if both have understood the basis of the contract, there cannot be mis-selling. There can be miscommunication, which I can understand. For that you will have to educate both, the customer as well as the intermediary. We are doing everything to see that this education happens. Insurance is a product that has gained some level of acceptance after the opening up of the industry. Earlier, insurance was not in the priority list of people, today they have understood the importance. So, a lot of education is required among the customers. Once that happens, this concept that you call mis-selling will come down. If you say only the intermediaries are responsible for it, I may not agree with that.
There have been many instances where LIC has been referred to as the ?bailout agency? for the government. Your thoughts?
We are not in the business of bailing out. We take a very reasoned decision before entering the market and wherever we get a good opportunity, we participate. In the process, if someone gets an exit, its part of the transaction. Only when somebody sells, somebody will buy and if that is called a bailout, then I can?t help it. We never enter into the market with the intention to give an exit to someone else. A bailout can happen only for a short period; we are a long-term investor, so this question does not arise. I have to take care of the returns that I give to my policy-holders, so we cannot risk our investments with an option that will ultimately become sour.
When we buy a stock, we don?t try to assess the value in the next week or ten days, we look at it over the next few years. If I have to hold it for a few years before I get the right value for which I had bought it, then I will wait for that period since I am not in a hurry. So, someone may not find value in it immediately, I may find it in a few years, so I will be there. Maybe our decision has been contrarian at times, but it has helped us all the way.
In his Budget speech, the finance minister had said that by March 31, 2014, there will be one LIC office in every town with a population of 10,000 and above. How do you see this panning out?
We have been developing various channels and various methods all these years. One is that we have opened more than 20,000 collection points or what we call premium points. Our own empowered agents, who are authorised by us, have the ability to collect the premiums and provide basic services to customers. Secondly, we have offices, where our senior business associates work from. After this announcement in the Budget, we are evaluating as to how many more places will I have to go and build offices. We have to see whether these premium points will count as an office. If not so, then we will have to again recruit people, which is a problem. I don?t have an additional surplus staff that I can deploy there. All these things are to be examined by us. But we have always lived up to the expectations of the owners. We will continue to do that.
Sources say that the market regulator Sebi is initiating talks with Irda to allow insurance companies in the stock lending and borrowing (SLB) mechanism. How do you think this will help the market?
It all depends on what I am holding in my portfolio, then I can leverage that. I do not know the details of the portfolios of other insurance companies. But if LIC gets an opportunity, we can definitely churn our portfolio more often. As far as I understand, this is a little sensitivity about transactions, so I don?t know if the regulator will allow us. Even if they allow, it may be for a very small portion. If an opportunity comes, we will look into it.