The Hindu Business Line : Life insurers well-placed to navigate turbulence

In India, the life insurance industry is built upon five sturdy pillars that make it resilient and reduce its susceptibility to short-term economic and market upheavals.

— K. Ananthan

The fear among customers whether life insurers will fulfil their long-term commitments to clients, while justifiable, is largely unwarranted.

Kapil Mehta

The volatility in the global and domestic economy has led to considerable anxiety about the future. Such unprecedented flux across geographies and industries has left both customers and companies uncertain of what lies ahead. The alarm triggered by the vulnerability of the financial sector has had a domino effect. It has resulted in concern spilling over to life insurance as well. Customers are concerned whether life insurers will fulfil their long-term commitments to clie nts. This fear, while justifiable, is largely unwarranted.

In India the life insurance industry is built upon five sturdy pillars that make it resilient and reduce its susceptibility to short-term economic and market upheavals.

Strong Capital Base

One of the fundamentals of the insurance industry is its emphasis on building a strong capital base. Insurance companies maintain large reserves and, therefore, are typically relatively stable entities. This translates into more security for those customers that are insured. Besides, the industry is strongly regulated by the Insurance Regulatory and Development Authority (IRDA).

As per these regulations, capital requirements or solvency margins are fixed for insurers, keeping in view the size and degree of risk undertaken. Solvency margin is the capital that an insurance company holds to ensure that it can always pay its claims and policyholder benefits. The specified methodology for solvency margin prescribes a conservative basis for estimating capital. Additionally, the regulator has mandated a 150 per cent solvency margin, even though the statutory minimum is a 100 per cent.

Long-term Orientation

Insurance companies, by the nature of their business, tend to focus on long-term time horizons. Companies often take 8-10 years to break even after start-up; insurance policies run for decades; and business economics require policies to stay on the books of the insurer for many years. Such a long -term perspective allows insurers to work patiently towards their goals. Insurers usually look for safety in investments rather than extraordinary returns.

Regulations prescribe the types of investments that insurance companies can invest in as a way to help ensure insurers focus on their ability to pay claims and meet their commitments to consumers. Rather than a quick haul in trading, insurance companies typically lean towards maturity. This makes insurers less vulnerable to interest rate and other interim fluctuations.

Traditional insurance funds are consolidated and are often primarily invested into safer, long-term instruments such as government bonds and treasury bills, which carry a lower level of risk but deliver fair returns at maturity. In unit-linked portfolios, investors can opt to reach for potential higher returns by investing in equities, which present more risks. However, while these products do have an investment risk, insurers are required to use certain prudent measures to diversify these portfolios.

Risk Management Capability

At a fundamental level, life insurance is about pooling of risk. Claims for early death of an individual are funded by others who live longer. Defining, dissecting and understanding risk is at the heart of life insurance. We understand how to manage mortality as well as investment risks. Our business sustainability is not contingent upon just investment returns.

Insurers in India are typically audited by internal teams, two external auditors, auditors of the promoter companies and IRDA. Such high level of scrutiny and inspection helps ensure that risks are being monitored, diversified and the business is taking steps to be secure.

A life insurer’s promise to its customer is that if he were to die an early death, his family’s financial needs will be aided by the insurance coverage he purchased. This fundamental need of death protection is the highest priority for life insurance and is equally applicable whether the Sensex is at 20,000 or 10,000. In fact, economic downturns force insurers to refocus on the fundamental death protection need. Thus, even if the economy of our country were to slow down, insurance needs will remain completely necessary and relevant.

Decades of Experience

Around the world, insurance companies often have decades of experience. It is not uncommon to find 100-year-old companies within this industry that are protecting lives all over the world. This is very different from many sectors where leaders have emerged over the past few years.

This experience translates into a distilled wisdom and commonsense that helps these institutions take volatility in their stride. There is typically a strong mindset within the management of an insurance company that the organisation is being nurtured and preserved to pass on to the next generation — and to always meet future commitments.

One of the fallouts of turbulent times is the high intensity of rumours, speculation and churn in personal financial portfolios. These are often precisely the wrong responses to these times.

More than ever before, these are the times for customers to remain steadfast and look within to identify their most fundamental need — financial security for their families.

It is also time to look to the advice of financial professionals who will assess families’ risks, long-term goals and evaluate their current plans. Life insurance addresses these requirements comprehensively and securely.

(The author is MD & CEO, DLF Pramerica Life Insurance)

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