IRDA had been in news this year with a slew of changes affecting both the life and general insurance industry. It’s been a tumultuous ride for both—the insurer and insured
The Insurance Regulatory and Development Authority (IRDA) finally launched mediclaim portability in October this year after delaying the initial launch date. Pension products have now been revamped again, after September 2010 new look was rejected by insurers as well as the insured. Despite mechanical rejection of medical claims by some insurers on flimsy technical grounds, IRDA only issued a circular which has hardly made any impact on the ground.
Portability – Mediclaim portability has been on a slow take-off till now. According to Fali Poncha, a veteran of the Indian insurance industry and executive chairman, IRICS insurance broking, “The need for portability is very real and it is a step in the right direction. The real hurdle to making portability a success lies in the fact that the terms and conditions relating to pre-existing diseases (PED) and time-bound exclusions are not common to all insurers. The laid-down time schedule is fraught with practical difficulties.”
No-Claim-Bonus (NCB) allows a policyholder to get an increased sum insured (usually 5%) for a claims-free year without paying additional premium. Portability will be limited to the sum insured (including bonus). Clarity was needed on whether the new insurer will allow bonus sum insured without extra premium. Not addressing this issue will ensure that the new insurer will charge a premium on the bonus sum insured, as well. Consequently, the net effect is that the policyholder loses the real benefit of NCB.
Pension - ‘No-guarantee’ option is not on the table. With a requirement to offer non-zero guarantee, high exposure to debt will continue. The annuity phase of the product will also be from the same insurer. Captive customers for annuity phase may ensure less motivation for insurers to offer best rate.
The annuity rates will be decided at the time of vesting of pension. If at that time another insurer offers better annuity rates, the insured is stuck with existing insurer—literally rest of life. To top if off, annuity in India is taxable which itself is the biggest snag. At the time of vesting, one-third of the corpus can be taken out tax-free and the remaining will now be enforced as annuity. There is no option for taking out the balance after paying tax. Anyone still interested in pension?
Mechanical claims rejection - IRDA has issued a circular to life and non-life companies asking them not to reject claims on technical grounds like a delay in filing. Some insurers including United India Insurance were rejecting claims mechanically based on delay in hospitalisation intimation and claims filing. Many claims continue to get rejected even after IRDA’s circular. With no warning or penalty for specific insurers, will the IRDA circular be taken seriously?
Cashless mediclaim elusive – Preferred-Provider-Network (PPN) has been created by government insurers to restrict cashless claims at hospitals who agree on the tariff rate for procedures. Government insurers have seen some success in adding high-end Mumbai hospitals like Jaslok and Fortis to its PPN list; however, the majority of big names like Breach Candy, Hinduja and Lilavati remain elusive.
ULIP to Traditional – It’s like jumping from frying pan into fire. With reduced upfront commission in ULIP, intermediaries are pushing traditional products. The acting chairman of LIC was quoted as saying, “In the past two years, we have tried to consciously shift to traditional products. Earlier, we had ULIPs and traditional products in the ratio of 60:40, which has now reversed.”
VIP – Last year it was Universal Life Policy (ULP) that IRDA suddenly discovered was toxic and decided to scrap it after it was in the market for over a year. It found its way back re-christened as Variable Insurance Policy (VIP). LIC Bima Account 1 and 2, SBI Life Flexi Smart Insurance are new VIPs in the market. A VIP worth skipping in your portfolio!
Highest NAV product - Insurance companies Moneylife has interacted with recently are not happy with the IRDA’s hint at scrapping highest NAV products. The hot topic seemed to have cooled down with IRDA still unable to make up its mind. Time will tell if highest NAV survives year 2012.
Online aggregators squeezed – IRDA’s stringent guidelines for comparison websites are seen as a deathblow for likes of PolicyBazaar.com, Myinsuranceclub.com and ApnaPaisa.com. Clamping down on advertising, ratings, endorsements or bestselling insurance products will surely help customers to get unbiased information for making a good buying decision, but restricting the lead generation fee to Rs10 is shutting the business door.
Motor insurance premium rise - In April, IRDA raised premiums for motor third-party liability insurance by up to 65%. The third-party pool has been in severe losses. From April 2012, third-party motor pool will work as a new ‘declined pool’ concept. The end result is that third-party premiums are likely to go up in 2012.
Lower lows on the Nifty may take it the level of 4,460
The market, which traded in the positive till noon, saw the gains swiftly eroded in the second half on persistent selling in blue-chips by institutional investors. The sell-off resulted in the market closing lower for the fourth day. For the third day in a row, the Nifty could not manage to make a higher high but made a lower low each day. On a 45.45 crore volume of shares traded on the National Stock Exchange (NSE), the index broke its first support of 4,630. If the trend of lower low continues and the benchmark is unable to hold itself above the days high, we may see it going down to the level of 4,460.
The market opened firm tracking the strong Asian markets on the back of a positive close on Wall Street overnight. Buying in realty, auto and banking helped early gains. The Nifty opened with a gain of 14 points at 4,660 and the Sensex climbed 40 points to resume trade at 15,584.
Brisk buying enabled the indices hit their intraday high in early trade. At the highs, the Nifty scaled 4,690 and the Sensex rose to 15,694. The market came off the highs and was range-bound till noon trade.
A strong bout of selling in blue-chips like Reliance Industries, Jindal Steel, Tata Steel and DLF, pushed the benchmarks into the negative. The sell-off resulted in the market touching the day’s low in late trade. At the intraday low, the Nifty fell to 4,609 and the Sensex 15,407.
Concerns about the fall in gas output from RIL’s prolific KG-D6 fields and its fallout on power and fertiliser industries weighed on investors.
The market finally settled in the red, down for the fourth straight day. The Nifty closed 22 points lower at 4,624 and the Sensex fell 89 points to 15,455.
Markets in Asia settled mostly in the positive, boosted by a green close of US stocks overnight. Meanwhile, Japanese manufacturing activity, as measured by the Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI), rose to 50.2 in December from 49.1 in the previous month. This apart, China’s factory activity increased to 48.7in December, from a 32-month low of 47.7 in the previous month.
The Shanghai Composite gained 1.19%; the Hang Seng rose 0.20%; the Jakarta Composite climbed 0.35%; the KLSE Composite advanced 0.31% and the Nikkei 225 surged 0.67%. Among the losers, the Straits Times declined 0.99% and the Taiwan Weighted shed 0.04%. At the time of writing, the key European benchmarks were mixed while US stock futures were flat with a positive bias.
Back home, foreign institutional investors were net sellers of shares totalling Rs1,015.92 crore on Thursday. On the other hand, domestic institutional investors were net buyers of equities aggregating Rs323.07 crore.
Dynamic plans give fund managers the flexibility to invest, but few managers are skilled for such a job. IDFC plans to take the plunge but would investors benefit?
IDFC Mutual Fund plans to launch a new fund—IDFC Dynamic Plan. According to the offer document filed with the Securities and Exchange Board of India (SEBI), it would be an open-ended equity scheme where the investment manager will have the discretion to take aggressive asset calls i.e. by staying 100% invested in equity market/equity-related instruments at a given point of time or he may have 0% invested in equity at another point of time, in which case, the fund may be invested in debt related instruments at the discretion of the fund manager.
Dynamic funds offer a flexibility to go fully into cash or debt and sit on the sidelines when the market is tanking. They will dynamically move from a fully-invested situation to being completely in cash and various stages in between, depending on the fund manager’s reading of the market situation Dynamic schemes are attempts at market-timing—something that fund companies usually claim should not be done. Not surprisingly, the ideas have largely proved good only on paper. The performance of dynamic schemes is difficult to be judged as there is no such index to benchmark their performance. But given their flexibility they are expected to perform better than other schemes or at least give positive returns.
Sadly, dynamic funds have given poor returns for the one-year period ending 23 December 2011 when they were supposed to go into cash. Funds like ICICI Prudential Dynamic Fund, HSBC Dynamic Fund and Pramerica Dynamic Fund have given returns of -18%, -20% and -16%. Some of the equity funds have lost less money. The Sensex for the period has returned -21% and Crisil Composite bond fund index has returned 7%. Therefore from the above performance, flexibility given to the fund manager has not made a great difference.
Fund managers are skilled in studying a company and buying the stocks for the long-term. Only a rare few, anywhere in the world, are market-timers and they apply very sophisticated and proprietary quantitative techniques. If a scheme is launched at an opportune time after which markets have gone up manifold, whatever mistakes the managers would have made, do not have a significant impact on the returns.
Therefore how the dynamic plan of IDFC performs solely depends on the competence of its fund managers. Suyash Choudhary and Kenneth Andrade would be the fund managers of the dynamic plan. Suyash Choudhary comes in with 11 years of experience and is the head of Fixed Income at IDBI MF, whereas Kenneth Andrade has 15 years of experience in equity research & fund management and is head of Investments at IDBI MF.