The Insurance Regulatory and Development Authority (IRDA) is planning to heighten the criteria for the appointment of actuaries or experts who assess and price risks for insurance business. Such a step from the IRDA aims at enhancing scrutiny of financial impact of risk and uncertainty in insurance business.
Under the draft of the proposed norms the IRDA has said that an actuary should be an employee of the company and below 65 years of age. Moreover, the regulator has also stated that (with effect from 2013) the actuaries should have a minimum 10 years of experience in the industry with a minimum 2 years of service in a life or general insurance company. Also, the said actuary must have 5 years of experience after getting actuary fellowship.
At present there's no age limit for appointment of actuaries; and general insurance companies in particular hire actuaries as consultants who generally are above 65 years of age. Only 5 to 6 general insurance companies have fulltime actuaries who are employees, while the remaining 17 companies work with part-time consultants.
Interestingly the draft norms come at a time when the regulator (the IRDA) has failed to fill up the post (lying vacant for the past four months) of Member Actuary - a key person to take a call on product approvals at IRDA. But nonetheless we believe that the proposed norms drafted by the insurance regulator would enable an efficient pricing mechanism and reduce underwriting losses as vigilant eligibility criteria would help to plug in the inconsistencies in the present methods. This in turn would also lead to fair premiums being charged from the policyholders thereby preclude over-pricing or under-pricing of insurance premiums.
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The Index of Industrial Production (IIP) for the month of July 2011 tumbled down to its 2-year low by growing at only 3.3% as against 10.0% in the same period last year. When seen on a month-on-month (m-o-m) basis, the journey for industrial growth has akin to a "see-saw" ride due to RBI's persistent anti-inflationary stance right since March 2010.
(Source :CSO, PersonalFN Research)
The dismal performance of the IIP for July 2011 can be attributed to. the following factors:
Despite growth in the core sector (consisting of eight core infrastructure industries - coal, crude oil, natural gas, petroleum refinery products, fertilisers, finished steel, cement and electricity) of 7.8% in July 2011 (as against 5.2% in June 2011), the IIP couldn't put up a good show. This thus reveals that prevailing high interest rates are hindering industrial growth. In the second quarter mid-review of monetary policy 2011-12 (scheduled on September 16, 2006) we expect that the central bank would refrain from increasing policy rates due to the following factors:
- Manufacturing Sector: The manufacturing sector (which constitutes 76% of the IIP) slowed down by registering a meagre growth of 2.3% (as against 10.3% in June 2011) as RBI continued to with its anti-inflationary monetary policy stance.
- Mixed sectoral growth: The consumer goods index managed to remain in the positive terrain, registering a growth of 6.3% in July 2011 (as against 2.3% in June 2011). Consumer durables and Consumer non-durables grew 8.6% and 4.1% respectively (as against 1.5% and 3.0% respectively in June 2011).
However, the capital goods index took the maximum beating (due to a halt in the capex plans of the companies) as it faltered to -15.2% in July 2011 from a positive 38.2% in June 2011. Intermediated goods too contracted to -1.1% against 0.6% in June 2011, while the Basic goods index posted a appealing growth of 10.0% in July 2011 (as against 7.5% in June 2011).
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- Elevated borrowing cost
- Elevated input cost
- Chances of slowdown in consumer spending
- Downward revision in GDP targets (from 9.0% to 8.2% by PMEAC)
- Nervous sentiment in the capital markets
- Manufacturing Purchasing Manager's Index (PMI) at a 20-month low of 52.6 points in August 2011
In order to keep the equity markets away from any systemic risks, the Insurance Regulatory and Development Authority (IRDA) is planning to scrap the highest Net Asset Value (NAV) guarantee products. This could further dent the sales of the Unit Linked Insurance Plans (ULIPs) as the highest NAV guarantee products account for 20% of ULIP sales.
Under the highest NAV guarantee products, customers are guaranteed returns based on the highest NAV a policy has achieved during the entire term of the insurance plan. However, IRDA is weary of the fact the insurers protect the guarantee by appropriately apportioning money in debt instruments. When the market falls the exposure in debt instruments increases and insurers try to sell equities at marginal profits. If there is too much concentration of such products in the market, a large number of insurers might sell equities at the same time to protect the guarantee, leading to a further market fall which leads to systemic risks.
In our opinion the IRDA has the right thing by putting a stop gap on the so-called 'highest NAV guarantee plans'. Many investors have been lured to buy such ULIP plans by their agents / distributors / relationship managers in the name of providing huge returns based on the highest NAV achieved by the plan in its tenure.
Policyholders should keep in mind that insurance is for indemnifying your risk, and thus insurance and investment needs should be dealt seperately. For insuring youself only pure term insurance plans are appropriate, and while investing you should give due attention to your investment objectives, goals, age, income, no. of dependents amongst others; which is a holistic investment planning process rather than an ad-hoc activity.
|Weekly Facts |
|Close ||Change ||%Change |
|BSE Sensex* ||16,933.83 ||66.9 ||0.40% |
|Re/US$ ||47.66 ||(1.5) ||-3.16% |
|Gold Rs/10g ||28,165.00 ||595.0 ||2.16% |
|Crude ($/barrel) ||111.33 ||(4.9) ||(4.9) |
|FD Rates (1-Yr) || 7.25% - 9.25% |
Weekly change as on September 15, 2011
*BSE Sensex as on September 16, 2011
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In an interview with the Mint, Mr. Pankaj Razdan - Deputy Chief Executive of Aditya Birla Group shared his views FII flows in India, inflation in India and RBI's monetary policy stance.
Mr. Razdan believes that at the end of the day whether it is the U.S. or Europe (with their respective problems) investors (in the U.S. and Europe) still have money. "People have made lots of money. Per capita income was far higher than any of the emerging countries put together. So, there is problem today in the economy, but people have money. End of the day, where are they going to put this money? It has to go into an asset class which is going to give money. Today, that asset class has largely been between the U.S. and Europe, the second asset class has been gold; most of these people started doing a flight to safety towards gold.", he said. According to Mr. Razdan, the fiscal deficit is the big reason for FIIs not investing in India. Explaining his stance on the matter he said, "I think we have a very high burden government and there is too much of money. There is too much of debt as well. Interestingly, if I look at complete debt, which is government, individual, banks all put together, and if I compare with any of the developed world, I mean the U.S. and Europe are 330-340%, China is 180% to the GDP. They are 116%, so we don't face the same problem the rest of the world is facing of deleveraging it. The difference is 1:3. So the whole fact is the notion that our overall debt to GDP is very high, so deficit would be a big problem."
As far as the inflation bug is concerned Mr. Razdan thinks that inflation today, is largely a global phenomenon. He is of the opinion that one has to live with the fact that those days are gone when we lived with inflation of 5.25% or 5-6% 10 years back. "Inflation has largely been exported because of excess liquidity in the world. If we really break down the inflation between agriculture, oil, if we keep these two separate, your input price on core inflation has really gone up. To me, if the whole world is shrinking right now, we are looking at the largest part of the world, which are consuming part of this commodity or other input core inflationary items. If they are slowing down, whether it's the US, Europe or rest of the world, except emerging markets, inflation would really come down and I think most investors would be looking at those things. So, in a way, it's not a right statement to make, but the slowing of the US and Europe augurs well for India because that is going to put pressure off the commodities if they are not going to grow. So to me, it's a transitionary issue right now," he said.
On RBI's monetary policy stance, whether it would go with a rate hike or halt it, he said, "One is what I would like to have it and what I think government will look at and RBI will look at. I think it's a split verdict. One is that you clearly see that RBI wanting it to slowdown so that inflationary pressure would really come down by way of consumption slowdown and to me from 8% to 6% is a massive slowdown. So if we look at that, if we look at the global turmoil, you look at the global situations slowdown, you look at good rainfall, agriculture commodity has to go down. You look at overall the gloomy mood and around those things, there is a school of thought that it's a time for us to go and halt. Not to stop, but to halt as of now. It may be a situation after a couple of months you see that inflation is still going and we always have the tool to go and do it, but it's a situation reached where you could possibly be hurt. But this section of people who are predicting is far lower than the people who believe that there will be 25 basis point kind of a hike because they would like to see a very strong indicator that it is under control, it is not 9.8% and becoming 9.2%. They want to see a very clear indicator that by March quarter it could be substantially lower."
Actuary: A professional statistician working for an insurance company. They evaluate your application and medical records to project how long you will live.
QUOTE OF THE WEEK
"If your outgo exceeds your income, then your upkeep will be your downfall."