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Life insurance IPO a distant dream

Calcutta, March 9: Domestic life insurance firms are in no hurry to hit the market with their initial public offerings (IPOs) even if the regulator announces the guidelines now, according to a research report by HSBC.

According to the report, the hitches — such as limits on foreign direct investment, a 10-year track record and the absence of IPO guidelines — that have prevented floats by domestic life insurers will be removed this year.

However, it believes “only a brave Indian insurer” will come out with an IPO now, given the impact of the new regulations on unit-linked insurance plans (Ulips) and the pending direct tax code (DTC) bill.

New policy sales by private firms have fallen 20.78 per cent to 88,45,283 till the end of January this fiscal from 1,11,65,771 a year ago.

The decline in the sale of individual regular premium policies was sharper at 22.7 per cent — from 1,05,67,140 to 81,68,782. “New business margins are also under pressure given the imposition of fee and surrender penalty caps in Ulips,” the report said.

Following the new guidelines, the share of unit-linked business to total policy sales came down to 48 per cent from 52 per cent before September 2010.

Though the premium income (of private players) from new policy sales during April-January rose 5.84 per cent year-on-year, it came on the back of a steep increase in the premium rates of Ulips.

“Some insurers have started offering more guarantees on unit-linked products (such as NAV guarantee, capital protection) as they are not subject to Irda cap on charges and are hence high-margin business,” the report said.

“Insurers have also tried to tap traditional products that are also not subject to caps on charges and fees. However, it will be difficult for private insurers to compete on profitability because the Life Insurance Corporation of India is able to fund higher policyholder participation rate with free reserves accumulated over past generations.”

The DTC, if implemented unchanged in March 2012, could result in a collapse in sales and significantly lower earning for the life insurance sector.

The current DTC proposal will strip Ulips of all tax advantages and also does not provide relief to existing Ulips.

The latest published draft proposals for DTC provide for only Rs 50,000 tax deduction for life insurance premium, medical insurance premium and tuition fees taken together compared with Rs 1 lakh available for deduction now. Besides, the insurers’ corporate tax liability will also increase to 30 per cent from 14 per cent.

R. Krishnamurthy, former managing director of SBI Life Insurance Company and the present MD (distribution channel) of Towers Watson, had said, “Many domestic promoters of life insurers will be in a dilemma because these changes will put capital strain and promoters having non-financial sector as core business will find it difficult to pump in money in their insurance venture.”

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