Insurance sector sees a rare drop

Experts view the break from the constant growth in insurance premiums over the last 10 years,irrespective of the market and economic conditions,with concern.

India needs long-term funds to build infrastructure and if the insurance sector does not grow,then the ability to fund infrastructure will get affected, said Ashvin Parekh,national head,financial services,Ernst amp; Young.

While the renewal premiums grew in April-November 2011,there was a significant decline in the new premium collections. These stood at Rs 62,499 crore,against new premium collections of Rs 77,140 crore in April-November 2010. New premium collections have in the past always witnessed growth.

Industry experts say that contraction in premium growth and weak markets is also limiting the equity market participation by the industry.

Insurance products and growth in premiums were riding on security markets,and so with the fall of markets,the premiums have suffered, said Parekh.

This contraction will impact the ability of the sector to provide depth to the equity markets. In 2008,when FIIs pulled out a net of over Rs 50,000 crore from Indian markets,the insurance industry invested a net of close to Rs 51,000 crore. However in 2011,till September,the investment by insurance industry stood around Rs 25,000 crore, said S B Mathur,secretary general,Life Insurance Council.

Economists feel that the impact of high inflation on disposable income and high bank deposit rates have also hit insurance investments. All these have led to a strong flow of savings into bank deposits, said Abheek Barua,chief economist,HDFC Bank. Market-linked products have witnessed a decline in investor interest as a result of weak equity market performance.

New guidelines have hit investment too. The number of individual pension policies which averaged between 12-15 per cent of the total policies in previous years stood at only 0.38 per cent in April-November 2011. Also,the premium collection on them has come down from the earlier average of around 20 per cent to around 3 per cent. Pension money is long-term money and a change in policy impacted the same, said Mathur.

IRDA,the insurance regulator,changed guidelines for ULIP pension plans in September 2010,requiring pension plans to offer a guaranteed return of 4.5 per cent. The entire industry objected to it and other than LIC and ICICI Prudential Life,no other company launched a product. The regulator has now decided to only go for a guarantee up to capital protection.