Indian insurers will have to look at more strategies for investing their assets and become more innovative to attract more members, as new regulatory changes intensify competition within the industry, the chief investment officer of a leading life insurer told AsianInvestor.
“One of the biggest changes has been the increase in the number of insurers that banks can work with,” said Rahul Bhuskute, chief investment officer at Bharti AXA Life Insurance, a joint venture between France’s AXA and India’s Bharti group.
The Insurance Regulatory and Development Authority of India announced a slew of changes in the last quarter of 2022; one of them was that banks can tie up with up to nine insurers to sell insurance products, up from three earlier.
"That's a big jump," said Bhuskute.
Bharti Axa Life Insurance
“It doesn’t mean every bank will have nine partners immediately, but clearly it’s in the direction of having a more effective and engaged architecture to drive insurance penetration in the country."
Insurance penetration has climbed to 4.2% in 2021 from 2.7% in the early 2000s, according to the Economic Survey 2022-2023 – a detailed annual report on the state of the economy prepared by the central government.
Life insurance penetration in India was estimated at 3.2% in 2021, close to the global average of 3.3%, the report said.
There are 24 life insurance companies in India. Life Insurance Corporation of India is the sole state-owned life insurance company and has the largest share -- 69% -- of the market.
The remaining 31% is distributed among private sector companies, among which Bharti Axa Life Insurance is one.
“With more insurance companies engaging with banks, there will be more products. Therefore, the investment patterns of most insurance companies are going to change,” said Bhuskute.
Bhuskute’s team evaluates potential investment opportunities for deploying surplus funds. His responsibilities include conducting periodic analysis of the holding portfolio versus the benchmark as well as liquidity management across funds. He also oversees liquidity analysis and stress testing portfolios.
The Mumbai-based CIO believes that investment teams at insurance companies will have to do much more than what they were doing earlier.
If an insurer engages with a bank that has multiple insurance partners, it will have to offer a wide suite of products because it is in competition with other insurers. If it focuses on too few products, it could be excluded [as a partner]. It needs different strategies such as equity-focused, large-cap or mid-cap focused, etc. You cannot have only one strategy on offer,” he noted.
Overall, this indicates insurers could be investing in areas they may have not invested in previously.
Another big move by the regulator came earlier in April 2022, when it eased sector limits for insurers, allowing them to park up to 30% of their investment assets in banks, financial services and insurance companies (BFSI), up from the previous 25%.
The BFSI sector is the largest sector in India’s Nifty 50 index -- one of the most widely tracked equity benchmarks -- accounting for about 38%.
Experts noted that this move allows insurers to increase exposure to that sector, which is possibly one of the fastest growing and most attractive parts of the Indian investment universe.
Image credit: R.M. Nunes / Shutterstock.com
CHANGES ON THE HORIZON
Recent tax changes are also likely to have some impact on investing patterns, for both insurers and their investors.
A finance bill passed in March will tax investments in debt mutual funds as short-term capital gains, a move that could strip investors of the long-term tax benefits that made such investments popular and prompt investors to move away from debt funds to bank deposits.
Debt funds with no more than 35% in equities will now be subject to short term capital gain tax -- similar to how bank fixed deposits are taxed in India.
“Investment strategies could change because if the situation changes, we need to take action to preempt any negative fallout. If bonds are going to have lower demand, we need to do something about it now,” said Bhuskute, adding that traditionally Indian insurers have been huge buyers of government bonds as well as high-quality local corporate bonds.
The insurance CIO believes that more easing measures for insurers are in the offing.
"We may see regulations that would allow for investing into international companies or funds. This could open up a new segment of investment," Bhuskute said.
"Over the years, we have seen the addition of alternative investment funds, real estate investment trusts and infrastructure investment trusts by the regulator. We may see these categories become a more meaningful part of the portfolio as their exposure limits are also eased."
He said it's also possible to see easing of limits on industry or sector exposures within portfolios, which could pave the way for thematic funds.
“I think regulations are evolving and both the regulator and insurers of mindful of being meaningful to the Indian policyholder," said Bhuskute.