Insurance

MNC ally not part of Irda job portfolio

The Insurance Regulatory & Development Authority (Irda) has said it has no jurisdiction over private agreements signed between a foreign partner and a domestic shareholder, which may commit to sell its equity to the former once the FDI cap in insurance is relaxed beyond the current 26%.

The issue has come to fore in the wake of the Vodafone controversy, in which some domestic shareholders were said to be acting as fronts for the foreign partner.

It has been reported that the foreign partners in many insurance companies may have entered into agreements with the domestic partners keeping the option of buying out the latter’s shares at a pre-determined price once the FDI ceiling is relaxed.

Irda has clarified that individual agreements are not under the purview of the regulator if a company abides by the 26% FDI cap. “As far as the foreign holding in an insurance company does not exceed 26%, we cannot take any action against individual agreements,” a senior Irda member told ET.

Several agreements may exist between shareholders regarding buyback in a hypothetical condition, but Irda is not concerned with their individual understanding, the member added. Irda is empowered to take action only if the Indian partner or partners actually go ahead and flout FDI norms by bringing down their stake below 74%.

The issue gained prominence after FIPB noted that Analjit Singh’s 12% stake in Vodafone was backed by the foreign investor as the loan taken by the individual was guaranteed by Hutchison. The matter came to fore when Vodafone acquired 51.96% in Hutch Essar. Based on its findings, the FIPB has demanded clear FDI guidelines for similar situations.

Insurance brokers turn launderers

As the government enforces new measures to check money laundering, launderers are targeting insurance companies where large premium payments are split over several transactions to avoid suspicion. Brokerage commissions in cash amount to nearly Rs 900 crore in the non-life sector alone.

In the non-life business, insurance brokerage is the most popular mode to launder money. Typically, most traders who want to convert black money into white channelise their operations through a brokerage. The broker promises huge discounts to the client on behalf of the insurer and is also paid a hefty commission.

In non-life insurance, which is estimated to be worth Rs 22,000 crore, at least 60% of the business comes from the corporate sector. Of the Rs 12,000-crore business in the segment, Rs 6,000 crore is accounted for by the private sector.

With brokerage fees touching 30%, it is estimated that half of this is routed through cash, which amounts to Rs 900 crore. The figure is higher for life insurance companies, which handle business worth Rs 35,000 crore.

“Using false invoices and bills issued by a dummy of the brokerage company, the money is routed back to the broker,” an industry source said. In the life insurance business, agents are pivotal in laundering money, receiving commissions in cheques and paying clients in cash, he added.

“If an agent or a broker can ensure a cash-revenue stream, insurance is the only sector where a money launderer is paid to launder money,” said a risk management consultant, who pleaded anonymity.

Industry insiders say insurance companies are unwilling to crack down on money launderers as it will affect business. “There is no incentive for companies to implement anti-money laundering (AML) measures. They will only go so far as the law prescribes and will not do it of their own volition,” he added.

Most insurance companies have internal checks and balances that detect the errant cases and deal with them at their level, obviating the need for supervision by Irda. Insurers, on their part, swear by internal regulations and compliance with stringent AML guidelines.

Sources at the enforcement directorate feel this could be more of a I-T evasion measure as against a crime listed under the Anti-Money Laundering Act.

Life cos slug it out on pension turf

Competition in the insurance sector is proving to be a boon for retirees. The battle for providing higher fixed-income returns has moved to pensions in life insurance, with companies trying to outdo each other. After hiking returns on its immediate annuity plan five months ago, Life Insurance Corporation has again raised returns after ICICI Prudential outdid its earlier rates.

LIC is coming out with Jeevan Akshay V, replacing its earlier product Jeevan Akshay IV. The new scheme will offer a 60-year-old policyholder an annual income of Rs 95,600 on an investment of Rs 10 lakh as against Rs 90,000 under the earlier scheme. With this, the state-owned insurer has outdone ICICI Prudential, which has recently launched its annuity product, offering Rs 91,434 for a similar investor.

There are other companies also offering annuities — SBI Life and Bajaj Allianz have their immediate annuity products — however, they have not yet jumped into the rate war. SBI Life offers an annual return of Rs 68,983 but the company also offers a death benefit, where the policyholder is assured of getting back what he paid. Bajaj Allianz Life offers a return of Rs 85,469 to an annuity buyer. LIC’s Jeevan Akshay V will be launched in September.

The higher returns will be available to those who have purchased deferred pension policies and where the payments start after September. The corporation is already offering the higher returns on its group products. Whole-life annuities are the converse of life insurance in their objective. While life insurance protects families against the risk of the breadwinner dying early, whole-life annuities protect individuals against the risk of living too long without income after retirement.

Whole-life annuities offer policyholders the option of getting a fixed income as long as they live, in return for a lumpsum payment. Until now annuities have not taken off because of investor resistance to products to schemes where the capital is not returned. But when insurers incorporate a provision for return of premium on death of the policyholder, the returns compare unfavourably with most fixed-income savings.

Although interest rates on government bonds have risen, insurers do not see a resurgence of guaranteed-return products. Insurers say that interest rate cycles are highly volatile and there are not enough fixed-income instruments available for structuring a guaranteed-return product. In theory, a company can, for instance, offer a guaranteed return of 7.5% by investing in long-term government bonds but in practice this is not possible because there is a reinvestment risk.