How deeply has IL&FS’ toxic debt impacted portfolios of life insurance companies?

We remain clueless! Insurance companies just do not declare the constituents of their portfolios (in its entirety) in the public domain, either to policyholders, investors, or for that matter, even to the regulator. This explains why the insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), had to specifically direct insurance companies to divulge their exposure to the beleaguered Infrastructure Leasing & Financial Services (IL&FS), post the latter’s fiasco in September 2018.

Broadly, life insurance companies manage two kinds of portfolios on investors’ funds. One, unit linked investment plans (ULIPs) (about 12 per cent of the total corpus managed by life insurers as on March 31, 2018), and two, traditional plans (about 88 per cent of the total corpus).

As per IRDAI’s FY2017-18 Annual Report, life insurance companies managed a total investment corpus of Rs 31.89 lakh crore as on March 31, 2018 approximately one and half times the assets under management of mutual funds and more than three times that managed by the Employees Provident Fund Organisation. Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company Limited explains, “ULIP portfolio management and disclosure norms are similar to those of mutual funds.”

Net asset values of most ULIP funds are published on a daily basis and their portfolios are disclosed on a monthly basis. “In ULIPs, investment risk is borne by the policyholder. Only financially-savvy customers should opt for these plans”, adds Sunil Sharma, Appointed Actuary and Chief Risk Officer, Kotak Mahindra Life Insurance Company Limited.

“The model is very different in case of traditional plans”, says Reddy. “Investments are made in accordance with norms set by the regulator. At all times, at least 50 per cent of funds are invested in government securities, 15 per cent in housing and infrastructure and the balance in approved investments like corporate bonds and equities.”

Sharma elaborates “traditional plans guarantee many benefits to the policyholder. While the guarantee is 100 per cent in non-participating plans (plans that do not participate in profits), sum assured is guaranteed at all times in participating plans (plans that are eligible to receive bonuses, if any).

Although bonuses are not guaranteed, but once declared, these are guaranteed for the life of the policy. These plans are ideal for policyholders who are not financially savvy. Here, the investment risk is borne by insurance companies.”

So, even in case of traditional participating plans, possibility of variability of return (in terms of bonuses) does exist. Because bonuses declared by insurance companies depend on the surplus in the fund, which in turn, depends not just on the fund performance, but also on the performance of the entire business.

And this is where things turn unsavory. Do you bother to ask where your bank invests your fixed deposit money? No, because you get a fixed return. You would definitely want to know where mutual funds invest, because your returns are not fixed nor guaranteed and depend on how these funds manage your money.

Why then should participating funds follow different norms? In fact, disclosures in traditional plans are close to being opaque. Adds Sharma, “We disclose that, which is mandated by the regulator.” For example, percentage of portfolio invested in an investment class is disclosed and not its constituents.

Look at what ICICI Prudential Life Insurance disclosed in a section of its public disclosure for Q3FY 2018-19. Schedule 8A (Investments – Policyholders) puts the amount invested in debentures/bonds at Rs 1,403 crore.  No further details are given.

LIC’s Form 3A (part of its public disclosure) as on December 31, 2018 puts the market value of “approved investments” at Rs 6,07,680 crore. No details are provided on what these approved investments are. The same statement also puts Rs 14,943 crore against “Provisions” and a further Rs 25,825 crore against “Provision for doubtful debt”.

Again, we could not find any details of the composition of provisions in the said disclosures. Why should stakeholders such as policyholders, investors and the community at large not know where insurance companies invest policyholders’ monies? Whom does this non-transparency benefit? More so, as these are staggering amounts.

Mutual funds and non-banking finance companies are yet to recover from the turbulence caused by IL&FS’s debt debacle. Recent media reports suggest that postal life insurance too may have been impacted. In the intricately interwoven financial world, how probable is it that insurance companies would remain unscathed?

Suggests Sharma, “both the regulator and the industry need to work together to examine what further disclosures could be made. At the same time, we must also ensure that policyholders are not burdened with information that is of no use to them.” The earlier Sharma’s suggestion is heeded to and the necessary details made public, the quicker will stakeholders’ concerns on actual portfolio status be assuaged.

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