Download Traditional insurance products will not go out of vogue - Sa-Dhan

Traditional insurance products will not go out of vogue‘
The Financial Express, July 08, 2007
The markets are showing volatile patterns. There are many options across asset classes available to the
investors. Puneet Nanda, chief investment officer, ICICI Prudential Life Insurance Company, shares his
expert opinion on some of the issues raised by FE Investor. Excerpts:
What is your outlook on interest rates, inflation, oil prices, and economic growth of India?
We expect interest rates to remain stable on the back of moderation in inflation and slowing credit growth in
the economy. Inflation is under 4.5% and is expected to remain under 5% for the next few months. Credit
growth has moderated to less than 27% from 30% levels over last few weeks and is likely to moderate
further based on empirical evidence on slowdown in retail credit. However, the risk due to higher oil prices
and global factors cannot be overlooked. It could prompt RBI to raise rates again, though likelihood of such
an event remains low in the near term
How do you see Indian equity markets faring? Do you foresee any correction in the near future?
We believe the equity market will remain buoyant, given the rising corporate profits on one hand and strong
foreign capital flows into Indian markets on the other. While markets have delivered super-normal returns in
the last 3-4 years, our expectations going forward are modest in line with sustainable corporate profit
growth, which is likely to be in mid-teens range.
The much feared correction in the market due to big ticket IPOs from banks and real estate companies did
not materialise so far due to strong inflows from domestic as well as foreign institutions. We have seen two
corrections in the last one year, both largely led by global factors, rather than local ones. We may have
similar corrections like those in the future too and as long as the economy does well, there will be a bounce
back as it had happened in the earlier instances.
How do you see the recent bond market crash impacting the global bond markets in general and
Indian bond markets in particular (especially when Indian call money markets are highly volatile)?
Bond markets have been stable as yield on 10-year government bonds has been in the range of 8-8.5% in
the recent past. Call rates have also moved from the highs they touched in March 2007 on the back of
improving liquidity scenario in the system. Most investors would tend to believe that Indian rate markets are
close to the interest rate peak in the current monetary tightening cycle, with softer inflation and slowdown in
credit growth. The levels of both long dated government of India bonds as well as corporate bonds remain
attractive for long-term investors like insurance companies and provident funds, leading to purchases by this
set of investors. Some more short-term volatility cannot be ruled out due to strong oil prices and global
factors. However, any significant rise in yields from current levels would provide attractive buying opportunity
to investors.
As a long-term investor how does an insurance company take exposure to real estate as an asset
class?
Real estate is an attractive asset class as a long-term investment opportunity for investors like insurance
companies. In addition to offering attractive returns, it helps in achieving portfolio diversification as an
alternative to traditional asset classes like debt and equity. At ICICI Prudential Life, we invest in real estate
directly and indirectly within the regulatory limits available.
What is your outlook on the insurance products offering guaranteed returns? How does an insurer
ensure that the guarantees are met?
Insurance companies offer products that appeal to some customer segment. Insurance products with
guarantee of either the premium or returns are attractive to certain customer segments and hence will
continue to be offered by companies. Insurance companies can meet guarantees because they are able to
invest wisely and generate sufficient returns while simultaneously restricting the downside. This entails
employing an asset mix containing various asset classes for diversifying risk and it also involves the
construction of an optimal hedge structure that prevents the downside.
What would you advise the ULIP buyers when it comes to portfolio rebalancing?
ULIPs by design are long-term in nature where customers enjoy flexibility (to switch between debt and
equity) and transparency (charge structure). They are products that have been chosen by the customer
because of these characteristics and also because they help the customers meet the need of enjoying
returns from the market as well as having an insurance cover and perhaps even some health riders.
The asset mix which is essentially weights of equity and debt in one’s portfolio should depend on individual
risk appetite, investment goals and horizon. In general, a person with higher risk appetite and longer horizon
can have higher exposure to equities.
Once a customer has chosen a certain asset allocation based on sound reasoning, we recommend
consistency till the risk profile of the customer changes because of changes in goals, income levels, age,
etc. Our switch options which give flexibility to customers are being offered for this purpose.
After ULIP’s success, what is the future of traditional insurance products, especially the savingsoriented ones?
Traditional insurance products will not go out of vogue as there is a section of customers who prefer them to
unit linked products. As the insurance market in India still has a long way to go, there is enough space for
various products to grow.
Traditional insurance products, especially the savings-oriented ones, are designed for those individuals who
do not have any appetite for risk and will not invest in market-linked insurance plans.
Currently, ULIPs attract customers as these products enable the customer to enjoy returns from the markets
and also have an insurance cover. Traditional products work differently and are designed for a different
segment of customers.
We will continue to research customer needs and develop innovative products to meet these needs.