Impact 
In an attempt to have a higher claim settlement ratio, the insurance regulator - Insurance Regulatory and Development Authority (IRDA) has proposed to set a maximum limit for sum assured on life insurance policies. The move is to ensure that insurers take on the maximum risk on themselves rather than the current practice of heavily relying on reinsurance companies to honour insurance claims.
The IRDA observed that most of the insurance products filed with them for clearance have assigned ‘no limit’ to their maximum sum assured. This leads to "fronting", which means more reliance on the reinsurer. Insurers that have reinsured very little risk may find it difficult to honour claims, which will damage the trust built on the industry.
We believe that the anything done to improve claim settlement ratio (for genuine claims) would be path breaking. This will also result in faster processing of claims and also instil a good risk management measure for insurers as well. Moreover, a transparent and fair process of claim approval will help instil confidence amongst the policyholders in the insurance industry. Capping the maximum sum insured will make the insurers work within their limits and not go overboard by reinsuring the liability with other insurers.
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| Impact
In order to avoid conflict of interest that may arise on account of managing multiple schemes, the capital market regulator - Securities and Exchange Board of India (SEBI) mandated that the asset management companies (AMCs) vide a circular to appoint one fund manager per scheme.
However, SEBI also made an exception vide its circular for mutual fund schemes managed by the fund manager having same investment objectives and asset allocations. Furthermore, the circular also enunciated that for mutual fund schemes having 70% of its portfolio being replicated across the schemes can be managed by the same fund manager. SEBI also directed AMCs to ensure that they have a written policy in place for trade allocation and that they comply at all points of time that the fund manager shall not take directionally opposite positions in the schemes managed. For instance, a fund manager managing two equity schemes, having 70% of the stocks in common, cannot buy a particular stock in one scheme, while simultaneously selling the same stock in another.
Furthermore, in order to bring transparency while addressing the issue of conflict of interest (wherein a fund manager is common across mutual fund schemes), capital market regulator directed AMCs that they should disclose on a monthly basis the returns provided by the fund manager for all schemes managed by him/her. The same applies for any scheme-related advertisement issued by the AMC.
We believe that the mandate of having one fund manager for one mutual fund scheme is a stiff directive issued by SEBI. At present, the mutual fund industry has 1,710 unique schemes and the total number of fund managers is 262. Considering the fact that at least one fourth of the schemes have unique portfolio (i.e., they don’t meet the criteria of having 70% of the stocks in common) it would require 428 fund managers to manage the same.
And if the mandate is followed in its entirety, the mutual fund houses coming up with NFOs would try and replicate 70% of the new fund’s portfolio, with an existing mutual fund scheme (thereby taking cover under the exclusion provision of the circular) and thus attempt to save cost (by not hiring a new fund manager). Moreover, as result of this, unique schemes (in terms of the underlying portfolio) may not be found by investors even though transparency would be infused in the disclosure for the returns generated by the respective fund manager of a particular scheme on a monthly basis.
| Impact 
The Indian equity markets have been on an upswing since the beginning of the year 2012 and have provided a return of nearly 14.4% so far. The second bailout package worth € 130 billion received by Greece, signs of economic recovery in the U.S. and mellowing WPI inflation in India (6.55% for the month of January 2012) have been the some of the vital factors which have led to the impulsive move of the Indian equity markets in the month gone by.
(Source: ACE MF, PersonalFN Research)
But interestingly, the chart above reveals that domestic mutual funds turned net sellers in the equity markets to the tune of Rs 1,865 crore in the month gone by. They seemed have preferred to book-profits (as they did in January 2012), but a noteworthy point is that cash balances remained minimal, thus indicating that domestic mutual fund are evincing interest in the Indian economy.
We too believe that Indian economy has strong fundamentals which are reflected in its resilience to external shocks and a good banking system. While, Q3FY12 GDP has slumped to 6.1%, it still looks very appealing as compared that posted by the developed economies. India’s average GDP growth for the last three quarter of the financial year is still 6.9%.
Thus taking this into consideration holistically, we believe that India is a good investment destination which surely but steadily is catching the eye of the investors (retail as well as institutional investors).
| Impact
Very often insurance policies are being mis-sold to policyholders by giving false promises. In fact the insurance agents many a times put their personal interests on the forefront and push only particular insurance policies which fill in their own pockets. For instance, group insurance policies where the main benefit to the group of policyholders is low premium, the insurers instead approach each individual policyholder of the group and sell them the insurance policy separately, thus resulting in higher insurance premium for the policyholder. Furthermore, in some cases insurance premiums are deducted without the consent of the policyholder.
Hence concerned over the anomalies in selling insurance products, the Insurance Regulatory and Development Authority is planning to revamp product designing practices in the life insurance industry to protect consumer interest.
To know more about what ‘policyholder friendly’ changes IRDA has proposed for please click here.
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In an interview with the Financial Express, Mr Noel Maye - Chief Executive Officer (CEO) of Financial Planning Standards Board (FPSB) shared his views on role of a financial planner, various financial products supporting a client’s financial plan, fee-based model and retirement planning.
According to Mr Maye, a financial planner should not be in the business of guaranteeing returns, rather he should help the client define financial and life objectives and needs, develop a plan taking into consideration the client’s current position, tolerance for risk and goals, and the current market environment and likely inflation. "The planner should understand the nature of the products that will be used by the client to achieve investment strategies and how those products are likely to perform in the face of inflation. Through regular meetings, the planner and client can agree on any adjustments needed to address inflation or other developments," he added.
Mr Maye believes that the most important thing for both the financial planner and the client is to understand the function of each financial product and how it supports the client in achieving financial and life goals. He also states that it is equally important for the client to understand how a savings-only approach may prevent them from reaching financial goals, and the role various financial products can play in helping grow and preserve financial stability and wealth. "Financial products should be the means used by the planner to help the client achieve financial well-being, and only appropriate products should be recommended to the client," he said.
Speaking about the fee-based model, Mr Maye thinks that most Indians do not realise that when they are paying commissions and getting what they consider is ‘free’ advice, the cost of the advice/service from the financial adviser is already included in the commission. "Advice isn’t free; consumers just don’t know that they’ve paid for it and the amount they’ve paid," he acclaimed.
As far as retirement planning is concerned, Mr Maye says that, "Traditionally, financial advisers have seen a person’s work life as the time to accumulate wealth and retirement as the time to disburse wealth. But with many consumers spending more time in retirement than in workforce, it’s critical that clients approach retirement with strategies that can carry them through 30 years of retirement. Also, many retirees want to live active lives in retirement and may take up part-time jobs, so old assumptions of the percentage of prior income needed or withdrawal rates may not hold."
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- The Prime Ministers Economic Advisory Council (PMEAC) has strongly recommended increasing the attractiveness of life insurance and mutual fund schemes to limit Indian investors’ appetite for gold. In its report, the PMEAC said, "The import of gold forms a large component in overall imports and variation in this element accounts for a very sizeable component in the change in the current account deficit. The best way to limit the appetite for gold is to work towards making other kinds of assets more attractive."
- The Securities and Exchange Board of India (SEBI) is planning to relax rules that require funds to appoint separate managers for each activity - mutual funds, portfolio management services and offshore advisory services. The regulator will put in place rules mandating disclosures of possible conflict of interest arising from the same person managing different funds resulting in lower cost for fund houses while investors will be able to enjoy the benefits of the cumulative experience of the investment team.
- The initial public offer of MCX got over-subscribed by more than 54 times and attracted bids worth about Rs 36,000 crore till final day of issue. The price of the IPO was fixed at Rs 1,032. This along with the advance tax payment which is due in mid-March 2012 will trigger liquidity problems for banks which already reeling under tight liquidity situation. The LAF borrowings (repo borrowing - banks borrowing from the RBI) of the banks are at record high of Rs 179,400.
- Despite rising redemptions from equity mutual fund schemes, HDFC Top 200, HDFC Equity, Reliance Growth, Franklin India Bluechip, UTI Dividend, ICICI Prudential Focused Bluechip and DSP BlackRock Top 100 Equity Regular which hold around 30% of the industry's overall equity assets of around Rs 1.8 lakh crore invested in equity markets by reducing their cash positions. However, the mutual fund industry, so far this year remained net seller in the markets with shares worth Rs 4,200 crore being sold.
- In order to give a further impetus to foreign investment in India, SEBI is planning to relax entry norms for Qualified Depository Participants (QDPs) who are the main intermediaries for routing the money through the newly approved QFIs route. They are responsible for enrolling the investors conducting know your customer (KYC) activities and filing tax returns. The SEBI wants to ease the minimum net worth requirement of Rs 50 crore prescribed for qualified depository participants (QDPs) on a case by case basis
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Reinsurance:The practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions.
(Source: Investopedia)
| | QUOTE OF THE WEEK
"Money never starts an idea; it is the idea that starts the money."
- W. J. Cameron
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