Equity option

Venkatachari Jagannathan
04 April 2002

The reason for this is not too difficult to find. For life insurers, it is their capital level that determines the kind of products they sell, their operational scale and other plans (like acquisition and expansion). This is apart from meeting the solvency norms.

But there is a snag here. With Indian promoters (or promoting companies) holding a 74-per cent stake (or slightly less) in their life insurance ventures, and a new venture needing at least six years to break even, will the shareholders keep on pumping additional money without any return on capital?

A question to ponder. Given this situation life insurers need to look for other means of financing. Can securitisation of the life insurance premium or other receivables be one such financial tool?

For the uninitiated, securitisation or monetisation is simply palming off a block of future receivables to investors as a tradable instrument for a sum to be received upfront. In India, securitisation of receivables is developing fast with finance companies auto and housing loan companies resorting to this method.

"Securitisation in the life insurance industry? Are you out of your mind." This was the immediate industry reaction not just from India, but also from countries like the US and the UK when this question was posed.

American Council of Life Insurers director (media relations and external communications) Herb Perone says: "Currently, there is no life securitisation in the US. We are exploring the issue with a number of our member companies and the National Association of Insurance Commissioners. Tax law changes, and the establishment of regulatory oversight of transactions will be necessary to make life securitisation economically viable in the US."

Concurs AMP Sanmar Life Assurance chief actuary Mike Wood, an Australian: "Securitisation of life premiums is not something I have come across in practice."

While securitisation has evolved well in the global debt market and in the non-life sector (through catastrophe and cat bonds) it is yet to make its presence felt in the life insurance sector. Very few securitisation deals have been struck in the life insurance world though life insurance contracts are long term in nature.