Managing life insurers\\\' stock market portfolios

Life insurance companies maintain portfolios definitely as per their investment strategy. But we see those are often handled by non-experts or people with little or no knowledge about financial analysis. In the fiscal year 2009-2010 the share market effect helped boost profits, but after the crash no strategy was taken to save the portfolios. Rather, valuable time was wasted by taking no decision in fear that realising loss would reduce life fund and board members as well as top management would face questions about sale of shares by incurring losses. The indecision also took place, because nobody wanted to take responsibility, even people involved with investment decisions.
The aftermath of the share market crash in the fiscal year 2010-2011 was very adverse for life insurance companies. The following implications were noticed:
1. Provisions came up with life funds in the event of fair value adjustments. Companies that followed this could adjust their realised loss with provisions; some companies might have followed other methods to adjust the investment asset cost that would have a worse impact on life fund if they tried to realise loss. There would be a new head under life fund and show a sudden loss. It is important to mention here that showing a life fund balance healthier is more vital for shareholders than the total asset.
2. Life fund was not increasing that much that could offset the loss someday in future, because life insurance business deteriorated due to many factors, mostly those related to good governance, lack of professionalism and lack of strategy. Seemingly, even people involved with reporting could not estimate the negative business looming. That is why, some of them wanted to hide the loss in life fund while reporting on assets. Some were clever while reporting on life fund as they would be in a better position during realising losses in an adverse situation.
In the country some people, even finance accounting people, are not well aware of the stock market investment and they do not rely on the market return possibilities in a logical way due to little knowledge or wrong concepts. Observations made in this connection are as follows:
1. Little or no understanding of the stock market exists there but profit is always expected without any estimation by most of the people,
2. There is little or no realisation regarding involving professionals with portfolio management providing necessary support rather than creating obstacles.
Who are really losing?: Losers are really those people who think they gain in the short term. But ultimately they are sufferers in the long term. As short term consequences of life insurances are gone, those who could not prepare well for long term consequences or did not take necessary steps to avoid any long term adverse situation may suffer in this position in the following ways:
1. From shareholders' perspective: Opportunity costs are increasing from those funds stuck with inefficient portfolios. Less or no return will have any impact on increase of life fund as well as asset base.
2. From policyholders' perspective: Chances of getting reduced bonus, as the investment income deteriorates as well as business,
3. Internal business: Core business is affected by less investment income as management cannot spend much on business development activities again. It will be the major factor for business performance deterioration.
4. Improving efficiency and learning: Learning with investment will be hampered for this little initiative with investment activities. Many new investment products will be coming within next 3-5 years, whereas life insurance investment will remain backdated and will not be able to outperform market return.
How we can deal with future challenges:
1. Investment strategy: The investment strategy must be set prior to investment of life fund. If we move our fund investments without any proper planning and without measuring the return and risks (both from money market and capital market), then there can be a serious problem with investment income which ultimately affects life fund increase.
2. Recruitment and retention of investment professionals: It is already discussed that life insurance companies are unlike other financial institutions and they do not really appoint investment professionals for investment activities, which can be very dangerous, because non-professionals mostly rely on news-based share trading which is not the way of dealing with investments. The whole life insurance industry should think about a recruitment and retention policy on professionals, if they really want to run companies for next generation. Otherwise, serious challenging issues there will arise.
3. Managements participation: Top management is sometimes unaware of investment return and relies much on core business. They think core business means only premium collection. But they just think about only 50 per cent of the game. Core business means premium collection and utilisation of premium money to earn better return. So we see a lacking in management's understanding of insurance business that can be avoided through active participation. Chief financial officers can play a vital role here. If they cannot understand investment return issues properly, then the companies cannot participate in investment activities properly. So we need finance professionals with updated information and knowledge about efficient fund management.
However, now it is high time that we focus on life fund management, otherwise a serious liquidity crisis may appear due to improper management of policy holders' money. This scribe thinks life insurance companies have got enough time to educate themselves.
So whoever wants to win the race must utilise resources in a proper way and set up own departments to meet the challenges rather than outsourcing vital activities that could be a competitive advantage in this modern business era. A listed company's ultimate success is when people are willing to buy its products or shares for a better prospect.
The writer, an investment
professional, worked with two
listed life insurance
companies in the country.
asifaziz2k2@hotmail.com