The Hindu Business Line : A roller-coaster ride for life insurers in 2007

The year ahead
Private players optimistic about their prospects.
Revenues from bancassurance seen falling.
Manpower seen as the biggest challenge ahead.

Radhika Menon

Mumbai, Dec. 31 The year 2007 has been a roller-coaster one for the life insurance industry.

Spearheaded by the Life Insurance Corporation, the insurance industry registered a growth of 110 per cent in fiscal 2006-07, raking in new business premium of Rs 75,406 crore (Rs 35,897 crore). The question that had been uppermost on most insurers’ minds was whether this high growth was sustainable.

Their fears were not unjustified; the strong growth in the last fiscal was followed by a slump when, between April and October 2007, the industry’s growth considerably slowed, to just 6.4 per cent at Rs 38,614.67 crore (against Rs 36,290 crore in new business premium during the year-ago period).

LIC growth negative

Insurers cite several reasons for the ‘slowdown’. On last year’s high base, growth would end up being lower. The dip in growth has also been attributed to the market leader LIC’s slump this year. At the end of the first seven months of the fiscal, LIC has shown a negative growth of 10.39 per cent at Rs 25,901 crore, from Rs 28,906 crore in the previous year.

The decisive shift in LIC’s path came last fiscal when it decided to wholeheartedly enter the investment-oriented unit-linked insurance plans segment vis-a-vis traditional plans such as term and endowment policies. As a result, the average premium per policy jumped from Rs 4,400 and Rs 6,800, contributing to the corporation’s unusually high growth in fiscal 07.

The LIC Chairman, Mr T.S. Vijayan, says that he is not worried. “We grew at 178 per cent the same time last year and hence the base is very large. We expect to end the year with a growth of 30-35 per cent in new business premium,” he told presspersons recently.

Pvt players optimistic

Private players, however, remain optimistic about their prospects for the next few years. “We expect the industry to grow at 30-40 per cent in the next two-three years. The private industry could see higher growth of 50-60 per cent with companies rolling out distribution networks,” said Mr N.S. Kannan, Executive Director, ICICI Prudential Life Insurance.

Expanding the branch network, hiring agents and pursuing more tie-ups with banks have been the private industry’s strategy for ramping up business.

Scaling up has meant that promoters of private companies have had to continuously pump in capital even as they are making statutory losses. The capital infused into the life sector surged from Rs 5 crore in 2000 to Rs 9,485 crore at the end of March 2007. ICICI Prudential stands as the highest capitalised company at Rs 2,900 crore.

Capital is increasingly becoming a challenge for private companies what with the hike in FDI (from 26 to 49 per cent) still stuck in Parliament. The year saw some new ideas emerge with the ICICI Bank group and SBI proposing an intermediate holding company for their life and non-life insurance and asset management businesses.

ICICI announced that its holding company was valued at $11 billion. Considering that this holding company has 74 per cent stake in the life company, which, in turn, accounts for 75 per cent of the holding company, it values ICICI Prudential Life also at around $10-11 billion.

‘detailed examination’

The holding company structure however has run into trouble with the RBI which believes that the issue needs ‘detailed examination from legal and prudential perspectives’ and is in the process of putting out a second discussion paper.

Speculation has been rife about whether ICICI will individually list its insurance companies to raise capital. ICICI Prudential has, in fact, been giving its employees stock options for the past three years.

“Making losses is not a constraint if you have to list a services company. It all depends on whether companies are ready to be listed and how they communicate to their shareholders in a hyper-growth environment,” said Mr Kannan.

Another bone of contention with the insurance regulator has been the issue of ‘actuarially’ funded products (products with complex charge structures). The IRDA’s decision to ban these complex products seemed harsh for the two companies that offered them — Aviva and Bajaj Allianz Life.

Scaling up has also brought with it the challenge of human capital, which insurers see as the biggest challenge in the years to come. “Manpower is going to be the biggest challenge, and with new entrants coming we will see a lot of poaching,” said Mr U.S. Roy, Managing Director and CEO, SBI Life Insurance.

Insurers say that the attrition in the case of frontline sales staff could be as high as 30-50 per cent, with new players such as IDBI, Fortis, Aegon Religare, Bank of Baroda and Legal and General, Bank of India, Union Bank and Dai Ichi Mutual Life insurance joining the fray.

See dip in bancassurance

With many banks entering the life insurance fray, life insurers could see a significant dip in the revenues they earn from bancassurance.

Mr Roy of SBI Life feels that it may take the banks some time before they are able to earn income through the bancassurance model. “It took us a few years to rake in business through the SBI branch network. It has happened mainly through training and the spirit of competition between branches to earn higher interest margins by selling insurance,” Mr Roy said. The company this year has earned 43 per cent of its new business premium from bancassurance, against 37 per cent in the previous year.

Outlook

The overall outlook for the industry however looks good. The indications lie in factors like “rising income levels and an insurable population; increasing awareness about the need for insurance; enhanced competition with aggressive growth plans of insurers in the interior parts of India; and the stated focus of policy makers on pension and health insurance provisions,” said Mr Sanket Kawatkar, Head - Life Insurance Consulting, Watson Wyatt Worldwide.

The Indian life insurance sector has come a long way. The penetration of life insurance as a percentage of the gross domestic product has shot up from 1.2 per cent in 1999 to 4.1 per cent at the end of March 2007. This is, however, still a far cry from countries such as the UK and Japan where insurance penetration is much higher at 13.1 per cent and 8.3 per cent of the GDP, respectively. But India is still ahead of China where insurance accounts for just 1.7 per cent of the GDP.

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