Life insurance cos cuts loss by 80%

 The 23-player life insurance industry in the country made a total loss of Rs 988.82 crore in the financial year 2009-10, according to the latest annual report of Insurance Regulatory Authority of India (Irda). But the more pertinent point is that the industry has reduced its loss by a whopping 80 per cent from net loss of Rs 4,883 crore in 2008-09.

Another interesting achievement during 2009-10 is that among 23 private sector companies — the only public sector company is Life Insurance Corporation (LIC), 8 companies have reported positive bottom line against 4 in the previous financial year.

Significant improvement in profitability was revealed by some of the companies. Of course, LIC has highest profit of Rs 1060.72 crore in 2009-10, jump of 11 per cent. Among private players ICICI Prudential has turned around with net profit of Rs 258 crore, Bajaj Alianz with Rs 542 crore and SBI Life Rs 276 crore.

Reducing losses by life insurance companies is big news because it is an industry where breakeven takes between 7 to 10 years and companies which are becoming profitable started about 10 years ago when the government opened up insurance for the private sector. Apart from long turnaround time, life insurance is also a cash-hungry business as private sector companies have already coughed up Rs 21,014 crore towards share capital till the end of 2009-10.

Contributing factors

There are many reasons for improved performance. First, with many players and huge number of products made available in the market, the volume growth in premium income has been phenomenal. Despite a high base, premium income in 2009-10 grew 20 per cent to Rs 2,65,450 crore as against Rs 2,21,785 crore in the previous financial year.

While private sector insurers posted 23 per cent growth, LIC recorded 18 per cent growth in premium income, shows Irda annual report. Said Birla Sun Life Insurance Chief Financial Officer Mayank Bathwal: “When volumes grow bigger, profitability improves because overhead cost gets divided over larger income.” With further improvement in performance, Birla Sun Life has already made net profit of Rs 29 crore in the first half of 2010-11 against a loss of around Rs 250 crore in first half last year. 

The second important reason is that with the industry  maturing, renewal premium is increasing its share in total premium income. In 2009-10 renewal premium accounted for 59 per cent of the total premium received by the life insurers and the remaining 41 per cent was from ‘first year’ premium. Renewal premiums are always more profitable as cost of collecting such premiums is very low. “It is like assured income over 10 or 15 years of the tenure of the policy without much expense. So the margins are always better,” said Life Insurance Council Secretary General S B Mathur. The council represents private sector players in the life insurance industry.

Agreed Bathwal: “Due to front loading of many customer acquisition expenses, surplus from first year’s premium is almost zero. But industry makes money from renewals or in-force premiums.” Over the last couple of years life insurers have also reduced cost by improving operational efficiency. 

Further bifurcation of the first year premium indicates that single premium income (premium paid only once as oppose to the premium payment every year) for the industry recorded 31 per cent growth during 2009-10. Because of the large inflow of premium income right at the beginning of the policy single premiums are pore profitable than regular premiums.