Sector slips into degrowth

Life Insurance industry: Changing course to return to glory

When the stock market was booming in 2007-08, country’s life insurance business also had a dream run. The total new premium collected by all players in the industry jumped up 23 per cent to touch Rs 92,988 crore in that year. But, with the global financial meltdown taking a heavy toll on our stock markets — the BSE Sensex tumbled from its peak of 21,800 to around 10,000 points, investors’ appetite for life insurance has also taken a beating.

In 2008-09, the financial year that ended in March 31, 2009, India’s life insurance industry grossed total new premium of Rs 87,107.62 crore, 6 per cent lower than 2007-08. While many large players, including the leader — Life Insurance Corporation (LIC), reported sharp drop in first year’s premium or new premium, there are a few smaller ones who pushed up their business. 

The slowdown in new business has halted the spectacular growth witnessed in the life insurance business ever since the sector was opened up in the late nineties. Till then the government-owned Life Insurance Corporation (LIC) had complete monopoly. Over the last eight years, 21 companies from the private sector have joined the fray and a few more are planning to join the bandwagon soon.

Today, the private sector players are  becoming a major force in the life insurance business. Till around 2005, the share of private sector in the industry was an insignificant 15 per cent. Now, in the financial year 2008-2009, its share has jumped to 39 per cent. The state-owned LIC, which had a virtual monopoly earlier, now holds around 61 per cent of the new business market, but being big in size, LIC is now growing much slower than private players.

Table turned

The rapid growth of earlier years, however, has suddenly come to a stand still as major players took a beating in their new business. LIC’s new business at Rs 52,954 crore in 2008-09, for example, was 10 per cent lower than the previous year. Similarly, the largest and most aggressive private sector player — ICICI Prudential Life collected only Rs 6,812 crore as new premium in the last financial, a drop of 18 per cent. Collections of other big players like Bajaj Alliance, Aviva, HDFC Standard Life were all lower in 2008-09. (See table).

Of course, some of the newer and smaller companies could manage to expand their new business mainly by spreading out to newer cities and towns and through expansions of distribution network. Prominent among the big gainers are: Reliance Life, SBI Life, Tata AIG, Birla Sunlife, etc.

Going for overkill  

Interestingly, Unit Linked Insurance Plan (ULIP), one of the major contributors to growth in two earlier years, became a major troublemaker for the industry in 2008-2009. Under the unit-linked plan premium paid is invested in stocks and in debts, in various combinations depending on the scheme one opts for. The boom in the stock markets in the first nine months of 2007-2008 (till December 2007) was used by the private players and LIC, to some extent, to lure investors buy unit-linked plan. Actually, sinsurance companies went completely overboard in selling ULIPs to cash in from the equity boom in 2007.

Using the massive surge in stock indices, sales representatives were orally promising 20 per cent or more, annual return on investments. As a result, as much as 90 per cent of the new business done by the industry in 2007-2008 came from ULIP.  In fact, most insurance advisors were misleading investors by not telling them the truth: that in case of a stock market crash they will lose money in equity-linked ULIPs. Said a senior analyst in a Mumbai-based investment bank “Llife insurers were selling insurance schemes as investment products with life cover attached to them. This weird act is just the opposite of the fundamental principle of the industry: life insurance is primarily for protection through life cover and investment gain is only incidental.”

But the stock markets crashed and many investors suddenly found that their investments in ULIPs had also evaporated. As markets remained depressed since the beginning of 2008, ULIPs went out of favour and life insurance companies were faced with falling sales. This was one of the major reasons for the poor performance of the industry in 2008-2009.

Said T R Ramachandran, CEO & MD, Aviva India “the fall in new business was fundamentally due to two reasons. Firstly, given the bulk of the industry sales was towards ULIPs, the volatility in the capital markets had a direct impact on sales. Secondly, the overall slowdown in the economy sled to many customers postponing their long-term savings, insurance and retirement planning decisions.”

The positive side

In a way, the setback in sales has a silver lining. With demand for new policies taking a beating, many insurance companies took the opportunity to consolidate their existing business by focusing more on the renewal premium from the policies sold earlier. All these years Indian life insurance companies were busy garnering volumes by pushing sales of new policies and lacking in efforts to get the renewals. As a result the lapse rate (when people stop paying premiums and the policy lapses) was as high as 30 per cent of the policies sold. This was bad for both, the policy issuers and investors.

For the issuer first year’s premium is expensive as it retains only around 70 per cent of the premium amount, the rest goes in sales commission and other costs. Form next year till the policy remains enforced, the retention moves up to around 90 per cent. For the holder lapsing of a policy within the first three years is bad as the loss is almost 100 per cent of the premium paid. Take the case of Bajaj Allianz Life Insurance whose total premium income grew by 9 per cent in 2008-2009 though the new premium income dropped by 31 per cent.

During the year, the company earned renewal premium at Rs 6,133 crore as against Rs 3051 crore in the previous year. Riding on the growth, Bajaj also showed a net profit of Rs 45 crore in 2008-09.

Talking to Deccan Herald, Kamesh Goyal, Country Manager, Allianz & CEO, Bajaj Allianz Life Insurance, said “our new premium did not grow last financial because we did not open new branches and new distribution network. Of course, the bad market also dampened the business.”

“But, at the same time we have more than doubled our renewal premium. This is good for us, as well as for our customers,” he added. Bajaj already has opened 10,000 branches and its geographical expansion will be slower in the coming years.  
Echoed Ramachandran of Aviva Life “we believe that persistency management is the main driver for a company to demonstrate sustainable growth. We have experienced a growth of over 50 per cent in our renewal premiums in 2008-09 and are constantly looking at measures to improve this metric.”

Herd mentality

The fall in new business may also work as a major correction of the excessive hawking of policies linked with share markets. The herd mentality in the Indian business made almost every insurance company pushing ULIP plans without any concern on the possible erosion of investors’ wealth. The backlash from investors will now make them more cautious.

Balanced growth

Naturally, the lessons learnt will make life insurance companies adopt a new strategy for balanced growth. They will go for prudent expense management and pursue sustainable growth model targeting profitability.

Companies will take up initiatives to better customer service and launch products tailor made for customers needs. Said Goyal “the year 2009-2010 would be challenging for the insurance industry due to slowdown in growth which will put enormous challenge to margins.”

Agreed Rajiv Jamkhedkar, CEO, Aegon Religare Life Insurance, a new entity in life insurance business: “We are committed to building a long-term, customer-centric business for which we have set a well-defined business plan and we shall try our best to execute that plan.” 

In 2009 life insurance industry, therefore, will concentrate more on products focusing on protection, term insurance, endowment and cash back and ULIPs with capital guarantee. Hopefully, the industry will rise again taking lessons from their past mistakes.