has enjoyed spectacular premium income growth, driven by the
enormous success of unit-linked products. Profits, however, remain
illusive at a time when many of the life industry’s hard-sell
tactics are being called into question by respected Indian business
leaders.
Since deregulation of India’s insurance market in 2000 a steady
stream of new entrants has continued to swell the ranks of private
life insurers and since late-2007 alone the number has grown from
15 to 21. All are seeking to share in the Indian market’s
astounding growth which in terms of premium income has yet to
disappoint.
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Over the past seven years total premium income has notched
up a compound annual growth rate of 29.7 percent, increasing from
$7.62 million in 2000 to $47.13 billion million in 2007, according
to reinsurer Swiss Re. Growth in 2007 at 36.3 percent exceeded the
seven-year average but was below the record 64.8 percent achieved
in 2006.
However, deep pockets are demanded as profits remain illusive for
most private life insurers in India.
In its 2006-2007 review insurance regulator the Insurance
Regulatory and Development Authority (IRDA) noted: “It is difficult
for the [private life] insurers to earn profits in the initial five
to seven years of their operations.”
According to the latest annual data from the IRDA the 15 private
life insurers operating in the fiscal year to 31 March 2007
reported a total net loss of INR1,933 crore ($445 million,
1crore=INR10 million [$230,000]), up from a total loss of INR1,184
crore in the previous fiscal year reported by 14 insurers.
By comparison the only state owned life insurer, Life Insurance
Corporation of India (LIC) which is now in its 51st year, reported
a net profit of INR774 crore in 2006-2007.
Of the 15 insurers in fiscal 2006-2007 only two, SBI Life and
Shiram Life, reported a net profit although these were marginal at
INR3.8crore and INR9.5crore, respectively. SBI Life is a joint
venture (JV) established in 2006 by India’s largest bank, the State
Bank of India and French bancassurer BNP Paribas. Shiram Life is a
JV established in 2005 by Indian financial services company Shriram
Group and South African insurer Sanlam.
The private life insurance sector’s losses reflected strains
imposed by rapid growth. According to the IRDA, in the 2006-2007
fiscal year private insurers increased total premium income by 87.1
percent compared with 2005/06 to INR28,219 crore. Total operating
expenses increased in tandem, rising by 83 percent to INR6,520
crore.
During the same period LIC achieved a 47.4 percent increase in
premium income to INR127,823 crore while holding its total
operating expenses to INR7,081crore, an increase of 17 percent. The
LIC’s operating expenses equaled 5.54 percent of its gross premium
income compared with private insurers’ average of 23.1
percent.
In terms of lapse rates data from the IRDA shows that LIC is also
well ahead of most private insurers. In 2006-2007 LIC reported a
lapse rate of 4 percent of non-linked business based on the number
of policies. The average for private insurers was 24.3 percent and
ranged from lows of 4 percent for Birla Sun Life and HDFC Standard
Life and 9 percent SBI Life to highs of 65 percent for Aviva Life,
37 percent for MetLife and 32 percent for Sahara Life.
The IRDA also noted that during the 2006-2007 fiscal year only two
private life insurers generated a surplus in their policyholders
accounts. These were Shiram Life and Sahara Life, the only Indian
life insurer that does not have a foreign partner.
All other private insurers were required to transfer funds from
their shareholders’ account to their policyholders’ account to
cover bonus payments to policyholders. Though insurers would not
normally be permitted to pay a bonus if there is an actuarial
deficit in their policyholders’ account, the IRDA amended its
regulations in the 2003-2004 fiscal year to permit this.
This explained the IRDA is to enable new insurers to maintain their
competitive stance in the market. The IRDA permits an insurer to
use shareholder account transfers to cover bonus payments for seven
years from commencement of operations.
The private life insurance sector has also committed massive
resources to expanding its distribution network. For example,
between 2004 and 2007 the total number of private insurer offices
increased more than seven-fold from 416 to 3,072. During the same
period LIC increased its office numbers marginally, from 2,196 to
2,301.
A similar trend was seen in the number of tied sales agents.
Between April 2004 and March 2007 the total number in service with
private life insurers rocketed from 370,846 to 890,142. During the
12 months 666,622 new agents entered the private life insurance
sector and 147,316 departed.
During the same period LIC increased its tied agents from 1,052,993
to 1,103,047, with 197,963 new appointments and 147,909
departures.
Overall the total number of agents in the industry increased by a
net 569,360 (40 percent) to 1,993,199 and, according to the IRDA,
account for more than 60 percent of sales.
Given factors such as rapid expansion of marketing infrastructures,
training expenses (7 percent of total costs in 2006-2007) and
transfers to policyholders’ accounts, it is not surprisingly the
private insurance sector is characterised by frequent injections of
additional share capital.
For example Bajaj Allianz, a JV between European insurer Allianz
and Indian motorcycle manufacturer Bjaja Auto, injected a total of
INR1076 crore in three tranches between December 2006 and December
2007. Similarly ICICI Prudential, a JV between UK insurer
Prudential and Indian bank ICICI Bank injected INR775 crore in
three tranches between January and July 2007.
Parallel with aggressive expansion of office coverage and agent
numbers, private life insurers have also leaned heavily on
partnering with banks to drive sales growth. With 65,000 branches
and 300 million customers banks represent an ideal distribution
channel for insurers and in terms of sales growth the strategy is a
success. Though precise industry-wide numbers are unavailable
bancassurance contributions to total sales of as high as 40 percent
were reported in 2007 by SBI Life and HDFC Standard Life. The
latter is a JV between UK insurer Standard Life and the Housing
Development Finance Corporation of India.
India’s private life insurers have been rewarded for their tenacity
by gains in market share in the face of solid competition from LIC.
Market share of the private insurance sector measured in terms of
first year single and recurring premium income climbed from 11
percent at the end of the 2003-2004 fiscal year to 26.5 percent in
2005-2006 only to fall back in 2006-2007 to 25.6 percent.
However, in 2007-2008 the private insurance sector surged ahead of
LIC to gain a 35.6 percent market share based on first year premium
income of INR32,764 crore, an increase of 68.9 percent compared
with 2006-2007. The LIC’s first year premium income increased by
5.3 percent to INR59,182 crore and the total industry’s by 21.6
percent to INR91,946 crore.
Growth in premium income during the past several years has depended
heavily on unit linked investment products (ULIPS). For example in
2006-2007 ULIP sales surged 167 percent and accounted for 57
percent of total first year premium income, according to the IRDA.
For private life insurers’ ULIP sales accounted for 87.5 percent of
first year premium income, up from 82.5 percent in 2005/06, and for
LIC 46.3 percent.
Popularity of ULIPs, which are confined to Indian mutual funds
only, was driven by a surging Indian share market. Measured by the
key Bombay Stock Exchange Sensitive Index (SENSEX) the market
appreciated by 44 percent in 2006 and 46 percent in 2007. The
SENSEX went on to reach an all time high in the second week of 2008
before beginning a precipitous decline that by early-July had wiped
35 percent off its value.
Early indications are that the stock market’s slide has impacted
new sales. In the first two months of the 2008-2009 fiscal year
(March and April) the IRDA reported total first year premium income
of INR8,119 crore, a 10.7 percent increase compared with sales in
the first two months of 2007-2008.
Despite the slowdown private insurers fared well in the first two
months of 2008-2009, lifting first year premium income by 73
percent to INR 3,948.41 crore. LIC, however, suffered a marked
reversal with first year premium income falling 17.4 percent and
its market share slumping to 51 percent from 64.4 percent in
2007-2008.
The dominance of ULIPS has drawn a reaction from CS Rao, the IRDA’s
former chairman.
“Life insurance products have always been regarded by the general
public as saving instruments with income tax benefits. Risk cover
was only incidental to the whole process,” said Rao.
“The traditional products have now been replaced by the unit linked
policies in view of the positive developments in the stock market
in the last few years. As a result, pure risk products providing
adequate life cover at reasonable rates have not yet emerged in the
Indian insurance scene.”
He continued that policyholders’ focus on investment returns had
resulted in a tendency to take advantage of short-term gains
resulting in high lapse rates. This represented a “huge drain” on
the life insurance industry’s resources, stressed Rao who called on
the industry to design products that would encourage policies to be
held for their full term.
The life insurance industry’s approach to marketing has also come
in for strong criticism from a retired LIC executive director,
David Chandrasekharan.
“The intense preoccupation with producing results in the short term
and beating the competition has been such an overwhelming concern
that there is little evidence that anything is being done to
promote ethics in selling,” said Chandrasekharan.
He added that “precious little” has been done to educate consumers
about the type of products on offer and the needs they serve.
Chandrasekharan came out especially strongly against mis-selling of
ULIPS.
“There is nothing wrong with the ULIPS per se,” he said. “What is
wrong is the way they have been designed by some companies giving
scope for unethical selling and mis-selling.
“All we can say in the present situation to the customer of
insurance is let the buyer beware.”
