Insurance : Industry On Growth Path

The Indian insurance industry is booming. With the stock market booming and with more disposable incomes in the pockets of young and the employed, life insurance in on an upswing and the industry can expect 40% growth in 2005-06 with the right strategies. The new business in 2004-05 has an impressive growth rate of 35.7%. The life insurance industry has recorded a new business premium level of Rs.25,343 crore. The accretion over the last year’s figure was to the tune of Rs.6674 crore. With the return of more favorable circumstances, the Indian economy has boomed again. Dozens of Indian companies are now taking over foreign companies from Tata Motors and Tata Steel to Videocon and Reliance. Six years ago, Indian companies were terrified of Chinese competition. Today, they are confident of conquering the world, including China. That is the best reason for thinking that India is on a higher growth path. With stringent administrative and economic reform, India may touch 12% growth but even without further reforms, 7% growth looks sustainable. Export growing at 20% and imports at a spectacular 38%. The current surge in the trade deficit holds out the promise that India would be able to absorb foreign savings on this scale in the current fiscal. Customs revenues would boom. And India’s forex hoard would hopefully be drawn down. Spurring investment has the potential to utilize foreign exchange reserves to spur growth. LIC’s premiums from sales of new unit-linked plans have grown 293% in the first quarter of 2005-06. Overall new business premium from individual policies has grown 62%. The life insurance is increasingly bought for retirement savings element and less for protection. The increasing life expectancy increases the need for retirement savings.

WIDER RANGE

Private insurance players have introduced a wider range of insurance products and step up brand promotion as part of their new strategy. These players have built a solid core business comprising largely of whole life policies where the primary objective is to provide protection. It would now follow up this strategy by widening the range by bringing in new policies including unit-linked schemes. A clear niche has emerged in the life insurance business for different companies ever since the private players came into existence. Private companies are emphasizing a lot of permutation and combinations of riders to design new covers at most competitive premium rates and launching them with a big publicity campaign. These new covers have the flexibility and added benefits to suit the needs of customers especially those who are unsatisfied with the traditional and rigid plans.

GROUP PREMIUM SEGMENT 

SBI is the undisputed leader in the group premium segment on account of its housing loans that are hedged by taking term life covers. Of the new business premium level of Rs.25,343 crore of life insurance, the individual segment contributed Rs.20933 crore while the group contributed the balance Rs.4410 crore. In the case of private players the HDFC Standard, ICICI Prudential, Tata AIG and Birla Sun Life, etc. group non-single premium played a dominant role. This could be on account of cross-selling and the relationship that these companies have with corporate accounts. IRDA has cracked down on misuse of group insurance and corporate agency system by coming out with new stricter guidelines that allow a group cover to groups only if the head of the group has an authority from group members to arrange insurance on their behalf. The only exception is employer-employee groups, where the premium on group insurance can be collected either by employers or by employees. Insurers have also been barred from entering into any memorandum of understanding or marketing arrangement, or referral arrangement for distribution of insurance unless the person is licensed by the regulator. With the imposition of the Fringe Benefits Tax (FBT) on employer contribution to superannuating funds, life insurance companies are getting the jitters. Group premium, which is highly dependent on corporate contribution to superannuating funds, has fallen by 41% for the life industry. This is because of the sharp rise in sales of individual policies, which have recorded a growth of 48%.

LIFE INSURANCE FOR WOMEN

In the US, there is a gap of only 5% between men and women policyholders. 59% of all women and 64% of men are policyholders. In India, the gap is much wider and life insurance for women was an untapped market a few years back. But lately, it has shown a significant rise. Women have decided to secure their future and reap the benefits of life insurance. As the number of professional women in India is increasing, more and more of them are taking up life insurance policies designed specifically for the opposite sex by insurers. Private players are also planning to introduce new policies catering to women. The proportion of women policyholders has grown to 30% and is rising. The biggest attraction in their policies is the exclusive rider benefits that cover pregnancy-related complications. Jeevan Bharti of LIC, Term Insurance Plan for Women of Kotak and Women First Plan of Birla Sun Life are the few most sought products among women.

UNIT LINKED POLICIES

Unit linked policies constituted the majority of the single premium policies at Rs.4940 crore while in traditional products constituted another Rs.3041 crore. In total, ULIP constituted Rs.7981 crore in 2004-05 i.e. almost 31% of the total new business accrued. Insurance these days is perceived not only as offering a protective cover but also as a mode of investment. This is why traditionally endowment products have been more popular than term products. It is precisely for this reason that not unit-linked plans are emerging as the most popular products promoted by insurance companies. Since equities have proved to be the most lucrative of asset classes over long periods and insurance is also a long-term commitment, the combination suits the needs of policyholders better. Some of the private companies are strong on the sum assured as they have more risk-based products. Single premium policies have contributed over Rs.5600 crore to the insurance premium, which is around 32% of the share of the total premium collected by the industry. Insurance premiums in life segments are paid in installments over the term of the product. This suits the needs of the vast majority of the population as they can put aside some money from their income every year to meet their insurance needs. However, others may have irregular incomes or may have got a windfall or a huge bonus and want to deploy that money towards insurance. Single insurance products are ideal for people falling under this category. Just life mid-cap equity funds have been the flavor of the mutual fund industry for some time now, unit-linked plans have been the hot favorites of the insurance industry. Every insurance company has launched a unit-linked plan. LIC’s Unit Linked Plan called Future plus is a deferred pension plan and is available with or without life cover. It can be taken as a single premium policy of under regular premium payment mode. The plan offers riders like the accident benefit rider and critical illness rider, which can be opted for at the time of taking the policy. The emerging trend of a sharp increase in the popularity of single premium insurance policies is gaining momentum. A large part of this premium is likely to have come from unit-linked plans. Unit linked policies like Bima Plus and the more recent Future plus had the largest share of single premium payments.

AGGRESSIVE COMPETITION

Despite aggressive competition from private players, LIC was unlikely to lose its market share as the insurance market was expanding. In the last financial year, LIC clocked a total income of Rs.1 lakh crore, with premium income over Rs.75000 crore. LIC is also planning to aggressively increase its presence in housing finance and mutual fund areas. The insurance industry is expected to increase its pace of growth on the back of an upswing in the market, which is expected to drive premium flows into investment-linked policies. India has recorded one of the best growths among countries in Asia. As against 2.88% of the GDP in the previous year, insurance penetration rose to 3.17% in 2004-05. India continues to rank 19th in terms of premium volumes and 18th in terms of life insurance premiums. While 14 life insurance companies operating in India have opened up competition in the insurance business, India’s post has notched up big number son the rural insurance front, although unsung till now. There have been a combined sales of over 18,000 policies in 2004-05 with a total sum assured of almost Rs.10000 crore in rural areas alone, just because of awareness among rural folk with a high recall on social security and almost 90% of India’s post offices are located in rural areas. The IRDA is in process of bringing out a regulation that will provide an infrastructure over which microinsurance can be developed properly. For the distribution of such products, a new band of microinsurance agents will be introduced. These agents will be working solely in the area of microinsurance and need not go through the process of producing a license from the regulator after going through an elaborate process of training and test. Insurance Companies selling Mutual funds have arranged sales conferences for their distributors at various places across the world, Hong Kong, Singapore, the US, Mauritius and so on. Among the mutual funds ICICI Pru, HDFC, Templeton, and Reliance had sent their top distributors abroad in the recent past. The practice of sending to earning insurance and mutual fund agents abroad is not a new thing. Even the LIC has aggressive plans and has obtained the government’s permission for deputing a large chunk of its Class III officers for the job of insurance advisors. LIC has over 60,000 employees in the Class III category and a total workforce of over 1.7 lakh. As per the LIC Act, only agents can vend LIC schemes. However, the finance ministry has given the go-ahead to amend the staff regulation and allow Class III employees to go for the insurance advisor’s job.

NEW PRODUCTS

Insurance companies are constantly introducing new features, adding additional riders and doing similar cosmetic changes to attract people. LIC is planning to aggressively increase its presence in housing finance and mutual fund areas in which it has already floated 100% subsidiaries. Health-related products have more and more potential in India. Medical insurance has played an effective role in the developed world. LIC is planning to come out with highly affordable individual policies with sum insured as low as Rs.10,000 to Rs.15,000 for the rural poor through NGOs, and Self Help Groups. The size of the policies will be much smaller than regular policies where the minimum value is Rs.50,000 per policy. There is a vast potential for this product as seen in the success of a micro-credit scheme operated by banks. New private insurance companies, in their effort to build brands, entered the market with big advertising budgets. In 2005 insurance companies spent more than Rs.200 crore on advertising while it was roughly half of that for Mutual Funds. For top insurance companies, advertising budgets swelled 13% as compared to the previous year, while for mutual funds, it rose by 3%, Television was the preferred medium for insurance companies, while MFs opted for the print medium.

AMBITIOUS PLANS

LIC has embarked on an ambitious plan to overseas subsidiaries to tap the NRI wealth. It already has subsidiaries in countries like Fiji, Mauritius, and the UK. The Company had also entered into a joint venture agreement with firms in Dubai and Saudi Arabia. The norms governing foreign investment in the insurance sector have been liberalized. The 26% ceiling will not include the stake held by those foreign shareholders in the Indian Promoter Company who have not subscribed to the equity of its insurance joint venture. The IRDA has made it clear that holdings of non-resident Indians, overseas corporate bodies and multinationals in a foreign institutional investor or a mutual fund will not be counted towards foreign equity even if they have invested in an insurance venture. The Regulators’ ruling is expected to affect the fate of most private insurance companies as international players hold a 26% stake in the ventures. Sahara Life and Reliance General are the only insurance companies without foreign partners. The Indian government is also planning to substantially relax the entry norms for insurers in the healthcare segment including paid-up capital requirements. Proposed changes include a separate classification for health insurance companies, to distinguish them from life and non-life insurance business. Currently, health insurance comes under the scope of general insurance. Multinational health insurance companies have complained that the paid-up capital requirement of Rs.100 crore is very high, as healthy insurers operate on a very thin profit margin. Now, this is expected to be slashed from the current level of Rs.100 crore to around Rs.25 crore. The private insurance industry in India may be only five years old but their expertise is already in demand. ICICI Prudential Life insurance has recently tied up with Sri Lanka’s second-largest insurer to provide technical support to the company. Besides, there are already instances of Indian insurance executives being posted overseas by their multinational parent. Japanese insurance giant Tokio Marine has plans to get into the life insurance business in India. Tokio Marine is looking at entering in Indian market through its group company Millea Asia headquartered in Singapore. LIC plans to come up with an initial public offer for its joint venture in Saudi Arabia and is considering a foray into Australia and New Zealand. The Corporation is also focusing on its Mauritius operations and eyeing other African markets like Botswana.

BREAK-EVEN

Among the new entrants of the insurance sector, none of the private players has reached the break-even so far. However, Birla Sun Life expects to be the first private life insurance company to break even by December 2006. The private insurance industry is around five years old with the life insurance business taking an average of seven to eight years to break even. The company plans to reach out to be the B and C segments by expanding its branch network in new cities. Birla Sun Life Insurance has managed costs efficiently and remained focused on long-term unit-linked plans. Life insurers succeed in achieving a cash break-even when renewal premium begins to match premium from new business. The company has utilized its capital more efficiently and managed to become the second-largest private life insurer with a paid-up capital of Rs.370 crore. The company is likely to take a hit on its group insurance business because of the fringe benefits tax that has been imposed on group insurance. The sale of Chennai Based AMP Sanmar Life Insurance Company marks the first exit by original promoters in the Indian insurance sector post-liberalization. The joint venture, which is the tenth-largest among the 14 life insurers in the country, employs over 800 staff and 8000 sales agents. It reported a premium income of Rs.105 crore in 2005-05 up 239% from Rs.31 crore in the previous year. The acquisition takes Reliance Capital into all financial services except banking. Reliance Capital has mutual funds and asset management funds totaling over Rs.11000 crore. AMP has decided to stay focused on its core wealthy management business in Australia and New Zealand while keeping its  Asian focus on asset management through AMP Capital investors. Sanmar also decided to take advantage of the opportunity to review its stake in the business. The GMR group, the biggest shareholder in ING Vysya Life Insurance is also looking to exit life insurance by selling its stake to a new partner. The group is in talks with several corporates, including the Rahejas, the Hero Honda group, and Moser Baer, to offload its holding. There is a possibility of ING Vysya Bank too selling its 20% stake in the insurance venture to the new partner. GMR is exiting insurance to focus more on infrastructure projects. GMR originally had a minority stake in ING Vyas Life Insurance as the company was promoted by Vysya Bank in 2000. When ING hiked its stake in Vysya Bank by acquiring shares from the GMNR group, ING Vysya Bank cut its stake in the insurance company by selling shares to GMR. IRDA is planning an onsite inspection of insurance companies. The supervision is likely to be on the lines of the surveillance conducted by the RBI. The Regulator will introduce a grading system for various entities in the insurance industry based on their financials. Insurers are keen to work out pension schemes for unorganized workers in India. Global pension and insurance fund managers like Prudential, ING Vysya, as well as domestic insurers and banks like LIC and SBI, have shown their willingness to venture with the pension Fund Regulatory Development Authority for working out post-retirement pension benefit schemes for 300 million wage earners in the unorganized sector. There are 420 million workers in the country, of which 60 million are covered under central government-floated PF schemes and another 60 million are covered under central government-floated PF schemes and another 60 million are covered by various other post-retirement pension schemes. The remaining 300 million are covered by various other post-retirement pension schemes. The remaining 300 million workers, who are part of the unorganized sector, have no access to pension benefits. There is an urgent need for working out a pension mechanism for these wage earners. With several foreign life insurance companies waiting in the sidelines there is a big demand for Indian corporates with deep pockets willing to invest in the insurance sector. Because of the present shareholding structure, only companies with deep pockets can promote insurance companies. Several insurers have already pumped in hundreds of crore into the ventures. Besides expanding the investible universe substantially, the move to invest in the overseas equity market is on increase to take exposure in business, which are lucrative, but not available in the domestic market. The Government is considering allowing foreign reinsurance companies to have branch operations or even subsidiaries in India. Reinsurers such as Swiss Re, Munich Re, and RGA have representative offices in India for several years. They have done business with Indian Insurers for several decades through reinsurance brokers, who are now licensed by IRDA. The government is reviewing the present restriction since not a single reinsurance company has come up in India after five years of liberalization. Allowing foreign reinsurance companies to set up branches or subsidiaries in India would bring more capital into the business and increase the capacity of the Indian market to retain risks. At present, the reinsurance capacity is concentrated with the GIC, which is among the top 25 reinsurers in the world. Yet there is a significant among of reinsurance capacity that is being imported from multinationals such as Swiss Re, Munich Re and the Lloyds market in London. Most of the risks of giant companies are ultimately passed on to the books of multinational reinsurance companies. IRDA, concerned over the volatility that policyholders are getting exposed to, is set to insist on option on all unit-lined policies, which will allow a policyholder to stay invested in a fund even after his policy matures. This investment protection feature will be a part of the new ULIP guidelines aimed at protecting policyholders. The guidelines would also include a minimum lock-in-period for a unit-linked policy and would also take a fresh look at how ULIPs are being sold. The biggest risk in unit-linked insurance plans is that as a temporary blip in the markets at the time of maturity could wipe out a large chunk of an individual’s life savings. Although, this applies largely to the equity markets investors in income funds are subject to volatility. Unit linked policies are designed for investors with an appetite for market risk. This is different traditional ‘with profit’ policies where it is the insurer’s responsibility to iron out the volatility. In ULIP the investor’s return is directly linked to the net asset value of the fund. At present ULIPs outsell traditional plans for private life insurance companies and account for over one-third of the sales of LIC which started selling ULIPs only two years ago.

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By Jagendra  Kumar, Jaipur, The Insurance Times, Published in Life Insurance Today, December 2005