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Going Around In Circles

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India's struggling insurance sector has another headache to handle — dwindling premium collections. The total new business premium collected in FY2012 was Rs 1,14,228 crore compared with FY2011's Rs 1,25,827 crore, a drop of about 10 per cent. During the same period, total collections fell from Rs 2,91,605 crore to Rs 2,83,315 crore.

According to the provisional data released by the Life Insurance Council, the only saving grace was the growth in the total assets under management (AUM). The total AUM of life insurers swelled to Rs 1,618,544 crore in FY2012 from Rs 1,482,549 crore a year ago. Non-linked new business premium also grew by 32 per cent to Rs 96,224 crore from Rs 72,878 crore in 2010-11. However, the unit-linked new business saw a significant drop of 67 per cent to Rs 17,455 crore from Rs 52,739 crore.

"This drop in total premium can be attributed to the change in the regulatory roadmap, declining number of products and disappearance of the pension business in the individual segment," says S.B. Mathur, secretary-general, Life Insurance Council. According to him, the individual pension business, which forms a major segment of the new premium for life insurance companies, has plunged to 1.80 per cent of the total new business premium.

Net investment by life insurers in equity markets also plunged considerably. In FY2012, the net buying by life insurers in equity stood at Rs 26,990 crore against Rs 30,565 crore a year ago.

How are the insurance firms faring? The top 10 insurers like SBI Life, ICICI Life and Bajaj Alliance are all profitable in accounting terms. However, these companies have huge accumulated losses. Sources say that the industry has accumulated losses of nearly Rs 21,000 crore.

However, valuations could drive business. "The industry is well capitalised and will continue to get great valuations as the business is sound," says Ashvin Parekh, partner and national industry leader for insurance practice at Ernst & Young. Recently, New York Life sold its 26 per cent stake in Max New York Life Insurance to Mitsui Sumitomo Insurance for Rs 2,731 crore;  the transaction valued Max New York Life at Rs 10,504 crore ($2.1 billion). Higher renewal rate of policies was the reason for the high valuation.

9.5% The drop in new business premium collections in FY2012

Regulatory hurdles have also served to keep the industry down. Insurance companies find it tough to attract agents, because agents' commission is now capped at 2 per cent of the cost of single premium and not more than 7.5 per cent of the regular premium contribution in the first year; this is further scaled down to 2 per cent in subsequent years. Six years ago, commission to agents was as high as 40 per cent in the first year of a policy.

On a brighter note, the life insurance industry has retained its retail character, with more than 341.6 million in-force policies on the books of life insurers as on 30 March 2012 — the highest number of in-force policies in the world.

(This story was published in Businessworld Issue Dated 30-07-2012)