Slow, But Steady

Four years ago, the life insurance industry was different: valuations were everything, and everybody focused on building market share. Today, sentiments and growth trend lines have been reversed. In the first four months of this fiscal, the sector has recorded a negative growth of 21 per cent.

All the top eight life insurers had 800-1,000 offices back then; the average now is about 150 offices. To make matters worse, there are voids in the management structure of several insurers. "Many senior and mid-level people at the branch level have quit, there is no hiring going on for these positions and everything is becoming centrally controlled," says an industry official who requested anonymity.

This restructuring is a result of the Insurance Regulatory and Development Authority's (Irda's) clamp down on the structure of unit linked products (Ulips) and capping charges to make them more consumer-centric, instead of leaning on business brought in by paying fat commissions to agents. The commissions system along with operating expenses such as record keeping, legal charges and audit fees have added to the accumulated losses in the industry.

Adding to insurers' woes, only 30 per cent of the agents are active on a yearly basis. That is because under the current rules, not more than 2.5 per cent of the total yield of the product can be charged as commission; this is a considerable comedown from the 30-40 per cent that most agents were paid by companies in search of building huge new business income from insurance premia.

Insurance companies are just about recovering from re-orienting their product processes and teams. "Shutting down offices does not mean the industry will suffer; the industry is going to become more competent with better processes," says Amitabh Chaudhry, CEO of HDFC Life in Mumbai. He also says that everyone is looking at new operating models with new distribution channels to get premium income. "Banks and corporate agents will be more powerful in selling insurance," adds Chaudhry.

Before September 2010, companies relied on extra charges — such as surrender charges and administrative charges — to increase income. All this is now being taken away; new products launched in the past 12 months are yet to manage to penetrate the market to a meaningful degree. "Lack of awareness about the revamped Ulip features and distributor realignment have slowed down sales," says Jayant Dua, CEO of Birla Sunlife Insurance in Mumbai.

Dua says the industry is set to start growing again in the third quarter thanks to the base effect, since new policies began to be sold only from September 2010. "Expense management is a key driver to profitable growth," he says.

The expense ratio is, on average, 18 per cent across the industry. That ratio should be below 10 for an insurer to be profitable. But despite all these problems, combined with slow growth and re-structuring the business, things are not as bad as they may seem. "We estimate the industry to grow by 13 per cent on a five-year horizon," says Samir Bali, partner (financial services), Ernst & Young. "There is scope for penetration, though even traditional products need to be more transparent."

Consolidation helps, too. Analysts add that there is enough in this industry to move from the current $50 billion to $100 billion by 2018. Things look bright — for now.

(This story was published in Businessworld Issue Dated 10-10-2011)