ICICI Prudential, HDFC Life Insurance opt for higher retention on books

Two of the largest private-sector life insurers, HDFC Life Insurance Company (HDFC Life) and ICICI Prudential Life Insurance (ICICI Pru Life), have raised their threshold for retention of risk on retail protection plans on their balance sheet, thus bringing down the overall retail protection sum assured that is reinsured.

For ICICI Pru Life, the earlier retail protection policies with sum assured above Rs 20 lakh were reinsured and now the management has upwardly revised this limit to Rs 1 crore. For HDFC Life, the limit has been revised from Rs 20 lakh to Rs 40 lakh.

Consequently, the overall retail protection sum assured that is reinsured has come down to sub-50 per cent for ICICI Pru Life, from the earlier 60–70 per cent. For HDFC Life, the mix of risk retained to reinsured has increased to 35 per cent, from 20 per cent.  

An increase in retention limit means the insurer increases the degree of risk it retains on its balance sheet. Beyond that, the insurer cedes the excess risk to a reinsurer. The higher the retention limit, the lower the reinsurance costs.

According to Nilesh Sathe, former Insurance Regulatory and Development Authority of India member (Life), as and when companies mature and reach a stage of increasing their risk appetite due to their financial stability and strength, they will look at increasing the retention limit and post higher risk to their balance sheets.

“Insurance companies increase their retention limit, based on their experience of underwriting. Higher retention may result in their increase in profit, but it may also render them vulnerable to higher losses in a pandemic-like crisis. One cannot totally eliminate reinsurers, which is a major risk mitigation tool,” said Sathe.

However, many experts also pointed out that this is perhaps a consequence of the recent upward revision in term plan premiums by reinsurers. Traditionally, term plan premiums in India were among the lowest in the world. Since the pandemic break-out, term plan rates have gone up between 25 per cent and 30 per cent. If the current increase by insurers is factored in, the increase in term plan rates will be anywhere between 50 per cent and 60 per cent. Large companies do not want to change prices too often, so as to be able to capture a sizeable market share in the retail protection segment, which is a margin-accretive business, observed experts.

In an earnings call, Satyan Jambunathan, chief financial officer, ICICI Pru Life, said, “The reason we have done it is that we believe that with the underwriting practices in place, with the risk selection procedures set up and with the new price being offered, this will be a profitable business.”

“We are basically standing up and saying 'I have even more faith that my price will work for the underwriting norms I have put in',” he added.

“Over the past seven to eight years, we have been slowly increasing the retention limit and this has been the stated way of risk management for us. Regardless of what was happening in the reinsurance world, in all probability, we would have got to the same answer,” Vibha Padalkar, managing director and chief executive officer, HDFC Life, told CNBCTV18.

Meanwhile a report by Macquarie Research has pointed out that a higher retention may have some risk implications for companies. In the case of ICICI Pru Life, which is retaining a large portion of the risk, analysts at Macquarie believe there are risk implications for the company in retaining a larger portion on its books in extreme events, and there are uncertainties surrounding the implications of a “long Covid”.

But for HDFC Life, with its average sum assured being around Rs 1 crore and since the insurance regulator asks for 50 per cent of the sum assured for solvency-margin calculations, the proposed change in retention will not affect its solvency margins.