Insurance term prices will continue to rise: HDFC Life's Vibha Padalkar

Company is a steady performer and it is 'comfortably beating' the Sensex's performance, says the top executive.

Private multiple life insurers have raised term plan rates after reinsurers prodded them. The move stirred up the market as term plan rates have been raised multiple times in a few years. Vibha Padalkar, managing director and chief executive officer of HDFC Life, spoke to Subrata Panda on the recent hike in term plan rates, the company’s decision to increase retention limit, and the union budget among other things.

Edited excerpts from an intereview

In the budget there was nothing for the insurance sector. Was that disappointing?

While there wasn't anything specific for life insurance this time, it did have some new things in our allied sector. For example, now the state government employees can contribute up to 14 per cent of their income to NPS (tax free), up from the previous 10 per cent. I am also hoping that some of the policy decisions may be outside the budget – any sector specific easing of business or some of the asks that we had--if that happens, it will be great. If the economy is back on track, then I would see this as a positive. So, we are not decoupled from what the finance minister has said in terms of wanting to bring out the animal spirits of the economy for India to become one of the fastest developing nations.

Q4 of a financial year is the best period for a life insurer. What are the trends you are seeing currently in the market?

We are seeing each of our channels grow very well, even on a two-year CAGR basis. We have a very balanced product portfolio, almost at an ideal level. Our non-par savings are one-third of our business, participating products are less than one-third, ULIPs are about one-fourth, and protection and annuity are around 11 per cent. The only change that we would like to see is selling more protection and annuity. These segments can grow as much as they want to and others will be somewhat range bound.

You have absorbed a significant portion of the term plan price hike from reinsurers, how will this impact your margins going forward?

We have increased prices by 15 – 25 per cent and this increase makes it margin neutral for us. It is erroneously quoted sometimes that because term prices go up by 40 -50 per cent and if we do not increase our prices by the same percentage, there will be a margin impact. The cost of reinsurance is only one part of our cost. We have increased our retention limit from Rs. 20 lakhs – Rs. 40 lakhs and this has just coincided with the reinsurance rate hike.

We started with retaining Rs. 5 lakhs and then gradually revised it upwards so it all depends on how we are learning from our experience and what cohorts we are comfortable with. Also, the size of our balance sheet is growing so our ability to retain more will progressively increase over time. This increase in retention also goes hand in hand with the price hike we have done. It is not a straightforward relationship between retention and profitability. Against retention, how a company is fairing is important. So, one has to triangulate it with our operating variances in our embedded value.

Does the increase in retention protect you from the frequent rate hikes of the reinsurer?

Not really. Because our average sum assured is about Rs 90 lakhs to Rs 1 crore so it's not like we are retaining everything. We will continue to be cautious because for us the sum assured is anything between 200x to 400x of the premiums. Hence, we have to be fairly careful of the underlying risk when we are underwriting the policy.

You have mentioned that hike in term plan premiums may become a business-as-usual event

The hike that you see has to be put in context. In the past six to seven years, the prices have gone down. And, at that time it was a very niche offering, largely in the top 6 – 7 metros and largely focused on urban and salaried profile. Now as we move to different profiles, interior parts of the country, and look to cover people with pre-existing diseases as well as those who have recovered from COVID-19, the rate hikes will have to be seen in that context. That is because the pricing in India is one of the lowest if you compare it with that of other countries. If we average out the price hike over the last 6 – 7 years, it is very much in line with inflation and wage hike. So, if people’s salaries go up, the need for protection increases too. And, yes, term prices will continue to inch upward over the next 4 – 5 years and it will be understood by people.

Is it becoming increasingly difficult to buy term products now?

I would put this into a larger context. Life insurers are covering a very significant risk with multiples usually up to 400x and these are also for a very long period of time (say 20-40 years). Hence there is a need to ask questions and collect relevant information that may be crucial from an underwriting perspective. There is also a pandemic led issue and I do believe that it might ease off over a period of time.

While Sensex has gone up by 14% in the last one year, HDFC Life's share price was down more than 8%. Is there any reason behind this?

Insurance, worldwide, is seen as a defensive stock as it is a long-term business. If you look at a long-term horizon, we are comfortably beating the growth seen in Sensex. Stock price movement is beyond our control and there has been some re-rating because of reallocation between financials and non-financials. Off late, we have seen a lot of volatility with the new listings. We want to be a steady performer that continues to show profitable and qualitative growth.

How soon will we see synergies from the acquisition?

Exide Life is our 100 per cent subsidiary, we will shortly file to the NCLT for the eventual merger and that is when the synergies will emerge. Exide Life as our subsidiary has done well and has grown much faster than the industry. There is now 100 per cent oversight over the company and hopefully the merger will happen soon.

Do you see further M&A activities in the sector? Also, are you open for further acquisitions?

Stake sales will happen and have been happening over a period. Given that the government has relaxed FDI, it has spurred some of the foreign promoters wanting to increase their stake in growing markets like India, so we will definitely see a lot more of that. M&A is difficult because a lot of things have to come together for a merger to happen.  We are absolutely keen to grow both organically and inorganically.