Aviva Life, a joint venture between the promoters of the Dabur group and the UK’s largest life insurer Aviva, is working out a new distribution model after its tie-up with two banks ended, resulting in a 24 per cent fall in sales from new policies. Aviva India Managing Director & CEO T R Ramachandran, who was until recently the head of retail at Citibank, spoke to Shilpy Sinha about the insurer’s plans to check the fall in sales.
In December, the life insurance industry’s premium collections dropped for the first time since liberalisation. What are the reasons?
Although the industry’s premium collection has dropped, it has actually grown at a slow pace if you put aside LIC and some other life insurers. This is fundamentally due to the weak capital market and low capital efficiency as funds are not easily available. I believe, that 2009 will be a challenging year for the industry and it will grow at 15-20 per cent. Areas such as profitability and customer care are going to be the big concerns for the industry.
Why has your premium income fallen 24 per cent during April-December?
Aviva India lost two major bancassurance partners in Centurion Bank of Punjab (CBoP) and Canara Bank earlier in the financial year, which has had an impact on the business. However, if we exclude CBoP and Canara, we are growing in line with the other private players and faster than the market.
Going ahead, our thrust will be to develop a multi-distribution model emphasising on building ‘owned’ distribution. We will continue to leverage our existing relationships with bank partners by increasing penetration levels, while keeping a lookout for any new business opportunities.
We have tied up with distributors for bancassurance and we are working on new models of distribution such as independent financial advisors and direct selling agents. In 2009-10, we expect to grow at 30-35 per cent.
Most banks are getting into the insurance space. So, too many insurance companies are chasing very few banks. The strategic answer is open architecture, as is the case in most parts of the world.
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Aviva also has some interesting models in some parts of the world, where we enter into distribution arrangements with banks and go for SPVs or take equity. But it is not allowed in India. So, one will have to take more and more complementary and supplementary distribution channels in order to substitute what is not there.
How are you trying to arrest the decline in sales?
The life insurance industry in India is akin to running a marathon and we are still in the early stages of the same. Our vision is to be amongst the country’s leading life insurers with quality business model, focused on sustainable growth.
Are insurance companies taking more time to breakeven?
First, a majority of the expenses go towards distribution. Real estate prices are one of the important contributors (to the expenses) and they were far higher than what was estimated in the original business plan.
Second, salaries account for 30-40 per cent of the operating expenses. Because of a scarcity of talent, or perhaps the need to put in talent at an accelerated pace, salaries grew very fast. Third, the margins for the industry were not as high as people had expected. Also, people did not expect low renewals.
How can renewals increase and the lapse rate be lowered?
The transparency level could have been higher, even in terms of disclosures made to customers. To raise the level of financial literacy, the onus is as much on insurance companies as it is on customers.
The regulator is looking to increase the lock-in period for Ulips from three years to five years. Will this help insurance companies?
This will discourage companies from selling Ulips as a short-term product. When you are investing with a 20-year horizon, you will not care whether it has a three-year or a five-year surrender. Those who are looking to invest for three years should rather buy mutual funds.
Almost 80-90 per cent of the products sold by private insurers are Ulips. In these times, should we expect new products to come into the market?
Traditional policies will be one of our thrust areas. Actually, Ulips are far more transparent than traditional products. You don’t know how a traditional product is managed.
You only get periodic bonuses and money back. We advise customers to look at debt funds at this point and we are certainly underweight on equity from the fund management perspective. We are just nibbling in the market. There are only four things an insurance company can work around — protection for your children, retirement as social security is not there, long-term savings and investment.
You can customise your products around these needs. Much more customisation has to be done.
Will the setting up of six standalone pension players affect your pension business?
Our business will not be affected. One of the advantages of PFRDA moving ahead in this direction is the concept of retirement planning getting embedded in the private sector and non-government sector. Once awareness for this product category goes up, all brands in the category benefit.
What are your capital infusion plans?
At the end of the financial year, we will take this plan to the boards of Dabur and Aviva who will take a call. But we will require capital infusion as we have plans to grow. The capital required will be known by May.
What about your plans to enter the mutual fund market?
We are still evaluating it. Given today’s rangebound market, nothing will happen if we do it by August this year. Whether to do it alone or through a joint venture are all questions in the air.