Insurance: Under the new regime

With staff strength and premiums down, life insurers are re-orienting themselves

In the past year, insurance companies, especially in the life segment, have found the going difficult. With the regulator, the Insurance Regulatory and Development Authority (Irda), capping various charges, seeking more disclosures and tightening corporate governance, things are no longer the same. The consequence: A greater emphasis on reducing costs rather than aggressively pursuing new business.

The year 2010 was a landmark year when Irda and the market regulator, Securities and Exchange Board of India (Sebi), found themselves in a turf war. This led to repositioning unit-linked insurance plans (Ulips) more as insurance products, by providing higher protection and focus on long-term savings for pension plans.

The industry is currently going through a period of adjustment, as companies continue to align their business models with the new environment. While insurers call this a defining change that will go a long way in making life insurance a preferred financial tool for long-term savings and protection needs, the immediate situation is not rosy.

Along with cutting down on sales of new policies, insurers are trying to bring down cost through rationalisation of infrastructure, better vendor management and sqeezing discretionary expenses.

After having grown at a compounded annual growth rate (CAGR) of 23.5 per cent, insurers witnessed a drop in income in the third quarter of the financial year. In October-December the industry recorded a decline of 25 per cent, while private players saw a fall by 50 per cent.

Insurers are now emphasising need-based selling. As a result, most companies have brought down the proportion of unit-linked insurance plans in total sales to 50 per cent, from 85-90 per cent earlier. In recent months, companies have adopted the new mantra of improving persistency, reducing costs and rolling out new distribution channels.

“Due to a decrease in agent commissions, cost-efficient distribution has become a challenge. This has forced insurers to increase the minimum ticket size of Ulips,” says A S Narayanan, chief distribution officer, Bajaj Allianz Life Insurance.

Most insurance companies have set up a separate desk to look into their persistency ratio — the percentage of policy contracts that are still in force a specified time interval after they have been issued.

Insurers are cajoling distributors to sell products on the basis of customer needs, encouraging transparency and understanding of the features and ensuring timely renewal payments to retain customers. Also, training and incentives are being provided to distributors to focus on longer- term sales and higher persistency in their portfolios.

“Persistency and long-term mix is the most important thing. There is not much difference between Ulips and traditional products, as the margin is low in both. It is not a margin game anymore,” said Aviva Life Managing Director and CEO T R Ramachandran.

The new norms emphasise the need for training agents to sell in the new environment, understand customer needs and provide relevant solutions. And if companies fail to discipline agents, the recent Irda circular will ensure that they go out of business. The guideline makes it mandatory for agents to renew 50 per cent of the policies sold in a year from July 1.

In the new regime, companies are focusing more sharply on managing expenses. Companies are launching new distribution models to bring down costs. According to data compiled by the Life Insurance Council, the number of direct employees has fallen by 18,184 per cent — from 267,819 to 249,635 — on a year-on-year basis.

The number of agents also declined by 273,984 — from 2,984,285 in December 2009 to 2,710,301 in December 2010. Life Insurance Corporation, the only state-owned life insurer, has also reduced its agent strength by 62,956.

Companies have increased focus on enhancing efficiency and productivity of employees and agents. Many companies have shut unproductive branches and retrenched employees.

On the product front, companies have started focusing more on single-premium products. Also, the minimum ticket size of policies has gone up. In single-premium products, policyholders need to pay the premium only once during the policy term.

With zero cost to pursue the product, insurance companies find it easy to sell single-premium products. The average ticket size is also higher and there is no risk of the policy lapsing.

Experts believe that bank-sponsored insurance companies are better placed in the new regime. Of the 23 life insurance companies, eight have been promoted by banks while of the 21 general insurance companies, three are bank-promoted. Bancassurance reduces the cost of setting up infrastructure for insurance companies.

Rajesh Sud, CEO of Max New York Life, says that while agencies will remain the dominant channel, industry will place a higher emphasis on improving knowledge, productivity and retention of agents. Also, bancassurance sales should gain, with higher engagement from banks in sales.

Online sales are becoming popular with insurers. So far, three companies have launched term policies on online platforms. They expect online sales to contribute 10-15 per cent to premium income under term plans.

“We intend to focus on alternate channels in the short term, given the variable nature of these models until such time as we get the desired productivity level and the cost structures on the agency front. Agencies will continue to be our focus area from a longer-term perspective,” said Puneet Nanda, executive director of ICICI Prudential Life Insurance Company.

By consolidating new business more companies turned profitable in the current financial year. In the pursuit of more business insurance companies had overlooked their break-even targets.

This year SBI Life, ICICI Prudential Life Insurance, Bajaj Allianz Life Insurance, Birla Sun Life and Kotak Mahindra had reported profits. Others like HDFC Life and Tata AIG Life are likely to report profits next year. “Break-even is something that every company can manage. The nature of the beast is funny in the insurance business. If I stop writing new business in the next 12 months I will break even in 12 months,” said the CEO of a life insurance company.

While companies are turning the tide by booking profits, shareholders are awaiting a hike in foreign direct investment, and Irda and Sebi are working on initial public offer guidelines. As per current norms, insurers who are in operation for 10 years can go public. Despite completing 10 years of operations, companies have not been able to list, because there are no guidelines in place.

The new entrants are likely to find it more difficult to do business. “It will be comparatively more difficult for the new entrants to establish themselves compared to already established brands. Distribution reach will play a critical role and companies having a limited presence may explore consolidation opportunities,” said Sud of Max New York Life.

Executives of life insurance companies expect the slowdown in year-on-year growth to continue in the next year. Nanda of ICICI Prudential Life describes the long-term growth story as promising, given the positive macroeconomic factors. “One can reasonably expect that the industry should grow ahead of the nominal GDP growth rate in the medium-to-long term, given the extent of under-penetration, macroeconomic opportunity and favourable demographics."