Life insurance companies are going to see a squeeze in margins and profitability, given the prescribed structural changes to be brought to unit-linked insurance plans (Ulips) from September.
According to an Edelweiss study, while margins on new business will fall further to 10-11 per cent from the current 16-21 per cent, the capital requirement will go up by 40 per cent. Anticipating a fall in return on average assets, the broking firm has cut valuation across companies by 25-30 per cent.
To make a Ulip a long-term protection contract, the insurance regulator made significant changes in the past few months. It capped the difference between gross and net yield, reduced the surrender penalty and mandated higher risk cover. All these changes will apply from next month.
The report said the Ulip NBAP margin (New Business Achieved Profit, calculated as a percentage of the annualised premium equivalent on new policies) will fall to 10-11 per cent from the current reported level of 16-21 per cent. In addition, it said capital requirements could rise by 40 per cent and the solvency requirement by 25 per cent. Also, maintaining persistency and expenses efficiently will become more important. The study says volumes would decline by 5-10 per cent over the current financial year.
The Insurance Regulatory and Development Authority has come up with guidelines to discipline agents. Insurers are not allowed to renew an agency licence if the average annual persistency ratio is less than 50 per cent; also, the minimum first-year premium collection by any agent should be Rs 1.5 lakh and he should sell at least 20 policies a year.
“With a cap on charges, efficient cost-management is the only lever and differentiator available to insurers to manage profitability. As per our analysis, to report NBAP margins closer to 10-11 per cent, the operating expense ratios for insurers should sustain at 10 per cent against 20 per cent currently,” the report said.
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However, the viability of new-look Ulips, coupled with more transparency, is expected to drive volume growth.
A major challenge would be to manage operating expenses effectively. The report noted a cut in commission rates would result in volume dip, requiring further cuts in fixed costs till optimal scales are achieved.
Insurance companies backed by banks, however, are better placed in the changing structure, as they have the advantage of a strong brand and variable cost structure.
At present, insurers such as LIC, SBI Life, ICICI Prudential, Kotak Life and Bajaj Allianz are profitable. During the first quarter of this financial year, Birla Sun Life reported its maiden profit. The prescribed changes are going to further strain loss-making insurance companies.