Covid-19: Life insurers to bite short-term bullet for future growth

Covid-19 and the subsequent lockdown will adversely impact life insurers in the short term. However, with a likely change in consumer behaviour and rise in demand for pure-protection products, the medium-term impact may turn out to be positive.

“Based on past regional experiences, it has been observed that such pandemics provide a fillip to protection and guaranteed products. We foresee some shift towards such product forms that are healthy from a margin perspective,” said Prashant Tripathy, managing director (MD) and chief executive officer (CEO), Max Life Insurance.

Covid-19 is expected to result in improved awareness and importance about life insurance as a risk cover, rather than an investment product, and this will propel the overall life insurance penetration.

“The last quarter of the year is quite significant for life insurers, and with the sudden lockdown in place, there was an impact on new business. However, the impact on profitability will be relatively less, as the product mix shifts more towards protection. I believe these are short-term hits and the need for insurance may be felt much more intensely in times of uncertainty,” added Tripathy. 

After the severe acute respiratory syndrome (SARS) outbreak in 2003, there was sharp uptick in new business sales in Hong Kong due to increasing demand for protection, according to Macquarie Research. It expects the same positive demand shift for life insurers after Covid-19.

According to ICICI Securities, life insurers stand to gain from increased demand for term insurance to offset weaker demand for linked savings products.

In fact, Santosh Agarwal, chief business officer (life insurance) at PolicyBazaar, says there has been a rise in demand for pure-life insurance, which has grown 30 per cent (mainly due to online capabilities).

What would also support demand for protection products is the new lower tax regime, under which taxpayers have to forgo exemptions. Many experts/analysts believe that since the new regime lowers the attractiveness of life insurance as an investment product, demand for protection products — which are priced relatively lower — could rise.

An extended lockdown, social distancing, and lower contribution of digital channels (3-4 per cent of overall business) are expected to hamper new business of life insurers in the near term.

“Existing business would continue, but new businesses would suffer, at least for the next nine months. This will hurt life insurers’ overall value,” says Ashvin Parekh, MD, Ashvin Parekh Advisory Services.

“The present environment will push the demand for insurance products. We expect a substantial hit on new business premiums,” said the CEO of life insurance company. 

The lower new business premium, in turn, will hurt the value of new business (VNB), which is a key performance indicator of a life insurer. Thus, the insurance premium data for March 2019 will be crucial.

Not only VNB, the impact could also be there in terms of persistency, with a likely delay in premium payment. 

Even during SARS, the persistency ratio in Singapore had declined significantly and remained weak for two-three years, according to a report by Kotak Institutional Equities. 

In fact, given the market volatility, some industry experts believe existing policyholders may surrender their unit-linked insurance policies. They see a good change in product mix over the medium term.

Avinash Singh, analyst at SBICAP Securities, says: “Life insurers will see near-term pressure on VNB, owing to sluggish new business growth. However, the overall margin should be broadly stable, as high-margin protection should continue to outgrow savings.”