The insurance regulator, Insurance Regulatory and Development Authority (Irda), has just released the norms for initial public offers (IPOs), but insurance companies are hardly queuing up for listing.
The industry is seeing a decline in new business premiums, which reflects waning risk appetite (for market-linked investment policies like unit-linked investment product) and poorly incentivised distribution set-up and is stuck between regulatory flux and recalcitrant markets. This translates to prospects of unexciting valuations in a poor market environment.
Valuations for life insurers include the embedded value of its assets and in-force business as well as goodwill or structural value. The structural value is the ability to generate future stream of profitable new business and is a function of new business premium growth projections and a company's expected profitability.
Consequently, Amitabh Chaudhry, CEO, HDFC Life, points out that new business margin is the biggest driver for life insurance valuations. This, he clarifies, can be loosely explained as the ability to deliver a certain absolute volume at a certain cost of acquisition. It therefore keeps the spotlight on new business premium growth with allied emphasis on efficiency of distribution and operations.
New business premium volumes have fallen 21% year-on-year for the 12 months to September 2011, as per data from the regulator. Volatile equity markets have hurt risk appetite and demand for savings products, especially ULIPs, offerings from life insurers. Historically, ULIP sales comprised 90% of new business premiums and private insurers saw phenomenal growth in a dizzying market share chase, attracting several new entrants resulting in 23 players in the pool.
Since then the industry has turned full circle with LIC dominating again. While private players have seen a 26% year-on-year decline in new business (first year premiums) for the 12 months ended September 2011, LIC's new business growth has contracted by a lesser 19.6%. The main reason of course was the controversy over Ulips and subsequent higher protection mandate on these products.
So the shift to traditional products has started. ULIPs are about 65% of the business mix of HDFC Life today, from 75% of the portfolio in 2009-10 and 87% in 2010-11. ICICI Prudential also has a similar mix of 65:35 between ULIPs and traditional policies according to Puneet Nanda, ED, and both companies expect to maintain this ratio going ahead.
There is limited scope for much innovation or differentiation in product design, says Ashvin Parekh, Partner and National Leader, E&Y, with demand for investments and savings products making up about 80% of the market. Unavailability of underlying financial assets to provide required yields and market volatility across asset classes have made insurers reluctant to focus on return based products, he adds. Finally, the tighter regulations further reduce scope for differentiation and most changes in product design are driven by regulatory changes, says Anil Sahgal founder of online financial advisory website, i-save.com.
Key innovations include the introduction of health insurance with insurers adding riders like accidental death and critical illness to products but it hasn’t made much of an impact yet, says Sahgal. The recent change by the Irda allowing insurers to offer an option to guaranteed returns of 4.5% for pension products through capital protection could drive some new product offerings, says Gupta of PWC, as will newer ULIP policies compatible with regulations after current ULIPs die a natural death. Given the cap on distribution charges for ULIPs, the higher investible proportion of the first year premium makes it a very attractive proposition for policyholders, he believes but cautions that lower distributor incentives will limit sales and product offerings.
Distribution issues
While most insurers blame the demand implosion to market volatility, it is clearly complicated by the regulatory shift in incentives from commissions to fee-based. While Parekh of E&Y and Nanda of ICICI Prudential believe the capping of charges is good for the industry from a longer term perspective, both agree that this will be painful in the near to medium term. The incentive structure has also rewarded volume chase without discouraging mis-selling or encouraging policy servicing affecting policy persistency. Parekh feels that the regulator should allow dynamism in compensation to punish lapsation and reward performance.
Cost Focus
Given the growth pressures, cost management is becoming significant and the focus on profitability is evident, says Parekh. Agent productivity and efficiency is a thrust area and could be a major differentiator and companies are actively reducing agency force to focus on productive agents.
Max New York Life has seen a 8 times rise in net profit to Rs 373 crore in first half of FY12 with operating costs (including commissions) down from 42.9% of total premiums to 31.7% boosted by a stellar agency efficiency performance. HDFC Life and ICICI Prudential have tracked a lower performance with HDFC’s numbers partly due to an agency force expansion after adding 1,500 people since April.
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HDFC Life CEO Chaudhry points out that the company is focusing on cutting costs by linking incentives to sales and reducing commissions. He adds that excluding commissions operating costs are down 32% year-on-year in the first half of FY12. The company reported profit of Rs 21 crore in the first half of FY12 against Rs 65 crore loss in the same period last year. In the same period, ICICI Prudential reported a net profit of Rs 689 crore compared to a Rs 101 crore loss in the year ago period.
| First Year Premium of Life Insurers | |||
| In Rs crore | 12 months to | %chg | |
| Sep - 2011 | Sep - 2010 | ||
| SBI Life | 2,453 | 3,172 | -22.7 |
| ICICI Prudential | 1,916 | 3,016 | -36.5 |
| HDFC Standard | 1,462 | 1,636 | -10.6 |
| Bajaj Allianz | 937 | 1,511 | -38.0 |
| Max New York | 841 | 969 | -13.3 |
| Birla Sunlife | 802 | 1,052 | -23.8 |
| Reliance Life | 674 | 1,410 | -52.2 |
| Tata AIG | 470 | 626 | -24.8 |
| Kotak Mah. Old Mutual | 414 | 538 | -22.9 |
| Canara HSBC OBC Life | 309 | 364 | -15.2 |
| Aviva | 301 | 328 | -8.4 |
| Met Life | 271 | 307 | -11.9 |
| ING Vysya | 266 | 274 | -2.8 |
| Star Union Dai-ichi | 256 | 227 | 12.8 |
| IndiaFirst | 252 | 236 | 6.9 |
| Shriram Life | 185 | 268 | -30.7 |
| IDBI Federal | |||