Insurance companies to again cut costs

After a tough quarter, insurance companies are going through a second round of cost rationalisation. A number of private sector insurers are planning to cut costs, as much as 20 per cent, in the next few months.

The first move being planned is closure of branches in not-so-productive areas. Life insurance officials said many companies were looking at reducing the number of branches by 5-10 per cent because of high maintenance costs. “In the current environment, we need the rupee to produce more,” said V Srinivasan, chief financial officer, Bharti AXA Life Insurance.

In addition, the salary structure of agents and managers is being changed. “Senior sales persons will be moved from a salary-based model to one based on commissions, as most of them have a high fixed pay component,” said another head of a life insurance company, adding the proposal was already with the top management.

The first round of cost-cutting took place last September, when the new guidelines on unit-linked insurance plans (Ulips) were implemented. Many companies had then reduced the number of agents. The second round is coming because collections have slipped. The industry recorded a decline of 20 per cent in collections on a year-on-year basis as on December, according to data from the Insurance Regulatory and Development Authority (Irda).

“Most companies are preparing to lower costs to be maintain margins, if not grow it. More such moves will be introduced in the coming days,” said a senior executive of a private life insurance company.

The variable cost model will be introduced in many cases. “The industry has been struggling and this may continue for at least another year. Only LIC (government-owned Life Insurance Corporation) is growing and can sustain its current cost structure,” said an actuary of a private life insurance company.

Companies say there are fewer Ulips in the market. And, only a few pension plans. “In the absence of many pension products in the market, we are losing around 30 per cent revenue,” said G N Agarwal, chief actuary, Future Generali Life Insurance.

At the meeting of the Life Insurance Council on January 19, the industry had reiterated that pension products should be more flexible, as with the September guideline of a minimum return of 4.5 per cent on these. “Customers are unwilling to buy a product that (only) guarantees a low return,” said S B Mathur, the chairman of the council.