Q3 results preview: Irdai's revised norms to weigh on life insurers' margin

Higher claims and operating expenses to impact non-life insurers' combined ratio

Implementation of new surrender value norms, higher acquisition costs, and pricing pressure in group term insurance are expected to weigh on the margins of listed life insurers in the December quarter of the current financial year (Q3FY25).

 

According to analysts, the revision in goods and services tax (GST) rates mainly for retail term and health insurance, potential changes in bancassurance regulations, amendments to the Insurance Act, and changes in personal and corporate income tax will be the key factors to watch out for the insurers.

 

Insurance companies now have to pay higher special surrender value to policyholders after the completion of the first year as per the revised surrender value, which was implemented from October 1, 2024. The insurers had to file the products as per the new norms. This has brought a host of changes, including discontinuation of certain products.

 

The industry is also likely to witness a slowdown in sales through the bancassurance channel, which is likely to affect the margins of the insurers. The value of new business (VNB) is the measure of profitability in life insurance, analysts said. 

 

“On the VNB margin front, the implementation of new surrender regulations is likely to put some additional pressure, amid already moderating year-on-year (Y-o-Y) margins, due to product mix changes, higher acquisition cost, and pricing pressure in (group term insurance) GTI,” analysts at Emkay Global Services said.

 

Analysts expect SBI Life — the largest private sector life insurer — to report a drop in VNB margin to 25.8 per cent in Q3FY25 from 27.4 per cent in the year-ago period. In Q2FY25, SBI Life’s margin stood at 26.9 per cent.

 

Similarly, HDFC Life Insurance’s margin is likely to see a drop to 24.2 per cent in Q3FY25 compared to 26.8 per cent in the year-ago period. In Q2FY25, the VNB margin stood at 26.3 per cent.

 

Max Life’s margin is expected to decline to 24.1 per cent in Q3FY25 from 27.2 per cent a year ago. In Q2, its VNB margin stood at 23 per cent.

 

On the other hand, ICICI Prudential Life Insurance’s margin is expected to increase to 23.4 per cent from 22.9 per cent last year as it is better positioned compared to its peers in terms of dependence on the parent bank for sales via banca channel, and new surrender regulations among others. In Q2FY25, its margin stood at 23 per cent.

 

Meanwhile, state-owned Life Insurance Corporation (LIC) of India’s VNB margin is expected to drop to 13.6 per cent due to fire sale in September and discontinuation of smaller-ticket products after the revised surrender value norms, causing a decline in retail annualised premium equivalent (APE). In Q2FY25, its margin stood at 17.9 per cent.

 

Separately, the non-life insurers are likely to see an impact on their profitability, measured by combined ratio, due to higher claims and operating expenses for multi-line insurers and higher claims ratio for standalone health insurers.

 

“While there is no change in operational efficiency of insurers, the change in accounting for long-term health policies will result in elevated operating expenses (opex) ratios. Loss ratios are anticipated to remain elevated, especially in the health segment,” analysts at Motilal Oswal said in their report.

 

Also, due to muted new vehicle sales in the country and no revisions in motor third-party premiums, premium income of general insurers is likely to get impacted.

 

According to Emkay’s estimates, in Q3FY25, the combined ratio of ICICI Lombard is likely to be at 103.6 per cent compared to 103.9 per cent last year. Its combined ratio in Q2FY25 stood at 104.5 per cent.

 

Star Allied & Health Insurance is expected to report a flat combined ratio at 100.5 per cent in Q3FY25 from 97.8 per cent in Q3FY24. Further, the recently listed GO Digit is expected to see its combined ratio at 111.1 per cent from 110.3 per cent last year. Its combined ratio was 105.4 per cent in Q2FY25.