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Look beyond surrender value rules as growth healthy for life insurers

There is some post-Q1FY25 guidance on growth and margins as follows: HDFC Life targets doubling VNB in four years and hopes to outpace the industry in retail APE (annual premium equivalent) growth

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Devangshu Datta
4 min read Last Updated : Aug 22 2024 | 10:47 PM IST
Private life insurers have performed well in the April-June quarter (Q1) of 2024-25 (FY25). But new surrender value regulations will trigger changes in the way the industry functions. Given higher payouts, insurers are likely to focus on persistency and they must cope with likely adverse impact on VNB margins (VNB is value of new business).

Apart from focusing on customer acquisition with high persistency levels, they will have to review the higher-upfront commission structure to encourage persistency, by increasing trail commission. They will also have to review non-par product IRRs (internal rate of return) and consider new offers like loan on insurance to address customers’ cash flow needs.

HDFC Life expects a gross impact of 100 bps on VNB margin due to higher surrender value on early exits. ICICI Prudential Life has already experimented with trail/level commission structures in products and is looking to modify commission structures. Non-linked business is about 20 per cent which will mute impact.
 
Max Life expects impact to be in the range of 100-200 bps and is working towards mitigating this impact with restructure of distribution commercials, and realigned maturing and surrender propositions.


 

SBI Life’s management does not expect much impact on margins given its ULIP driven product mix. No change in commission structure is expected.

There is some post Q1FY25 guidance on growth and margins as follows. HDFC Life targets doubling VNB in four years, and hopes to outpace industry in retail APE (annual premium equivalent) growth. ICICI Pru Life’s management hopes to outperform industry growth in FY25 while maintaining VNB growth in line with business growth according to earlier guidance. Max Life has guided for VNB growth in the mid-teens. SBI Life is targeting APE growth in the high teens to 20 per cent with 28 per cent VNB margin.

The Q1FY25 is boosted by a base effect but even on a 2-year CAGR basis, players have grown individual APE by 13-26 per cent. Managements are guiding for a mid-to-high teens growth in FY25, and given a strong July, analysts are upgrading APE estimates for FY25.

Insurers have focused on ULIP as a category to drive growth since capital markets have done well and higher ticket traditional products are being hit by changes in taxation.

New products and funds in the ULIP space will capitalise on strong stock-market trends. There has been a positive impact on sum assured driven by growth in retail protection and higher attachments of riders in savings products.

The individual weighted received premium (WRP) for private players grew 22 per cent year-on-year (YoY) in Jun’24 (a three-year CAGR of 19 per cent). For the industry, individual WRP grew 18.9 per cent YoY in Jun’24 (a three-year CAGR of 14.3 per cent). For FY24, private players grew 8 per cent YoY. 

Among listed players, HDFC Life (including Exide merger) grew 34 per cent YoY, SBI Life grew 18.3 per cent, Max Life and ICICI Prudential Life grew 22.2 per cent and 27.8 per cent respectively, while Bajaj Allianz Life grew 35.2 per cent YoY in Jun’24. Individual WRP for LIC grew 12.7 per cent YoY while it was flat in FY24 compared to FY23. In terms of WRP, LIC's market share dropped to around 32 per cent with SBI Life as the largest private player with 7 per cent share. The combined market share of the listed private players – SBI Life, HDFC Life, ICICI Prudential Life, and Max Life – accounted for 58.6 per cent of the private insurance industry.

Changes in the surrender policy will cause volatility in premium growth through H2FY25.

However, the strong performances and the fact that these changes will ultimately make insurance more attractive to customers should drive growth in the medium-term.

Stocks of HDFC Life and SBI Life hit 52-week highs on Thursday, while ICICI Prudential Life’s stock did so on Wednesday.

According to Bloomberg, most analysts polled in August are positive on these four stocks—10 out 11 in case of HDFC Life, all 11 for SBI Life, 7 of 10 for ICICI Prudential Life and 14 of 16 in case of Max Financial (listed parent of Max Life). However, one-year target prices suggest limited upside of 5-7 per cent, except in the case of Max (16 per cent).

Topics :HDFC Life InsuranceLife InsuracnceICICI Prudential Life InsuranceInsurance sales

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