The life insurance industry is on the cusp of a radical change and if it wants to survive, it must not only turn its present business model upside down but also think innovatively, says consultancy major Ernst & Young.
Following stringent new guidelines from sectoral regulator Irda, the 22 private life insurance players -- most of which are still deep in the red -- have to change their entire business model, be it in terms of their product portfolio, sales and distribution model or marketing, Ernst & Young India Partner for Financial Services Rohan Sachdev told PTI in an exclusive interaction here today.
"The private life insurers have to undo and unlearn whatever they have been doing all these years here if they want to remain in this business in this radically changed regulatory environment," Sachdev said, adding, "The success will depend on how a company sells, what it sells and how it services its customers."
Sachdev said IPOs by life players, which are expected to take place in the fourth quarter of this fiscal after Irda notifies the guidelines, will help these companies increase their embedded valuation, which is a method of valuing an entity on the basis of its prospective profit.
However, he warned, "An IPO in itself cannot help them cushion against the impacts of these changes, which will have serious implications on the bottomline of the players."
It can be noted that as of Q1, among the 22 private players, only SBI Life, Bajaj Allianz, Kotak Life, Shriram Life and ICICI Prudential were profitable. But Sachdev pointed out that even for these five firms, the profitability was mostly due to high lapsation money, which will not be possible under the new regulatory environment.
On September 1, sectoral regulator Irda notified the new norms for life insurers, with a thrust on unit-linked insurance products -- which were in the eye of a storm recently following a tussle between market watchdog Sebi and sectoral regulator Irda over jurisdiction -- to better protect policyholders from mis-selling by dealers and sparing them from huge commissions.
As per the new Ulip guidelines, the commission paid to distributors and expenses charged by insurers will no longer be front-loaded, but will be distributed over the lock-in period of the scheme, which has been upped to five years from three years previously.
In addition, Irda has fixed the floor for guaranteed returns from Ulip pension plans at 4.5 per cent and has imposed strict disclosure norms.
Pointing out that the most serious impact of the new guidelines will be on the capital management of the companies, as these norms demand that insurers report their financial numbers on the basis of their economic capital, Sachdev said the companies will have to drastically cut down on their distribution cost, which today constitutes a whopping 70 per cent of the overall expenses of the insurers.
Giving his opinion on the way forward for the industry, Sachdev said, "To tide over the current flux and remain in the business, the private players at the earliest will have to adopt an innovative approach in terms of product portfolio -- which is now heavily loaded to the tune of 85 per cent by Ulips -- distribution model and the very manner in which they sell their products now."
Stating that, "Ulips under the new regulatory regime cannot be sustained," he felt, "The Ulips are not going to be the flavour of the future. Products of the future will be traditional plans, regular participatory plans and universal life plans."
But Sachdev warned that unlike state-run LIC, the private players will find the going tough, as their product portfolio is heavily skewed towards Ulips.
On the sales and distribution front, Sachdev, who has been tracking the life sector for the past 14 years, including 10 years in Britain, said the most radical change that the companies will have to bring to the table "is a complete revamp of their distribution model."
Blaming the poor distribution model for the pathetic state of the industry, which is marked by low persistence and high lapsation rates, he pointed out that no company knows how to properly target their prospects now.
Faulting the industry for the high agent attrition, he said, "The domestic industry has the highest agent attrition among the large insurance markets in the world, with the average life span of a private life agency being a paltry nine months, which is way off LIC's or the global average, which is nearly 10 years."
"What's needed is changing the profiling of target customers," he said, adding that companies will have to adopt micro-targeting if they want to survive in the business now.
"Companies must not only segment their agents, but also customers. A better segmentation and alignment of customers, agents and products can really be the game-changer for the industry," he said.
