New business shrank last year but ICICI Prudential Life Managing Director and CEO Shikha Sharma says that there are some signs of revival and premium from new sales will grow this year. She tells Shilpy Sinha that the country’s largest private life insurer intends to focus on consolidating its business as it works towards a break-even over the next 12-18 months. Excerpts:
Last year, you saw a fall in new business. Did you anticipate it and how do you look at 2009-10?
We had anticipated a slowdown in the economy, but we did not expect a negative growth. The industry has seen negative growth and our performance was also in line with the industry. But consumer sentiment is coming back. Companies have also adjusted to change and have come up with new products, which are more relevant for this market. This year will see positive growth. with the markets going down, there was a fear factor. There is an economic uncertainty and people don’t want to commit to long-term savings instruments. Banks were also offering high deposit rates.
Last year, you did not expand since you had added a large number of branches in the previous year. Do you still have excess capacity?
Normally, it would have taken 12-15 months to digest the capacity. But now, it would take us two to two-and-a-half years to absorb it. We will look at expansion next year. In terms of the medium- to long-term target, we started a rural and health pilot last year and these are doing very well. Our focus will be on operating efficiency, on productivity of sales force and this is a good time to build the capabilities required. While we will grow in line with the market, it is important that we are efficient.
Do you need more capital?
We will need capital for building infrastructure and provide solvency margin for new business that you write and for funding strain. We will need capital as we write new business.
When will you break even?
It depends on how business pans out. We would see an expense break-even in another 12-18 months. The change in product structure also changes the capital needs. It is important to focus on the expense ratio, new business margin, embedded value and stat (statistical) loss. Our expense ratio had gone up to 14.9 per cent when we were doing massive expansion. Now, it has come down to 14 per cent.
So, should we expect a listing after 18 months?
A break-even is not something that investors are looking at. The important things to look at are things like expense ratio. There are a few things, which are constraints. One is the state of the markets. Unless the 26 per cent foreign investment cap is increased to 49 per cent, we cannot get a lot of FII participation.
With the government looking to do away with the mandatory listing clause, does it still make sense for you to list?
There is some ambiguity on whether you have to list in 10 years, or whether you can list after 10 years. If the clause is done away with, then a listing will happen if it makes sense for promoters to list. We have a strong parent, so we have the ability to bring the required capital. It’s going to be more a function of does the market want to see a separate valuation for the life insurance company?
Why has it taken insurers longer to break even?
People did not anticipate this kind of growth. In terms of market share, it was expected that the private sector will get 40 per cent in the first 10 years, but we are already at 60 per cent. The big changes are really on the top line. Inflation has gone ahead of what we had had expected. Attrition has gone ahead of what we have expected. But these are smaller aspects.
With so many players, will it be like mutual funds where there are five-six large players and the others are also-rans? Do you see consolidation?
This is a testing period and, if it lasts for two years, it will separate the industry. The industry structure will be like five-six big players and a number of smaller players who decide to stay. You cannot afford to hang in there since this is a capital-intensive industry. That should drive consolidation.
So does it make sense for a large player like ICICI Prudential to buy firms?
It depends on who the seller is. If I am going to get some synergy – either to get a scale benefit or a new distribution franchise or phenomenal brand or serious capability – then it makes sense.
How will a risk-based capital help?
There are capital requirements for different products with and without guarantee. It will take into account what types of assets you are investing in. It will help differentiate, based on the type of asset and type of liability. Right now, Irda has to prescriptively ask you to load and to do weight adjustment. But it will take time. Also, there is the issue of capital lightening so that there is access to subordinate debt.
What about other areas, especially product approval and clearance of ads?
We are waiting for the distribution committee recommendations to be implemented. That will allow some new channels to come up. The industry has not displayed the maturity that it needs to. Also, there is enormous competition, so Irda does not want anything to happen where they have to go for a reversal.
There is talk of you moving out…
I do not want to comment on the issue.
