'Geo expansion, high growth led to losses'

ICICI Prudential Life Insurance Company has maintained its leadership amongst private sector life insurers ever since it launched operations seven years ago. Speaking to Falaknaaz Syed and Rajendra Palande, the life insurer's Managing Director , Shikha Sharma, talks about how the journey has been so far and also why she thinks unit-linked insurance plans are the best allocators of long-term funds. Excerpts:

How has your journey been so far as the head of a life insurance company?

I was involved in a lot of start ups. There is a lot of future growth in the market and it has been an exciting place to be in. Most interesting part of this (life insurance) business is that it is a high growth industry, which is changing at a fairly rapid pace.

There is a lot you can learn about consumer insights and managing large number of people. Life insurance is high growth market and it's evolving. So you can shift the market, evolve your strategies as you grow along.

Did you face any constraints at any point in the last seven years?

When we started, the base constraint was where to find the talent because the only insurance experience you could find was with LIC or internationally. Now, if you are trying to set up a different kind of a company then obviously you could not have started purely with LIC resources.

Today, there are a different set of challenges that have emerged in a competitive market with hyper growth. Therefore, you see a lot of talent movement. So from creating a talent pool, the challenge today is retaining and growing the talent pool. You need to make sure that you can hold on to your talent base and also design your processes in such a manner that you are able to operate in a high-attrition market place.

We have a very high retention rate of the best talent. Our attrition here is in single digit. The company's average attrition rate is slightly better than the industry at just over 30 per cent. The industry attrition rate is about 40 per cent.

What has caused people to shift from traditional policies and towards ULIPs?

I think two things have driven that shift. One is the demographic change that is happening in the country. We are a country which is seeing faster change than in other parts of the world. When that faster change happens, people like to plan for shorter cycles.

When I joined ICICI Bank in the project finance department, we used to do a 10-year cash flow, sometimes a 15-year cash flow, basically a very long-term loan. In a very deterministic model, we would see the tenure, other details and therefore would conclude that you can afford to give this much loan to the company.

Today, I don't think anybody would have the guts to do a deterministic cash flow model. You would only do a simulated scenario model and even there people would not dare to project the future. That is the reflection of how the world has changed.

So people go in for shorter-period insurance now?

People find it difficult to plan for more than three years at a time because the world is moving so fast. In that scenario, individuals also find it very difficult to plan for cash flow for a 10-year period.

They know that they will have savings need, expense need but it's very difficult to predict what your cash flows are going to be. Ulips did two things "" gave the flexibility of managing payments based on cash flows and also the ability to invest more in equities and capitalise on a booming capital market reflecting strong economic growth.

In Ulips, the policyholder decides where the money will be invested. When insurance sector was opened up, it was expected to provide long-term funds for infrastructure. Is that not a concern?

Actually it's a myth because you have a product that provides flexibility to the consumer. The industry was growing at 15 per cent a year, it's now growing at over 40-50 per cent, even if you leave out last year. The average holding period for a traditional plan is six years while it is 7-7.5 years for Ulips.

The first year lapse ratio for a traditional insurance plans is around 15 per cent, while it is 10""15 per cent for Ulips. If funds are staying for this long, they are available for long term investments.

Now, what is long term investment? Does it have to be a loan or can it be debt or equity? And, what is infrastructure? Is it roads or is it also steel plants? I think it's achieving some fundamental objectives. It is increasing the proportion of long-term savings that the country is able to target. I am a firm believer of market mechanism. So creating a long-term investment vehicle through a market traded investment is I think more efficient.

Your losses have increased?

Our losses have increased because of two reasons. Firstly, we increased out branches from 177 branches (two years ago) to 583 branches (last year). Secondly, there is a high strain when you write insurance business in India.

The reserving requirement in India is very conservative (read high). We grew at a fairly rapid rate last year. But if you look at our expense ratios, they have been declining. Last year the expense ratio was flat despite the huge investments we made in infrastructure. So the losses have not come because of any inefficiency issues but because of high growth. Our expense ratio last year was 13.9 per cent.

What will be the growth this year?

Last year, the growth rate was high for the already large industry. Sustaining that rate of growth will be tougher as we are operating from a much larger base. I expect us to have a significant growth this year but maintaining a 103 per cent growth will be difficult.

Today we account for 10 per cent of the market so we can grow faster than the market but not independent of the market. The growth rate will come down. But I think we will reap the investments last year in terms of giving us the growth momentum for this year.