Ten years ago, a survey had projected that the life insurance industry would see its premium income grow at a compounded annual growth rate (CAGR) of 18.9 per cent.
Growth has been much faster. From an annual premium income of Rs 21,581 crore in 1998-99, it reached Rs 2,21,688 crore last year, translating into a CAGR of 23.58 per cent. The Life Insurance Council estimates the current financial year would close with a total premium income – renewal and those from new sales – of Rs 2,55,000 crore, which means a CAGR of 25.16 per cent.
|AT A GLANCE |
|LIFE INSURERS PROFIT & LOSS |
|Insurers ||2007-08 ||2008-09 |
|SBI Life ||34 ||-26 |
|ICICI Prudential ||-1032 ||-577 |
|Birla Sunlife ||-437 ||-686 |
|Reliance Life ||-768 ||-900 |
|HDFC Standard Life ||-243 ||-502 |
|NET PROFIT/ LOSS FOR THE INDUSTRY |
|Pulic insurers |
|New India ||1401 ||224 |
|National ||163 ||-149 |
|United ||632 ||476 |
|Oriental ||9 ||-53 |
|Private players |
|ICICI Lombard ||103 ||24 |
|Bajaj Allianz ||106 ||95 |
|Reliance ||-166 ||-52 |
|Iffco Tokio ||7 ||3 |
|Tata AIG ||16 ||4 |
|Source: Council (Figures in Rs cr) |
While income grew faster than expected, most companies that have been in operation for seven-eight years missed the target to break even, as they focused on market share. Partly driven by the financial crisis and also because of capitalisation requirements, profit is the new buzzword for insurance companies.
While the management is pushing for profit, the promoters are eagerly awaiting passage of the Insurance Bill, which proposes to increase the ceiling on foreign investment to 49 per cent from 26 per cent fixed a decade ago. A higher foreign investment cap will help lower the burden on Indian promoters, as life insurance companies need to maintain a solvency margin of 1.5 times. So, for a business of Rs 100, they need to have Rs 150.
While the government also proposes to dispense with the requirement to mandatorily list after 10 years, some companies are also exploring the option of having more than one foreign partner.
"Broadbasing the equity should be preferred over hiking the foreign investment limit. There are issues relating to management control if the foreign investment limit is raised. The whole metrics have changed and valuation will be influenced by new business income. The foreign partner of the top five insurance companies will benefit by initial public offers (IPOs). Depending on the financial performance of insurers, the Insurance Regulatory and Development Authority (Irda) and the Securities and Exchange Board of India (Sebi) will allow insurers to list," said Ashwin Parekh, a partner at consulting firm Ernst & Young.
Meanwhile, for the management of insurance companies, belt tightening is the order of the day. Companies are renegotiating rents, closing unprofitable offices, asking employees to switch off electricity before they leave and office stationary comes at a premium.
Private life insurers are focusing on rationalisation of sales force and consolidation of infrastructure. In addition, they are trying to retain old customers.
So far, only a handful of the new generation players such as SBI Life, Bajaj Allianz, Kotak Life and Sahara Life have managed to breakeven. But even they have been inconsistent, partly due to the vagaries of the stock markets, since unit-linked plans account for most of the sales.
SBI Life was the first life insurer to turn profitable for the yearended March 2006, but reported a loss last year. What has helped the SBI-Cardiff joint venture is the low cost of distribution. Unlike others, which get 20-25 per cent business through the bancassurance route, SBI Life piggybacks the 15,000-odd branches of State Bank of India and its associates.
With companies focusing on profitability, expansion has nearly come to a halt for the moment. Insurers have shifted their attention to channel productivity and carving out new distribution relationships. Over the last 12-15 months, insurers have either reduced the number of branches or not added any, resulting in an addition of 86 branches across an industry with 22 players.
"If companies are not making profits after eight or nine years of operations, it’s high time they look at profitability," said Kamesh Goyal, country manager, Allianz.
Wiser by the experience of the older well-entrenched players, the newer players are moving with caution. "We are going into smaller towns, mainly Tier- II and III, and we find the same business volume as in urban areas. In order to differentiate themselves, companies will have to focus on one distribution channel, one product type and a particular geographic segment. We will be focusing on pulling out excess cost, will set up branches carefully and make use of technology more," said Kapil Mehta, managing director and chief executive officer (CEO), DLF Pramerica Life Insurance, which is looking to break-even in eight to 10 years.
The story is much the same in the general insurance segment. While the general insurance companies started reporting profits several years ago, even they are focusing on making risk underwriting more profitable. So discounts, the main element of their strategy post-detariffication, are a dirty word now. Covers such as group health insurance, which were offered free with fire and engineering policies, are suddenly being withdrawn to ensure profitablility.
"The key challenge is to ensure robust underwriting practices with right underwriting practices," said ICICI Lombard Managing Director and CEO Bhargav Dasgupta.
"Competition between private and public players is good for the industry. The challenge for the industry is to bring in innovative covers at affordable prices and sell through innovative channels," added General Insurance Council Secretary General S L Mohan.
Compared to life insurance, the non-life industry is less capital intensive. With only 0.06 per cent penetration, it is still a challenge for the industry. Since the pressure on capital is less, there is less pressure on the Indian promoters to sell or to tap the markets.
There are players who are just beginning to offer stake in companies or exit. But that’s a different story that would unfold over the next three years, said insurance company executives.