Mumbai: As the cost of expansion by writing new policies erodes profitability, private life insurance companies are tweaking their business model to focus on renewal premiums rather than market share.
“There was a tremendous focus on top line (sales) growth earlier,” said S.B. Mathur, secretary general of Life Insurance Council, an industry body of life insurers. “They have now realized that focusing on renewal premium is essential to attain break-even.”
Expanding revenue: A branch of Birla Sun Life Insurance in Mumbai. Private life insurance companies had expanded their distribution channel aggressively over the past few years for a bigger market share. Ashesh Shah / Mint
Selling a new policy to expand revenue involves large initial costs, known in the industry as new business strain, and insurers typically make profits off renewal premiums, paid when the policy is due for renewal.
India has 22 life insurance companies, including state-run Life Insurance Corp. of India Ltd (LIC), the country’s biggest.
In the June quarter, total renewal premiums for the industry grew 17.5% to Rs32,750 crore from Rs27,870 crore a year earlier, according to data provided by Life Insurance Council.
Single-premium business grew 13% to Rs5,580 crore and that from regular premiums declined by 8.4% to Rs8,838 crore in the same quarter. Regular premium is the money paid as premium over the life of an insurance policy.
“Focus on profitability, persistency and renewal premium is important to attain break-even. Selling long-term policies will help achieve this,” said Puneet Nanda, executive vice-president, ICICI Prudential Life Insurance Co. Ltd, the country’s largest private sector life insurer.
The company’s total premiums rose 13% to Rs15,356 crore in the last fiscal, with renewal premium income increasing 61% to Rs8,872 crore. New business premiums fell 17% to Rs6,592 crore in the same period.
The company’s expense ratio, or the ratio of operating expenses to premiums, dropped to 11.6% during the quarter ended June from 14.5% a year earlier.
According to a report by Edelweiss Securities Ltd, co-authored by Vishal Goyal and Vivek Verma, operating expense as a percentage of premiums varies between 10% and 40% for insurers, and is the biggest determinant of profit.
Companies with lower operating expense ratios have the ability to offset negative variations of persistency, a measure of the policies that remain valid.
Insurers have now introduced front-loaded policies, charging a higher amount in the first year, to reduce new business strain and lower persistency risks.
Private insurers are also steering away from single-premium policies that generate lower value.