Focused on scale, India’s private life insurers give low returns

As the Indian insurance market matures, it will likely erode insurance companies’ capacity to generate returns based on asset management rather than managing liabilities


A rebound in returns in the sector during 2011 and 2014 was mainly due to policy surrenders and lapses of ULIPs and a drop in cost of acquiring new business as incremental business fell. Photo: iStockPhoto
A rebound in returns in the sector during 2011 and 2014 was mainly due to policy surrenders and lapses of ULIPs and a drop in cost of acquiring new business as incremental business fell. Photo: iStockPhoto

Mumbai: India’s private life insurance companies have delivered returns far below cost of capital, destroying investor wealth for nearly a decade now as they continued to focus on building scale instead of selling high-margin protection products, a study by global research firm McKinsey & Co. said.

“Unlike other markets, however, growth in India’s life insurance industry is correlated more closely to equity market performance than rising GDP. And profits remain elusive: for more than a decade, the private industry has delivered overall returns far below the cost of capital and even below the returns in other Asian markets,” the consulting firm said in a report dated 20 January.

According to McKinsey, a rebound in returns during 2011 and 2014 was mainly due to policy surrenders and lapses of unit-linked insurance policies (ULIPs) and a drop in cost of acquiring new business as incremental business fell.

“The industry’s negative returns are no surprise, since most Indian private life insurers have chased volume by building large sales forces with significant fixed cost infrastructure and who focus on selling low-margin ULIPs,” the report said.

Not only are the private life insurers failing on returns, the gap between the leaders and laggards is massive compared with other markets. The top three insurers grew their surplus by an average of more than 25% between 2002 and 2013. “McKinsey research into value-creation amongst the 15 largest insurers in the market reveals an 81 percentage point spread in book value growth between the top and bottom performers,” the report said.

McKinsey warned that as the Indian insurance market matures, it will erode insurance companies’ capacity to generate returns based on asset management rather than managing liabilities. Indian life insurers focus heavily on managing investment based on their efforts to prop up their revenue instead of managing liabilities.

“We believe that in the next decade life insurers carriers in India will create value consistently only by mastering liability management: pricing and selecting risk more wisely, designing more protection products and building the distribution skills to sell them,” said McKinsey.

The firm points out that tie-ups with banks for bancassurance—the sale of insurance policies through bank branches— was the biggest value creating channel for insurance companies. In 2015, more than 55% of new business premium was won through bancassurance while sales through the agency channel only amounted to 28%.

To generate more value and increase returns, life insurance companies should find specific and small geographies for business, concentrate more on protection plans, lower costs by adopting digital tools and build risk management skills.

“As affluence rises, demand for protection, pensions, annuities and long-term care products will provide significant opportunities for growth,” the report said.

New business premiums from sale of individual annuity and pension products have grown by 30% per annum during the period between 2013 and 2015.

In the initial years, long-term products were being sold to customers and in such cases there is an upfront cost incurred. But if the payment does not continue for the initial committed tenure like 15 or 20 years, it has led to lower returns in the later years,” said Sampatth Reddy, chief investment officer at private life insurer Bajaj Allianz.

Reddy added that business generation from bancassurance channel has increased manifold and would continue to drive growth here on.

“The business model has now shifted to bancassurance channel,” he added.