Mumbai: Shikha Sharma, managing director of ICICI Prudential Life Insurance Co. Ltd, or ICICI Pru, admits that there is a slowdown in the insurance business, but adds that she is not surprised by it. According to her, the company’s business plan for the current year took into account “a definite slowdown in growth”.
Optimistic outlook: The insurance industry has plenty of scope to grow in the 15-20% range in the medium term, says Sharma.
“At that time, many of our competitors had thought that I had gone bananas. If the markets are stabilizing and most of the product innovation is done, it’s obvious that there will be a moderation in growth.”
Sharma isn’t willing to discuss media reports about her exit from the ICICI group and says, “There is nothing to talk about as of now.” “I have never planned my future. I just take things as they come.’’
In an interview with Mint, Sharma spoke on the impact of the global slowdown on the insurance industry in general and ICICI Pru in particular. Edited excerpts:
With the stock markets in a bear phase, is it right to say that unit-linked insurance products (Ulips) have lost their significance, thereby impacting the growth of private insurers?
The industry has seen a negative growth of 6% as of December, but one needs to understand that this is a long-term business. Since 2000, when the sector opened up, it has been growing at 30-40% every year and it’s not a small market. In a large market, this rate of growth is not sustainable.
Also See Gaining Momentum (Graphic)
When we were working on our business plan for the year, we had planned a definite slowdown in growth. At that time, many of our competitors had thought that I had gone bananas. If the markets are stabilizing and most of the product innovation is done, it’s obvious that there will be a moderation in growth. It is a mass market, but it’s still an underpenetrated market and so there is (an) opportunity.
Our medium-term outlook is that the industry has plenty of scope to grow in the range of 15-20%.
As far as Ulips are concerned, the customers have benefited from a booming equity market. Why will an educated customer choose an endowment product over a Ulip? This is because it offers the much-needed flexibility. If you look at it as a long-term investment option, Ulips will continue to score (over endowment products).
Ulips are here to stay. There may be some correction, but there will not be a wholesale migration.
The asset allocation pattern has changed. Last year, about 80% of new (funds) flow was going into equity. Now, 60% of the incremental (funds) flow is into equities. That’s what Ulips allow. However, the proportion of Ulips in our portfolio has not gone down. Private insurers’ market is a Ulip-dominated market and it will continue to be so.
We do not expect negative growth this year, but there could be single-digit growth and, as market begins to turn, the customers will come back. We have to manage cost and conserve capital and stay invested.
How has the group insurance business grown?
The group insurance business has been growing steadily at around 10-15% annually. It has become a much more competitive market. There is no easy margin matrix for the industry. In a competitive market, expenses have gone up as players are investing in branch expansion and spending on advertising. To that extent, the margins have been squeezed.
Have you lost market share in the group insurance business?
We have grown our group business. We would like to forego business if it comes at a price that we cannot afford. In the group market, that’s always the case. Whenever a new player enters, there’s (a) pricing war.
So, what are you doing to keep growing?
One has to get the momentum back. First, we have reoriented the sales team and distribution. Second, we have always had a capital guarantee product and (we have now) launched a return guaranteed, fund-based product. In past 18 months, we have started selling health insurance products. Besides, we are also covering the rural market.
Health policies now account for 20% of our incremental policies. Here, the ticket size is smaller, but there is risk and so margins are high.
Many financial services businesses are slowly moving to rural geographies. What does this mean for ICICI Prudential?
When we started our rural business, it was to meet the obligatory requirement (that all private insurers had to meet). We were working with cooperative banks and microfinance institutions. About 50% of India’s population is still in rural areas, but the challenge is to reach out to those markets in a cost effective way.
We have 1,000 micro offices and each of them has only one employee, with technology playing an important role. We offer the same products suites in rural pockets that we offer elsewhere. We are selling many education insurance products. Rural policies account for about 8% of our total business.
The rate at which you have been adding branches has slowed.
We have had a massive branch expansion in the last two years. Last year alone, we opened 1,500 branches. We may not need to add branches for the next six-eight months.
What’s your outlook for the insurance sector? Isn’t it likely to be hit hard by the downturn?
I don’t share your pessimism. There has been a big correction and we are in the middle of the cycle. Six months down the line, we should have a good government in place and, following the implementation of the fiscal packages, things should look up.
India has some inherent strengths, which can enable a revival. We have a huge opportunity to build the infrastructure at low cost as the commodity prices have come down. There are a lot of positives in the economy.
Are you concerned about your investments in the equity market?
We deploy our funds, depending on the asset classes that our consumer have invested in. We had an exposure to Satyam (Computer Services Ltd), which we sold in the market.
We have always followed a conservative investment hypothesis and all our funds outperform the benchmark (indices). We do not invest in speculative stocks. (The) Satyam (scam) could not be anticipated by anyone, but we were able to absorb the shock because of our diversified portfolio.
ICICI Pru has been appointed as one of the pension fund managers under the new pension scheme for the unorganized sector. What’s your plan in the business?
We see huge potential in the pension space. There will be increased clarity on regulations once we move along.
When do you see ICICI Pru breaking even?
It will take another two years.
What’s your views on increasing the ceiling on foreign direct investment in the insurance sector?
Opening up of the insurance sector will attract foreign flows, which will be good for the economy. Insurance is a capital-intensive business. I am sure that the sector will be able to attract capital even now, though the valuations may be different in depressed markets.
Graphics by Sandeep Bhatnagar / Mint