New Delhi: Success can sometimes hurt, as promoters of most Indian life insurance firms are discovering. Soaring policy sales are forcing insurers to dig deeper into their pockets to boost capital so they can cover related costs and underwriting risk, delaying their payback period.
Fresh business, or first year premiums, in the sector grew by 23.31% to Rs92,989 crore in 2007-08 from a year ago. In the two preceding fiscals, business had grown even faster at 94.96% and 47.94%, respectively, according to a report by the Insurance Regulatory and Development Authority, or Irda.
“The payback period has stretched to around 12 years from the seven years assumed when the insurance industry was opened up to competition in 2000,” says Sanjay Aggarwal, national industry director, financial services, at consulting firm KPMG.
High growth rates mean a significant part of a private firm’s portfolio is made of early-stage policies. In India, expenses for both a life insurer and the insured are front-loaded, with a big chunk of premium in the first year going towards writing off distribution costs such as an agent’s commission.
The returns for an insurer come after a few years when the expenses shrink.
According to Satyan Jambunathan, senior vice-president and head-finance, ICICI Prudential Life Insurance Co. Ltd, around eight years ago when the industry opened up, plans were made assuming that the growth would be 30-40%. In the recent past, however, fresh business grew faster, sending profitability projections haywire, he says.
Parliament in 2000 dismantled the monopoly of Life Insurance Corp. of India and opened up the sector to private firms and joint ventures with foreign firms, whose holding was limited to 26%. The growth of private insurance has accelerated after a slow start.
“The market has evolved differently from what was anticipated. No one thought life insurance firms would be able to extend distribution reach to this extent,” says Vimal Bha-ndari, country head, India, Aegon NV, the Netherlands-based insurer that has applied to Irda for a licence to start a business in the country.
Aegon is partnering Bennett, Coleman and Co. Ltd (BCCL), publishers of The Times of India and The Economic Times, and Religare Enterprises Ltd to start its local operations.
The regulator requires life insurance firms to maintain a 150% solvency margin, or the excess of assets over liabilities. The margin indicates how prepared a firm is to meet unforeseen requirements. To meet the regulation, insurers have to build up their reserves and pump in more capital at regular intervals.
In January, Aviva Life Insurance Co. India Ltd raised its capital base by Rs246.3 crore to Rs1,004.5 crore. Kotak Mahindra Old Mutual Life Insurance Ltd is expected to infuse alm-ost Rs500 crore of equity capital in three years. ING Vysya Life Insurance Co. Ltd plans an infusion of Rs500 crore in 2008-09. Bajaj Allianz Life Insurance Co. Ltd has grown to Rs875 crore, after an infusion of Rs175 crore in January. Given the high industry growth rate, more capital infusion would be needed, experts say.
“The break-even considerations are many, but the biggest factor is new business strain,” says Jambunathan.
Not all new life insurers have failed to break even. SBI Life Insurance Co. Ltd, in which the majority shareholder is India’s largest bank State Bank of India, recorded a net profit of Rs2.03 crore in 2005-06. “The firm has succeeded in achieving an early break-even on account of its lower cost of operations, as it has been able to leverage the network of its Indian partner the State Bank of India,” says the 2006-07 Irda annual report (the 2007-08 one is yet to be released).
SBI Life is the first private life insurer to break even, but it is not the largest in terms of fresh business. In 2007-08, ICICI Prudential was the largest among private firms in terms of fresh business. SBI Life came in third after Bajaj Allianz.
A tight leash on costs is critical for a private life insurer’s success, and the economy-wide escalation of operating exp-enses is expected to hurt these firms. Says KPMG’s Aggarwal: “It’s partly due to faster scaling up. The actual growth in the industry has been faster than originally planned, but not as profitable as planned. The reason is that cost structures have gone up in the form of significantly higher-than-planned employee costs... Distribution costs are also very high.”
“Everything (increasing cost base and geographical expansion) is going to push up the capital cost and gestation period of running a life insurance company,” Aggarwal says.
Not everyone believes there is a strong case for the delay in the break-even point. Bhandari says some of the assumptions made in 2000 still hold good, but it would primarily depend on the strategy of an insurer. “If you follow an aggressive policy, break-even will get shifted forward. With a more modest expansion, keeping capital in mind, you can reach break-even in about seven-eight years,” he adds.
So far, only SBI Life seems to have got the balance right.