Life insurance sector may see consolidation

Also See How Top Life Insurers Fared (Graphic)

Life insurers collected a combined Rs32,799 crore in first-year premiums during the 10 months that ended 31 January, a fall of 9.36% from a year earlier when they had garnered a 35% increase in fresh business, according to the industry regulator.

The drop was led by state-owned Life Insurance Corp. of India (LIC), the country’s largest insurer. ICICI Prudential Life Insurance Co. Ltd, Bajaj Allianz Life Insurance Co. Ltd and Aviva Life Insurance Co. India Ltd, some of the largest private insurers, also posted declines.

The data, on the website of the Insurance Regulatory and Development Authority (Irda), relates to premium collections from individuals and does not include single-premium insurance plans. Some experts are saying the decline could be an early precursor to a wave of consolidation in the industry as insurers seek mergers and acquisitions to gain size and reach.

New business premiums and policy renewals are declining as the economy grows at a slower pace after expanding an average 8.9% in the last four years. Economic growth is forecast to drop to 7.1% in the fiscal year ending 31 March, the slowest pace in six years.

Demand for Ulips, which provide life cover and invest part of the premium in equities, has slumped after an almost five-year stock-market rally ended last year, with the Bombay Stock Exchange’s benchmark Sensex index diving 52%.

“Because of the pessimism in the markets, people are putting money in the bank. They are not renewing their policies and that will affect the growth rate of (life insurance) companies, especially the small-sized ones," said Abizer Diwanji, national industry director of financial services at audit and consulting firm KPMG. “This can lead to consolidation of the (life insurance) industry."

Ulips bore the brunt of the market gloom, Diwanji added. Ulips account for 80-90% of the portfolios of private life insurers.

To be sure, premium collections are likely to rise in the last two months of the fiscal year, when most households invest in insurance for tax savings.

India started handing out licences to private insurers in 2001 after dismantling the monopoly of LIC, seeking to improve insurance coverage. Insurance industry revenues have grown rapidly as economic expansion, rising consumer awareness, growing incomes, the absence of a social-safety net and new products such as Ulips spurred sales of policies. LIC still remained the market leader.

In the first 10 months of the current fiscal year, LIC’s first-year premium collections fell by 30% to Rs12,631 crore, compared with 1.07% growth a year ago. The data doesn’t include single-premium policies. ICICI Prudential Life Insurance’s first-year premiums declined 14.5% to Rs4,102.91 crore.

According to Gaurang Shah, managing director of Kotak Mahindra Old Mutual Life Insurance Ltd, several of his company’s policyholders are reducing the size of the premium they pay and are not renewing policies, mostly Ulips, that have a minimum three-year lock-in period.

“People who have paid (premiums) for three years have stopped paying further, but are continuing with their policies," said Shah.

“Consolidation should happen in the industry in near future," he said, adding that his company’s overall persistency ratio has fallen to 85% in January from 87% a year ago. “The next year is going to be tough and persistency ratio is likely to drop further," he added.

Persistency ratio is a measure of the percentage of policyholders who continue paying premiums.

“Our prediction for 2009-10 is that insurance companies will have greater focus on renewal and persistency management, which will lead to increase in capital base," said T.R. Ramachandran, chief executive and managing director at Aviva India. “Many players will need to change their focus from only exclusively focusing on new business to ramping up infrastructure, collection capabilities, and customer touch points among others to make the renewal process more customer-friendly because that will become a very important game."

Kotak Mahindra Old Mutual Life registered a growth of 48% in non-single-premium policies for the nine months to January, compared with 85% a year earlier.

Paresh Parasnis, executive director with HDFC Standard Life Insurance Co. Ltd, had said in a recent interview with Mint: “We ended the last year (2007-08) at about 86% and this year our persistency ratio has come down to mid-70s."

“What we have seen is that (the) customer continues to stay with us...but the level of premium that he or she commits is coming down," Parasnis said.

“Today, the number of customers are increasing 30% year-on-year, but average premiums, given what is happening in the marketplace and (to) individual finances, have come down," he had said.

However, some insurers, including LIC, say they aren’t perturbed. T.S. Vijayan, chairman of LIC, said: “Our persistency ratio has been the same as last year at 94-95%. We are not facing any decline in the renewals. The slowdown in sales reflects the market conditions."

Graphics by Ahmed Raza Khan / Mint

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