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.”
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.
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
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.
Sanket Kawatkar, head (life insurance consulting) at Watson Wyatt Worldwide Inc., a global consulting firm that specializes in insurance and financial services, said that any company that achieves significant growth in new business volumes every year will incur losses until profit from renewal premiums exceeds new business strain.
“The problem has been exacerbated by the fact that the business models followed by the private life insurance sector have stressed top line and market share targets, as opposed to capital management, bottom line (profit) management, etc.,” he said. “Even issues like productivity or efficiency of the distribution channels—established at enormous costs—have been sacrificed to achieve this high topline growth.”
Private life insurers had been expanding their branches and distribution channel aggressively over the past few years. Most of their premium income was generated by unit-linked insurance products (Ulips) that offered market-linked returns. Sales of Ulips rose during the equity bull run that continued until the fourth quarter of 2007-08.
“The private sector life insurers have been mostly selling Ulips. Single-premium (business) has started reducing and renewal premium has started growing. This shows that companies are focusing on profitability now, and not merely market share,” said Mathur of the Life Insurance Council.
In India, most life insurance firms had expected to break even in eight-nine years, but the cost of new business growth came in the way. India allowed private insurance firms about a decade ago by dismantling the monopoly of LIC.
Now, besides extending their break-even targets, these firms are focusing on renewal premiums to attain profitability.
“We have increased our renewal premium (income) and reduced our expense ratio, but a fixed cost will always be there. We hope to break even in the next two-three years,” said Nanda of ICICI Prudential.
The Edelweiss report says that single-premium business generates lower value compared with regular premium business for insurance companies, while renewal premium business does not incur acquisition costs and has a positive impact on inflows. Private insurers are steering away from single-premium policies, reducing their single-premium exposure from 24.4% in 2005-06 to 8.8% in 2008-09, said the Edelweiss report.
Mathur said that as the private sector insurers turned profit-conscious, the collective renewal premiums from Ulips had grown 106.27% to Rs46,000 crore in the year ended March, from Rs22,300 crore in 2007-08.
He, however, added that it would be essential for insurers to focus on expansion and distribution and not only on renewal premiums.
“In order to shift focus from new business premium to profitability, companies have to define minimum productivity level for every branch office to ensure that expense over-run is not there. Lastly, overspending for getting new business has to stop,” said Kamesh Goyal, chief executive officer, Bajaj Allianz Life Insurance Co. Ltd.
“While there is already some focus on renewal premium by all companies, it can be increased further,” said Jayant Khosla, chief executive officer and managing director of Future Generali India Life Insurance Co. Ltd.
While Edelweiss pointed out that the life insurance business is capital intensive and insurers have to make heavy investments in distribution, infrastructure and systems, according to Khosla, growing too fast or too slow will have negative implications for profitability.
Some insurers also said that in order to shift focus from market share and new business premium to renewal premium and profitability, the regulator should ask the industry to compulsorily disclose losses, expenses, margins and profitability. This would prevent insurers from focusing merely on new business volumes to expand market share.
“There should be more disclosures by life insurers, so that the focus remains evenly spread across topline growth, market share as well as profitability,” said Nanda.
Khosla said that reporting should be made on the basis of embedded value, or the present value of estimated future profits plus adjusted net asset value. “Disclosure of embedded value will put pressure on life insurance companies to maintain profitability, which in turn will reduce focus on new business premium.”
According to Goyal of Bajaj Allianz, renewal figures, claims ratio, expenses, new business margin, embedded value and new business strain are some minimum disclosures that need to be made by life insurers in the interest of their stakeholders.