In its first quarterly result for FY17, SBI Life Insurance Company Ltd declared its embedded value (EV) for the first time. Embedded value represents the present value of all future profits from the existing business plus shareholders’ net worth. For SBI Life, its EV stands at Rs12,999 crore. For the quarter the insurer also grew by 78% in its new premium and reported a growth in profits by 6%. Arijit Basu, managing director and chief executive officer, SBI Life Insurance Co Ltd, talks about why the company declared the EV now and the story behind the growth numbers.
Other insurers declared their EV earlier, why did it take you so long?
Embedded value (EV) is not a mandatory requirement by the regulator and so far it was the analysts that were interested in the embedded value. This is why you saw companies disclosing their EV around the time of foreign direct investment (FDI) hike announcement. We were also told by analysts to disclose EV and non-disclosure meant they were uncertain about our business. We also felt that this would be in line with best practices. So we decided to disclose our embedded value.
You will be going public soon. Will it be an offer for sale where the stakeholders divest their stake or will you raise capital for the company?
In terms of divesting a stake, SBI has already decided to divest 10% of its stake to our foreign partner BNP Paribas Cardif. We will go public in a couple of years to raise capital. We haven’t taken capital from our shareholders since 2008 and so far have managed on accrued profits. But we are growing at a rate of 40% per annum and we will need capital in a year or two to sustain this growth. For the quarter our individual new business premium grew by 69%, whereas the industry grew only at 16%.
Is the growth primarily because of the bancassurance channel?
Even our retail agency channel is doing a good job. Our agency is growing at 34% and the average premium sold is about Rs 2.2 lakh per year whereas the industry average is about Rs 80,000. We put a lot of effort in training and focusing on agents’ persistency. We have targeted a persistency ratio of 80% for our agents. We believe persistency is very important because that is where the profits come from. The new business premium goes into meeting all the expenses so it’s actually the renewals that generate profits.
In terms of bancassurance, yes, our branch activation levels are high but it is still not the maximum. Currently, only 40% of SBI branches sell insurance. But I feel our bancassurance model is the most cost-efficient. We don’t have our staff in all the branches. Our staff to bank ratio is 1:40, which means one person from our company is assisting bank-specified persons in 40 branches with sale. Other companies have one staff member in every branch, which only increases the costs. Only in the 300 top branches do we have one staff member per branch.
Irdai has issued a discussion paper on directing insurance companies to go public after completing 10 years of operation. This will enhance disclosures. How do you think the industry will cope?
In terms of disclosures, all companies disclose financials and certain analytical ratios as mandated by Irdai in its annual reports. But once insurers decide to list, there will be greater emphasis on disclosures. While this is not a concern for older and bigger insurance companies, for younger companies disclosures will be a concern. They will first need to get their house in order, otherwise they will not get a good valuation. So making this a mandatory condition may not be suitable. For us, listing will ensure better governance.
Consolidation has begun with HDFC Life merging with Max Life. Will consolidation pick up? Will you look at mergers?
You may see consolidation happening as one strong company may look to merge with a middle-level company. But we are not looking at mergers because I am not looking at inorganic growth. We are growing faster than any insurance company and if we sustain the growth, we should be number one in the next few years. Consolidation doesn’t really bring growth because there is nothing that you are doing differently. Both the insurers would have been doing the same things in terms of products and distribution.
While in terms of total new business premium you have grown by 78%, your profits have grown by only 6% for the quarter. The growth doesn’t seem to translating into profits. Is it also because profits in the industry have come down as the profits from lapsed bucket have reduced?
Slow profits are more a reflection of growth. Yes, there was a time when lapsed profits formed a sizeable chunk of the profits, but the situation has changed over time. The costs in life insurance are recovered in the first year from the first-year premium, causing a new business strain on the company. So a company that’s growing fast will show a new business strain and this will have a negative impact on profits, even though the impact on value for the company is positive. The strain is mitigated by renewal premiums. In our case, our renewal premiums are growing at 20% and as persistency improves further, our renewal book will become more sizeable.
Irdai has allowed an open architecture in bancassurance, but there aren’t many takers. What is the view of SBI on this?
The option of an open architecture was given sometime back, so it’s still very nascent. SBI feels that cross selling or selling third party products is still at a very nascent stage. 60% of SBI’s bank branches don’t sell insurance so that’s the immediate challenge first. Cross selling is very important for customer acquisition and retention. Customer typically need eight set of financial products that include insurance as well and unless the bank can get all the branches to cross sell, opening it up is not right. There is no aversion to an open architecture but now is not the time, it will perhaps happen 2-3 years down the line.