Customers are opting for small-ticket insurance policies as financial markets remain volatile and the economy grows at a slower pace.
The average size of premiums paid on new life insurance policies declined by 15% in the fiscal year ended 31 March to Rs9,942, from Rs11,738 in the previous year, according to data provided by the Insurance Regulatory and Development Authority.
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The average size of premiums earned on new policies by private insurers declined by 11% to Rs9,942.
State-owned Life Insurance Corp. of India (LIC) posted a bigger drop of 25% in average premium size to Rs5,885.
The data is based on premium collections from individuals and didn’t include single-premium insurance plans.
One reason for the shrinking size of average premiums is stock market volatility that has turned investors against unit -linked insurance policies (Ulips) that had gained popularity during the boom years of the economy, experts say.
A part of the premium paid on Ulips goes towards insurance cover and the rest is invested in stocks and other market instruments.
The Sensex, the benchmark index of the Bombay Stock Exchange, has declined 31% over the past year. It ended at 12,134.75 on Monday, up 731.50 points, or 6.4%.
“Policyholders are looking at fixed deposits and guaranteed policies now,” said R. Krishnamurthy, managing director of Watson Wyatt Worldwide, a global consultant. Investors are adopting a cautious approach towards Ulips, he added.
The life insurance industry registered a 10% fall in new premium income in the last fiscal year compared with 2007-08, led by slumping demand for Ulips.
It was the first time since insurance was opened up to competition in 2001 that the industry closed a year with a decline in new premiums.
Life insurers collected a combined Rs44,688 crore in new premium income in the year gone by.
LIC’s new premium income fell 23% from the previous year to Rs18,070 crore.
New business premiums are also declining as the economy grows at a slower pace after expanding an average 8.9% in the last four years.
A survey of professional forecasters conducted by the Reserve Bank of India (RBI) has cut the estimate for economic growth to 5.7% for 2009-10, from an earlier 6%.
The economy probably expanded 6.6% in the year ended 31 March, less than the 6.8% forecast earlier, according to the median compiled by RBI from the forecasts.
“With a steep decline in the stock markets, retail investors are shying away from the markets and market-related investment options. They are only going for bank fixed deposits,” said R.K. Gupta, managing director of Taurus Asset Management Co. Ltd.
According to data from RBI, aggregate bank deposits in the year to February increased by 21% to Rs37.35 trillion.
Reliance Life Insurance Co. Ltd chief executive officer P. Nandagopal said the average size of new premiums may be shrinking partly because of expansion into under-penetrated rural areas by insurers, as in the case of his company.
“Rural areas are contributing most to the portfolio, leading to smaller average size. More business for the company is coming from interiors,” Nandagopal said, and added, “It (decline) also means that policyholders are cautious about markets and they are not taking out large-sized policies.”
Graphics by Sandeep Bhatnagar / Mint