Life insurers get demonetisation bonus
Of the Rs12.44 trillion that has come into the formal system, some has found its way into financial assets such as life insurance policies
While the impact of the government’s move to demonetise high denomination currency notes is still being evaluated, the insurance sector seems to have benefitted in the immediate aftermath.
According to the monthly business figures for life insurance companies released by the Insurance Regulatory and Development Authority of India (Irdai), individual single-premiums collected in November—for all the life insurers—was Rs6,692 crore; 507% more than the Rs1,103 crore collected in November 2015. Even on a month-on-month basis, the segment grew 170% from Rs2,481 crore in October.
The total first-year premium (regular plus single premium) has grown 113% year-on-year (y-o-y) and 45%, compared to October 2016.
“The industry on an average was growing at 28% month-on-month. But in the month of November, it grew over 40%, which is quite a pleasant surprise," said Anoop Pabby, managing director and chief executive officer at DHFL Pramerica Life Insurance Co. Ltd.
Unexpected kitty
According to industry experts, demonetisation has had a significant role to play in this, since about Rs12.44 trillion has come into the formal system, some of which is bound to make its way into financial assets.
“As a lot of money has come into the formal channel, the financial industry will see a lot of inflows. Not just insurance but even mutual funds would see a huge growth. This trend is here to stay... till the money stays in the banking system," said Vighnesh Shahane, chief executive officer and whole-time director, IDBI Federal Life Insurance Co. Ltd.
The added liquidity has given banks an opportunity to sell third-party products. “In November alone banks have sold twice of what they usually sell in a month of third party products," said Pankaj Razdan, managing director and chief executive officer, Birla Sun Life Insurance Co. Ltd.
Falling interest rates
One of the main reasons behind the sharp y-o-y increase in November has been growth of single-premium business for the Life Insurance Corporation of India (LIC). In November, LIC collected Rs6,438 crore as premium for individual single-premium plans, compared to Rs899 crore in November last year—clocking a growth of over seven times.
According to an emailed response from the insurance company, the growth was due to the sale of various plans including the Jeevan Akshay-VI immediate annuity product.
Annuity is a pension product that guarantees income for life. According to LIC, it was not demonetisation that had a role to play in the performance but vigorous sales pitches and sustained marketing activities. “The sale was also driven by the fact that there was downward revision in the annuity rates of Jeevan Akshay-VI plan with effect from 1 December," LIC said in its response.
LIC’s Jeevan Akshay is immediate annuity plan where the policyholder pays a single premium and the annuity payment starts soon after. Annuities are paid through the lifetime assuring retirement income.
Experts believe that falling interest rates have been a factor as well.
“There is growth primarily because a fall in interest rates increases the attractiveness of fixed guaranteed returns (non-participating plans) products, so life insurance agents encourage their customers to buy these guaranteed products before they are discontinued and re-filed by the insurers with lower guarantees. Demonetisation would have had a minimal impact on the life insurance sales growth," said Pabby.
Old products, new shape
A recent research note by Milliman, an actuarial services company, said that with the downward trajectory of interest rates in India, the life insurance industry in India could witness a re-pricing of existing products and could also lower the bonuses on traditional insurance plans.
Insurance companies have already begun the refiling process. Birla Sun Life Insurance Co. Ltd, for instance, plans to discontinue its non-participating plan called income assured after December, and will then re-launch it.
“We were expecting the rate to be around 6% in 2017-18 but that looks like will happen much earlier. In the case of our income assured plan, we are able to offer guarantees till December. Post-December, we will have to reset our returns and possibly offer a new product with a slightly lower rate," said Razdan.
While demonetisation and falling interest rates may have been the reasons behind the bumper performance, some say that post-Diwali sales should be factored in as well.
“Usually, the month of Diwali is slightly dull for the industry and a lot of that is made up for in the next month. Considering the festival was in October some spike in performance can definitely be attributed to post-Diwali sales," said P. Nandagopal, founder and chief executive officer, OpenWorld Insurance Broking Ltd.
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