BackWe are not dependant on a big bank to generate lot of business for us: DHFL Pramerica’s Anoop Pabby
Anoop Pabby talks about why they sell mainly non-par products, expectations from the bancassurance channel, and more
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DHFL Pramerica Life Insurance Co. Ltd was known as DLF Pramerica Life Insurance when it started life insurance business in FY09. In FY14, DHFL took over DLF’s stake and the company was renamed as DHFL Pramerica Life Insurance. The insurer largely sells non-participating products as about 70% of the insurer’s portfolio is non-par plans. Non-par products guarantee the investment benefits upfront. Anoop Pabby, managing director and chief executive officer, DHFL Pramerica, in an interview to Mint Money talks about why they sell mainly non-par products, expectations from the bancassurance channel and changes that company has undergone when the shareholders changed from DLF Ltd to Deewan Housing Finance Ltd. Edited excerpts:
The insurance industry grew by 26% in FY17. How much of it can be attributed to demonetization?
The biggest beneficiaries of demonetization were insurers that are promoted by banks or have strong bancassurance tie-ups. Money came in to the banks and then people deployed that money in savings instruments, mutual funds and insurance policies. But that is the story of the past. This year, the private sector insurers are growing at 14% and we are growing at 85%. Our growth is very organic and we are not dependant on a big bank to generate lot of business for us.
So what have been the drivers of growth for the industry and for you?
I think the economic cycle of life insurance industry has been slightly out of tune with the general economic cycle. After the product reforms on unit linked insurance plans (Ulips) and surrender value came fully into force and started to be understood by the customers, the customer confidence came back and the revival started post 2014.
And now with the markets going up, Ulips are back in favour. So growth is back and is led by new individual business premiums. Ulips are contributing to the individual retail premium growth significantly as it now constitutes about 42% of the new business premium.
Talking about us, we are now 108 branches (up from 60 branches three years ago) and by the end of this year we will be 125 branches well spread out including in the east and the north-east. We segment our customers and then target them through the affinity distribution channels. Even my agency sales force is segmented as it caters to different segments of customers like Defense and paramilitary personnel, parents of school going children and home loan customers. We focus on these segments, build products around them and develop distribution channels that specifically cater to these segments.
This is why when you look at our sales manager productivity; it is in the top quartile in the industry.
But when you talk about productivity, it’s looking at new business premium. What about retention? In FY16 your 13th month persistency was 50% against the global norm of 90% and above whereas your fifth year persistency was 16%. Why?
Currently, our 13th month persistency is at 75% and we are targeting to close the year at around 80%. There is a historical reason for low longer duration persistency level. When the company got its license in FY09, the initial book of customers was built on the back of third party distributors. The company didn’t have big proprietary distribution as it takes time. So, the customers that were brought into the book in the initial years were customers who were sourced through these distributors who had no loyalty to the company resulting in poor persistency. In FY14 when the shareholders changed and DHFL took over DLF’s stake, the entire strategy was overhauled. The focus shifted to bringing in persistent quality customers.
Majority of your portfolio consists of non-participating plans in which the returns are guaranteed. How risky is it to manage guarantees when the interest rates move down and what is your rational to sell long term guaranteed returns?
It depends on the guarantees that are there on your book and the tools you can leverage to ensure that interest rate risk gets mitigated in your book. With extra solvency, we have enough capital available to make investments to mitigate future interest rate risks. Additionally, we sell single premium term plans to home loan customer that acts as a natural hedge against guaranteed non-par portfolio in the event of an adverse interest rate movement. Also if you are conservative about reserving from the very beginning, you can handle the downward movement of interest rates much better.
The rationale for selling non-par products is to not create a mismatch between customer expectations and reality. Non-par plans because they are guaranteed in nature, reduce the risk of mis-selling significantly. Also with longer tenures and tax free guaranteed returns, non-par products are able to compete with other financial savings products in the market.
Earlier you talked about Ulips contributing to the growth of the life insurance industry. What percentage of your business is in Ulips and why?
The product mix that we sell largely comprises of protection oriented and non-par guaranteed products. Ulip is not part of the current product sales focus and hence 3.7% of our portfolio comprises of Ulips. Ulip is best suited for bancassurance-led distribution platforms. These are market linked products and are well-understood and accepted by the financially savvy bank customers. Since we did not have a strong bancassurance distribution in the past, Ulip wasn’t well suited as part of our distribution strategy.
This year, we have tied up with two large south India-based private sector banks—Lakshmi Vilas Bank and Dhanlakshmi Bank for retail distribution. Ulips will therefore now start moving up in our product portfolio.
You launched an online term plan this year. Most insurers have already launched their term plans online. Why are you a late entrant in this space?
Three and a half years ago when the shareholder change took place, the company made a lot of investments in setting up of infrastructure and technology. Now that it has been done and we are profitable, we are looking at online products. Our online term plan offers most of the customization benefits that the market is offering right now. But when you see the type of term plans being bought online, 90% of the plans are plain vanilla plans. With consumer awareness increasing, there will come a time when they will buy insurance like any other retail product. In terms of our online offerings, other than the online term plan and Dengue Shield (which was launched last year), we plan to launch a Cancer plus Cardio-specific insurance product and a Ulip product shortly.
The ratio of expenses of management of your company for FY17 is 38%, an improvement from FY16 but when I compare it with bigger insurers who have an expense ratio of about 14%, it looks huge. Why is your expense ratio so high and how does it impact benefits to the customers?
You need to compare the ratio of companies of the same vintage and you will find we are far superior. In life insurance, the business builds over a period of time through persistent customers. The expenses on the other hand grow much slowly compared to the growth of gross premium. So if you look at expense ratio of an 8-year-old company versus a 12-year-old company, the expense ratios can look very different because the bigger and older companies are able to build economies of scale.
Also for companies not promoted by a bank, expense ratio will always be a challenge. It will never fall to that low a number till the time you acquire a large distribution network like a bank and we are working on that. We now have three banks as part of our bancassurance business. When the business from these partners starts to flow in at a lower cost, the expense ratios will fall further.
In terms of benefits to the customers, in the case of non-par or guaranteed products, it doesn’t matter because the returns are guaranteed and as discussed earlier, we are predominantly a non-participating company. In case of participating products, the returns are linked to how well the participating fund is performing; so if expense ratio continues to be high it could impact the par-fund.
With insurers, getting listed disclosures have increased. Insurers now disclose things like the embedded value and the value of new business margins. How much pressure does it put on non-listed companies to bring their disclosures on par?
The writing is on the wall. Whether you IPO or not, you will have to be far more transparent than what you have been in the past. So tomorrow, when the public listed companies disclose their ratios and numbers in the public domain, it will automatically put pressure on the non-listed companies to disclose as well. In fact we too would be disclosing financial and operating metrics in line with the listed insurers.
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