The Hindu Business Line : Life insurance: The cover drive

THE life insurance sector, dealing as it does with something as mundane as life and death, may lack the glamour associated with automobiles or diamond jewellery. But its growth rate could well be the envy of marketers in the more `happening' industries.

The fiscal gone by has been an exciting one for the insurance industry. First-year premium income (which indicates future cash flows from the fresh set of proposals underwritten) was up by Rs 25,000 crore — 36 per cent more than the previous year.

Private players have played a key role in catalysing this performance, accounting for close to half the incremental premium growth; in the process, they registered a growth of close to 130 per cent in premiums underwritten.

The story at LIC has not been bad, either. Considering its stature as an industry giant, a growth of 22 per cent in first-time premiums is not something to be scoffed at.

But private participants are snapping at its heels and the market share figures bear testimony to this threat. From 87 per cent in FY04, LIC's share has dropped to 78 per cent in FY05.

And the trend has continued into this fiscal; the numbers for the first two months indicate that LIC's market share has slipped by a further two percentage points (all figures are without adjusting for single premiums).

Analysing the figures

To better understand how the insurance landscape is changing, we analysed the performance of various players by drawing upon the statistics in the IRDA (Insurance Regulatory and Development Authority) Journal (for this April and May).

The growth in premiums and market share numbers was computed by spreading out single-premium collections over 10 years, which is the international norm.

The following are the important conclusions:

Adjusted for single premium, the industry registered 14 per cent growth in premiums, across individual and group plans.

There has also been a shuffling of the pecking order among private insurance players, compared to their standings this March.

Though ICICI Prudential continues to head the list, HDFC Standard Life (HDFC), which finished FY05 as the fourth largest private insurer in terms of market share, had moved up to occupy the second slot at end-May.

HDFC was given a leg up by a more than two-fold jump in premium collections for individual plans and a manifold rise in premiums for group plans.

HDFC's gain has come at the expense of Birla Sun Life (BSL), which slipped three places to occupy the fifth slot. Premium collections for individual plans grew just 12 per cent and group premiums dropped nearly 100 per cent. BSL's total premium collections for the two-month period are down 22 per cent on a year-on-year basis.

Bajaj Allianz's position as the third largest private sector player has remained unchanged.

However, Bajaj improved its market share from 2.8 per cent at the end of March to 3.6 per cent as of end May.

A significant jump in group, non-single premium and a close-to-100-per-cent leap in individual non-single premiums have been the key growth drivers.

Also, in Bajaj's case, the contribution from single-premium plans, at a shade over 40 per cent of total premiums collected, is the highest among its frontline peers.

Tata AIG occupies the fourth slot, with a market share just marginally lower than that of Allianz Bajaj. Individual non-single premium collections played an integral role in Tata AIG, pushing it up from its No 5 position at the end of FY05.

ICICI Prudential continues to consolidate its position as the country's leading private insurer.

From a market share of close to 9 per cent at the end of March this year, ICICI Pru gained a further three-percentage-point share in the April-May period and established a lead of eight percentage points over its nearest private sector competitor, HDFC.

Growth rates across both individual and group business were strong, at 75 per cent and 56 per cent respectively; this is noteworthy considering that it has come off a relatively higher base.

Other players, too, have posted strong growth rates, though from a small base.

In LIC's case, the total premium collection, reckoned after the single-premium adjustment, declined by 2 per cent on a year-on-year basis.

The composition of LIC's premium income for April and May reveals a five-fold rise in individual single-premium and a drop in both individual non-single-premium and group single-premium.

For LIC, too, single premiums make up more than half of the total premium collections. The high dependence on single premium has led to LIC's market share declining to 67 per cent, as of end May.

What could be in store

As the numbers indicate, private participants are making steady inroads into a territory that was once LIC's sole preserve . To a considerable extent, product innovation has played a vital role in this achievement, as is vindicated by the success of unit-linked plans.

In FY05, unit-linked plans accounted for close to 35 per cent of all premium payments and grew a whopping 400 per cent over FY04. Insurers benefit because such plans are not as capital-intensive as the regular plans, and the investment risk devolves on the policy-holder.

With the equity market fairly buoyant over the past two years, it should come as no surprise that investors flocked to such plans in droves, in expectation of handsome returns.

Given the current state of the market, inflows into such plans look set to continue.

However, over time, as the market alternates between phases, investment performance will be the arbiter of investor choice; poor investment performance will lead to swift retaliation from investors, who churn their portfolios and move into an investment fund that has delivered superior returns.

Should the equity/fixed-income market get choppy, insurers with a greater degree of exposure to unit-linked plans mayencounter higher unpredictability of fund flows.

Further, portfolio composition for such plans is decided by the insurance companies and is not regulated by the IRDA.

This may make an investor gravitate towards a plan that invests purely in equities, ignorant of the risks associated with such a decision, and attracted solely by the prospects of high returns.

A move by the authority to regulate how such plans are sold might well see the sector's acceleration shift a gear or two downwards.

Keyman insurance

With the IRDA stipulating in end April that keyman policies should be sold only with a life cover element and without maturity benefits, premium collections from such plans are likely to slacken.

Signs of an incipient slowdown are evident from the numbers for the first two months of this fiscal, with group premiums down 23 per cent on a single-premium adjusted basis. Though premium collections may dip, this may not have a detrimental impact on companies as such group plans score low on the profitability front.

Consolidation, a reality

The other theme to watch out for in this space would be consolidation. With AMP having announced its intent to exit the venture it has with the Sanmar group, the spectre of consolidation may be upon us earlier than expected.

It is also interesting to note that a few more players are interested in entering the market (ventures of Shriram Group and Principal Group — in association with Vijaya Bank and PNB — have recently received approval).

Given the competitive nature of the market and the assumption that most of the low-hanging fruit, as it were, would have been picked by existing players, finding customers, not in number but of quality, could prove the biggest challenge yet for new entrants.

Another aspect of consolidation also needs to be addressed by the regulatory body — prescribing a set of safeguards to ensure that the interests of policyholders stand protected in the event of their insurer biting the dust in a shake-out. Such a move would be reassuring for both investors and policyholders alike.

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