The Hindu Business Line : Insurance eating into MF turf?

With an increasing investor preference for ULIPs, whether insurance companies are taking away some of the business of the mutual fund industry is anybody’s guess.

Suresh Parthasarathy

With the introduction of ULIPs (unit linked insurance product), insurance companies have emerged as prominent players in the Indian equity market. Insurance is increasingly becoming an investment product rather than a mere risk cover. Of the new premium collected by insurance companies, about 75-90 per cent comes through ULIPs. Some of the insurance companies do not even have traditional policies (albeit term insurance) in their basket. With an increasing investor prefere nce for ULIPs, whether insurance companies are taking away some of the business of the mutual fund industry is anybody’s guess. The bull market, increasing disposable incomes of the new generation, have all added to the popularity of the ULIP.

The mutual fund industry has seen assets under management almost double in the past three years from Rs 2.1 lakh crore in 2005 to the current level of Rs 5.45 lakh crore (out of this 31 per cent is accounted for by equity schemes).

The new premium collected by insurance companies alone stood at Rs 93,000 crore in 2007-08, up from Rs 30,334 crore in 2005.

Strength of Insurance Industry: The major strength of the insurance industry lies in its extensive distribution reach, achieved through its agency force and branches. As per the IRDA’s annual report for 2006-07, total individual insurance agents were at 19.93 lakh, which is 8.6 lakh higher than the previous year. Assuming similar additions this year, the agency force presently may be in the range of 25 lakh.

This suggests that the insurance industry has been more aggressive in adding distribution agents when compared to mutual funds. According to Mr Pranav Misra, Senior Vice-President, ICICI Pru Life Insurance, at any given point in time, 50-60 per cent of these advisors are active.

In ICICI Pru Life’s experience an active advisor writes new business for Rs 80,000 a year or about 12 policies per annum.

To train an insurance advisor and to induct him into the business, the company incurs expenses in the range of Rs 2,000-3,500. To become an advisor, one has to undergo 50 hours of training. Currently ICICI Pru has 2.9 lakh advisors and it has added 55,540 since 06-07.

Private players are also aggressively expanding their presence through branches across India. As per the IRDA’s annual report for 2006-07, private insurance companies had 3,072 branches and LIC 2,301.

Bancassurance (banks tie-up with insurance companies to sell the insurance products) has already started to contribute a major chunk of new premium, as banks expand, the premium collected too can increase substantially.

Weakness: Since insurance is mostly ‘sold’ rather than ‘bought’, insurance agents need good marketing skills and need to update themselves on the markets to sell ULIP products.

Most of the insurance agents are part-timers. Due to lack of spare time, they find it difficult to add clients. To convert a prospect into client requires frequent follow up. These are the major reasons for attrition in the industry. Once the agent moves out, apart from the reminder notice, the policy holder will not have any other direct contact with the insurer; this, in turn, increases ‘lapsing’ where investors let their policies lapse.

Mutual Fund: Mutual funds, popular mainly for their liquidity, currently account for 4.1 per cent of Indian household savings.

When compared to insurance, mutual funds tend to be viewed more as a shorter term investment —say for a holding period of three-five years.

High transparency and the ability of the investors to see his/her portfolio and returns regularly have helped inflows into mutual funds. Professional management and tax benefits are the other benefits.

Weakness: Despite being popular with better informed investors, the penetration level of MFs is low and is mostly confined to metros. The current equity assets of Rs 1,70,000 crore are from areas representing less than 200 postal pincodes. The number of branches when compared to insurance industry is abysmally low. Again, AMFI certified agents number less than 70,000 against 2.5 million insurance agents.

Win-win for both

With about 40 per cent of the insurance agents estimated to be inactive, the number of such agents is approximately 10 lakh. The top seven insurance companies are also leaders in the mutual fund space.

Having spent substantial sums to train agents to market insurance, these agents can be roped in to sell mutual funds as well.

Since the mutual funds are not that difficult to sell, this can lead to activation of a huge number of investor accounts for MFs, which can be used to cross-sell products. The several common players across the MF and insurance sectors will ensure lower conflict of interest. An expanding market size can also reduce cost of operation for both sectors, lowering charges for final investors.

Fixed deposits, which are easy to understand and are marketed by banks, currently hold Rs 34 lakh crore of public money.

A channelisation of some of that money into equity is best for any country that wants to increase its GDP.

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