Leading life insurance players have been focussing on building a balanced product portfolio, increasing their share of protection (pure term cover) and traditional policies. Vibha Padalkar, MD and CEO of HDFC Life, believes that while there is scope for ramping up protection business, players have to be wary of the possible risks. Excerpts:

After several regulatory changes, the life insurance sector has seen healthy growth in recent years. What is your outlook on the sector? Where do you think are the opportunities?

There is immense scope for life insurance players in India, given the favourable demographics and under-penetration. At HDFC Life, we try to address the customer requirement across mortality, morbidity, longevity and interest rate risks — key risks that a customer is looking to address. On mortality, for instance, we slashed our online prices on pure term cover (40 per cent in case of HDFC Click 2 Protect). In morbidity, we look at various illnesses such as cancer. Cancer care product is an excellent one because there is a lumpsum payment on detection of the illness, along with a portion of sum assured (1 per cent) that you receive every month for five years.

Longevity risk — the risk of outliving ones’ assets/income — is also becoming a cause for concern among individuals. We try to address that issue with our annuity product. Our ‘Pension Guarantee plan’ gives one the option to lock into current rates, with annuity payments after a few years (deferred annuity plan).

Our non-par ‘Sanchay Plus’ offers one of the best returns in the market. This reduces the reinvestment risk for an individual who is assured of affixed returns over a period of time.

Hence, we believe that we have covered the needs of individuals at every stage, by offering a gamut of products across categories.

Leading private life insurers, including HDFC Life, have been focussing on diversifying the product portfolio in recent years. What is the ideal product mix for HDFC Life?

In the long run, we expect to have a product portfolio mix with participating and non-participating savings constituting 25-35 per cent each; protection about 10 per cent; annuity 7-8 per cent, with ULIPs making up the balance. Demand for any product segment will be a function of customer preference, macro-economic factors, market sentiment, regulatory landscape, availability of attractive products, among other factors.

But many players are focussing on protection policies (pure term cover) to drive profitability. Do you see any risk with such aggressive competition and push on protection policies?

I believe protection is a high-margin business and there is huge scope for it. We have seen life insurers focus a great deal on protection business recently.

But it is too early to say that the industry has cracked the protection business, because the mortality experience in rural areas is still a grey area. It will take time to understand India’s mortality profile. I believe that the protection business will be a U-curve in India.

Companies that entered the protection space more recently might have to tighten processes. Competing only on pricing is a risky proposition. Companies could take a hit on irrational pricing. Robust underwriting will be critical in this business. For instance, in the government-backed life insurance scheme — Pradhan Mantri Jeevan Jyoti Bima Yojana — where insurance cover of ₹2 lakh is offered, we have been able to make a small profit when many others have incurred losses.

Your HDFC Sanchay Plus product met with strong response, given the relatively higher interest rate (IRR of 6-6.4 per cent when launched) the product offered. But there have been concerns on how you would manage the rate risk in the portfolio in a falling interest rate environment...

We are confident of managing the risk well, even in a falling rate scenario.

The key risks in non-par savings products like Sanchay and Sanchay Plus are interest rate risk and reinvestment risk.

These risks are managed by, one, prudent pricing and dynamic re-pricing of new business. We have re-priced our Sanchay Plus product which now offers IRR of 5-6 per cent (from 6-6.4 per cent earlier.

Two, aggregation of cash flows from complementary non-par businesses such as Credit Life product (where on death a lumpsum is paid to help pay off loan liabilities). Three, investment in assets with complementary cash flow profile.

To elaborate further, Credit Life is a short-duration liability business. Premiums collected in this segment are invested in long-duration debt securities, creating excess asset duration on a standalone basis.

The scale at which this business has been written allows us to achieve ALM (asset liability management) at an aggregate level. Policyholder claims of Credit Life are paid out of renewal premiums receivable from products such as Sanchay Plus, thereby reducing reinvestment risk.

Investing in partly-paid bonds issued by top-tier corporates also allows HDFC Life to lock into yields upfront, while requiring principal payments over a five-year period. Here again, we utilise the renewal premiums on non-par savings products such as Sanchay Plus to make the payments on such partly paid bonds.

All of this helps us mitigate interest rate risk. An external actuarial consultant has validated HDFC Life's risk management approach.

Growth for life insurers has been led by the bancassurance model (bank tie-ups). Will agency channel gain traction? Will more banks adopt the open architecture — selling more than one insurer’s policy?

We believe that the agency channel will do well over a period of time. All the metrics under our channel are doing well and growth should be robust over time. On Banca, I believe that, over a period of time, banks will have to offer more product options to customers by roping in other insurance partners.

Customers will have preferences for new and innovative products and if banks do not offer them, they could start losing customers. Pre-emptively embracing open architecture will be the way to move forward.

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