Life insurance industry in India Life after the game-changing unit linked regulations of September 2010 (910)

Transcription

1 Life insurance industry in India Life after the game-changing unit linked regulations of September 2010 (910) Unit linked guidelines were first introduced in December 2005 and the first set of major changes to these guidelines were issued in 2009, when the Insurance Regulatory and Development Authority (IRDA) mandated a cap on charges on unit linked insurance plans (ULIP). This set in motion a massive industry-wide exercise of repricing the unit linked products and introducing initiatives to control costs. However, it was the ban on sale of ULIPs by the Securities and Exchange Board of India (SEBI) on the grounds that they had not been approved by SEBI that resulted in the sweeping changes introduced by IRDA by way of the revised unit linked guidelines, which came into effect from 1 September 2010 (the 910 ULIP guidelines). The industry reacted to these changes through further control on costs, overhauling their product strategy, revisiting their profit margins, making changes in their distribution strategy and, in some cases, conducting a complete and/or radical rethink of strategy and operations. On top of the 910 ULIP guidelines, IRDA issued additional guidelines in 2011 that led to a further tightening of norms for all forms of insurance intermediation, including agents, corporate agents, referral arrangements and distance marketing. All of these also contributed their share in affecting the business volumes during the past 12 months. In this article we discuss this tumultuous period for ULIPs in India and the impact it has had on the life insurance industry. Industry s reaction to the unit linked guidelines The industry s immediate reaction was to reprice the ULIP products to comply with the new guidelines. The prevalent structure of unit-linked products with higher allowances for distributor commission/expenses was no longer viable and compliance with the cap on charges specified by IRDA was eventually met by both a reduction in profit margins and distributor commission. The companies were forced to tightly control costs to increase their profit margins. Some of the actions taken by the industry are summarised in Figure 1. Impact on life insurance business As was generally expected, one year after the implementation of the 910 ULIP guidelines, the new business collections have dipped by close to 15%. However, some observers have been surprised to see that this trend of falling year-on-year new business premium has continued beyond August This could well be due to other guidelines and regulations that were introduced last year that also had a bearing on distribution of insurance. A reduction in distribution capacity by way of the further loss of agents and corporate agents last year meant that there were fewer feet on the street to sell insurance policies during 2011 when compared to 2010, thereby contributing to the overall reduction in new business premium last year. It is clear that the unit linked guidelines have significantly contributed to the decline in new business premium collections during October 2010 to September However, we also need to bear in mind the context of the prevailing economic conditions since the global financial crisis in 2008/09 that could have also contributed to the declining proportion of linked business. From its peak contribution to total individual new business premium of 86% during the fiscal year ending 31 March 2008, the contribution of unit linked business steadily declined to 60% in the fiscal year ending 31 March Furthermore, the decline in the contribution of unit linked business has continued unabated during the period 1 April 2011 to 30 September 2011 with the contribution dropping to 34% as compared to 71% in the same period in towerswatson.com

2 Figure 2. Some of the actions taken by the industry Cost control Non profitable branches shut down Excess workforce trimmed Inactive agents pruned Controls on spending increased Prudence and caution encouraged across levels Commission Commissions on unit linked products reduced significantly Overrides being paid to distributors on unit linked products rationalised Some of the actions taken by the industry Products Limited innovation focus on NAV guarantee products Charges levied on additional services provided to unit linked policyholders Focus on single premium unit linked business Minimum premium levels on unit linked products increased Regular premium unit linked pension products disappeared from the market Traditional products came into focus Distribution Agency channel severely impacted mass exodus of part timers/fence sitters Corporate agency channel also impacted focus shifted to traditional products Banks relatively less impacted though the share of traditional products in overall business increased for many banks Group business relatively less impacted registered positive growth Given that cost of guarantees was not included in the charges that had been capped as part of the unit linked guidelines, majority of the insurers came out with revised ULIPs with guaranteed net asset value (NAV), which were quite popular. However, recently IRDA has raised concerns on the sale of NAV guaranteed products, specifically on grounds of the risk of mis-selling through potentially misleading or poor communication and also the possible impact of such products on the securities markets. Given the current regulatory structure, there is very little scope for product innovation and it is the fund performance that is becoming a yardstick for the attractiveness of ULIPs. In the context of the external pressures on the industry as a whole, companies have taken a pause and have re-evaluated their business plans. Capturing market share at any price is certainly not the focus of the insurers and the companies are instead striving for profitable growth, whereas previously some players seemed to be more top-line focused. While companies are revisiting their business plans and sales strategies, the new business volumes have been lower. Selling business through agency channels is typically considered to be costlier than selling through a captive bancassurance partner, although this is not always the case in practice. In a bid to cut costs, the companies have enhanced their focus on developing their existing bancassurance relationships and acquiring new ones, while growing the agency channel continues to be a challenge. As a result, the market share of bancassurance has been steadily increasing over the years at the expense of the agency channel, especially for private insurers. With more banks wanting to enter the life insurance market, bancassurance, which contributed to one-third of the total individual new business premium collections of private insurers during the fiscal year ending 31 March 2011, is well placed to further increase its share of the new business premium and possibly emerge as the dominant distribution channel in the country over the next decade. towerswatson.com 15

3 Impact on pensions business As noted earlier, the biggest casualty of the 910 ULIP guidelines has been the individual life unit linked pensions business, which recorded a decline of close to 96% during the period October 2010 to September 2011, on a year-on-year basis. Individual pensions business had evolved over the years into a largely unit linked based business and the new requirement of offering a guaranteed return on linked pension policies saw insurers, especially private insurers, completely retracting from the market for regular premium individual pension products. This resulted in almost complete loss of revenues from that segment, which otherwise accounted for over one-third of the total new business premium collections of the industry. In comparison, other product classes in the individual life segment collectively recorded a marginal gain of approximately 4% in un-weighted new business premium collections during the said period. Interestingly, unlike the individual segment, pensions as a product class was the lone contributor to the growth in group business segment during the period under review. The linked group pensions business had very marginal variation during the said period and hence the entire growth in group pensions business was on account of growth in traditional non-participating business. This is in some way a reflection of an industry-wide phenomenon wherein new contributions to group superannuation schemes were being redirected to traditional products as against unit linked products. Recent pensions guidelines released by IRDA IRDA recognised the challenges being faced by the industry with respect to developing the unit linked pensions market and recently issued separate guidelines governing pension products, which have come into effect from 1 December We shall now consider some of the major provisions of the pensions guidelines and the associated challenges. Minimum returns to be offered on pension premiums are no longer mandated. Instead, at the time of sale, insurers need to specify an assured minimum non zero return on premium or an assured maturity/death/ surrender benefit (non zero return) on pension policies. While the removal of a mandated guaranteed minimum return on unit linked pensions policy is a welcome move, the new requirements come with their own set of challenges. When guaranteeing a rate of return on linked pension policies, companies need to ensure that the guaranteed rate is comparable to the other long term savings options available in the wider market. At the least, the policyholder would typically expect the companies to provide a minimum guarantee of the long term risk free rate of return. Likewise, the policyholder might reasonably expect the guaranteed maturity value on their pension policy to be equal to or higher than those provided by zero coupon bonds of the same tenure. At the least, the policyholder might be expecting his investment in the unit linked pension policy to provide a positive real rate of return at maturity, adjusted for inflation. While it is understandable that the regulator wishes to safeguard the interests of the policyholders money invested in ULIPs, 16 towerswatson.com

4 guarantees have tended to cause the insurers to be cautious in their investment approach and this, in the long run, will likely result in generating lower returns on these funds. The guidelines specify that the insurance company that contracted the original deferred pension policy would necessarily need to provide the annuity product to the policyholder. Currently the state-owned Life Insurance Corporation of India (LIC) sells the majority of the immediate annuity policies in the Indian market. This is believed to have resulted in a huge longevity risk being built up within LIC. Reportedly to develop the annuity market and in a bid to spread this risk with other insurers, the regulator has mandated that the insurer who sells a deferred pension policy to a policyholder would also need to issue an immediate annuity to the same policyholder at the time of annuitisation. This may not be in the best interest of the customer as he or she does not have an option at the time of vesting, surrender or death to select the annuity provider offering the best rates. However, in the long run, this provision might help in developing the annuity market in India as the private insurers will now develop and attractively price their annuity products, lest they risk losing their customers for deferred pension products. Having done so, they would still need to offer comparable returns as those being offered by LIC, which has enormous investments in high yielding assets, which might not be available for subscription currently. To counter this challenge, private insurers could rely on their fund management capabilities to deliver better returns during the accumulation stage of a deferred pensions product such that at the time of vesting, surrender or death, the funds available to the policyholder are comparatively larger. This would help them to obtain a higher monthly annuity income in absolute terms, even if the annuity rates are themselves slightly uncompetitive when compared to those of LIC. Of course, one must always appropriately take account of and allow for any asset-liability mismatch. Conclusion The period since September 2010 has been a challenging year for the industry as, in addition to declining revenue, the industry also lost a certain distribution capacity. Some of the domestic promoters of the insurance companies have openly stated their desire to sell their stake, in spite of the fact that the valuations of these companies would have suffered on account of the fall in business and prevailing market conditions. This in a way is reflective of the internal growth challenges being faced by the companies and the reluctance of promoters to continually fund the business with no break even in sight in the near term. Towards the end of 2011, IRDA published its IPO guidelines to help companies raise capital to fund their growth. But many practitioners do not foresee domestic insurers approaching the public to disinvest their stake or to raise fresh equity in the short to medium term, as the market sentiments do not appear to be conducive at present. Moreover, without a corresponding increase in FDI limits from 26% to 49%, Foreign Institutional Investors (FIIs) would not be able to subscribe to the IPOs, which could impair the price discovery process for the equity stake on offer. Without the involvement of FIIs it could possibly be a challenge to get the public issues fully subscribed as domestic investors alone might not have the required capacity to absorb the desired entire public issue. towerswatson.com 17

5 However, the silver lining has been that more companies have reported profits this year, which might encourage promoters of other companies to stay invested in this business for a little longer and drive positive sentiments in the market. The bancassurance channel, deferred pensions business and immediate annuities market could collectively emerge as the key drivers of future growth for the insurance industry in the near term. With Punjab National Bank entering into manufacturing by picking up an equity stake in MetLife India, Syndicate Bank being in the final stages of short listing its partner for life market entry and many more banks having expressed their desire to enter this business, we could see the declining trend starting to reverse during The bancassurance guidelines, which has thrown open the bancassurance market to late entrants might also prove be a shot in the arm for the industry. With the new pension guidelines coming into force, 22 pension products have been filed with IRDA for approval. This could help the industry revive the pensions business in the country, which was one of the primary causes for decline in new business collections last year. The bancassurance channel, deferred pensions business and immediate annuities market could collectively emerge as the key drivers of future growth for the insurance industry in the near term. With companies moving away from a top-line oriented approach to a bottom line focus, sales at any cost would be replaced by profitable growth as the new mantra for the industry. Enhancing sales force productivity, reducing costs, improving persistency and increasing the share of customer wallet by cross selling additional products would serve as the foundation on which companies could plan to build quality business and a strong customer base going forward. Contact Rajesh Sabhlok is a senior consultant with the Risk Consulting practice in India. Rajesh has more than a decade of experience in the Indian insurance industry and currently specialises in providing bespoke strategic consulting support to life insurance, general insurance and health insurance companies in the areas of products, markets, distribution and business strategy. Rajesh Sabhlok rajesh.sabhlok@towerswatson.com Vivek Jalan is Director - Risk Consulting at Towers Watson in India and leads the life insurance consulting practice. Vivek has over 10 years of experience in the Indian Insurance industry and has successfully lead several consulting assignments for life insurers in varied areas such as product development and pricing, business planning, actuarial appraisal valuations and business strategy. Vivek Jalan vivek.jalan@towerswatson.com 18 towerswatson.com