India Market Life Insurance Update India Issue 61 December 2015 Introduction We are pleased to release our 61 st quarterly newsletter on the life insurance industry in India, covering developments during September to November 2015. As per data released by the Insurance Regulatory and Development Authority of India (IRDAI), the life insurance industry collected weighted new business premium of INR236 over the first two quarters of FY2015-16, a year-on-year growth of 3.3%. While the private life insurance sector witnessed a double digit growth of 20.2% in its weighted new business premium collections, the overall industry growth was pulled down by a fall of 8.9% witnessed by the state-owned Life Insurance Corporation of India (LIC) in the same period. Single premium sales rose for both private players and LIC which were driven by the group single premium segment recording a growth of 59.6% and 42.9%, respectively. Many foreign partners in life insurance joint ventures in India are at varying stages of increasing their respective stakes. Bharti AXA Life is the first insurer to have received the regulator s approval for increasing AXA s stake from 26% to 49% in the joint venture. Following the Insurance Laws (Amendment) Act 2015, the insurance regulator has issued a number of new regulations, exposure drafts and guidelines. Publication of recommendations of the committee that examined extant life insurance regulations and subsequent release of exposure draft by the IRDAI on Assets, Liability and Solvency Margin (ALSM) of life insurance business and guidelines on Indian Owned and Controlled are some of the significant ones. In the reporting period, two-fifths of new product launches were unit-linked products, which are in demand due to good returns in unit-linked funds. We provide an overview on these and other market developments in this edition of the newsletter. We hope you continue to find the newsletter interesting and informative and look forward to receiving your feedback. Towers Watson Risk Consulting & Software, India In this issue Industry statistics Industry new business performance Financial assets of household sector in India Market update Stake transfer to foreign players Company news Q2 Financial results FY2015-16 Embedded Value (EV) disclosures by private life insurers Appointments and key role changes Update on social security schemes Regulatory update IRDAI (ALSM of Life Insurance Business) Regulations, 2015 IRDAI (Other Forms of Capital) Regulations, 2015 IRDAI (Minimum Limits for Annuities and other Benefits) Regulations, 2015 The Insurance Laws (Amendment) Act 2015 - Guidelines on Indian Owned and Controlled Guidelines on remuneration of Chief Executive Officer (CEO)/ Whole-time Director (WTD)/ Managing Director (MD) of Insurers Anti-Money Laundering (AML)/Counter-financing of Terrorism (CFT) Guidelines IRDAI (Issuance of Capital by Indian Insurance Companies transacting Life Insurance Business) Regulations, 2015 IRDAI (Registration of Corporate Agents) Regulations, 2015 IRDAI (Preparation of Financial Statements and Auditors Report of Insurers) Regulations, 2015 IRDAI (Obligations of Insurers to Rural and Social Sectors) Regulations, 2015 Others Distribution update Growth in new business premium income by channel during April to September 2015: New business momentum driven by bank-led distribution models Products update Recent product launches Contact details Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 1
Industry statistics Private insurers continued to witness growth in new business, registering a year-on-year growth of 20.2% in weighted new business premium collections in the period April to September 2015. At the same time, the LIC recorded a decline of 8.9% in weighted new business premium collections, resulting in an overall industry growth of 3.3%. Whilst LIC witnessed a decline in weighted new business premiums, it demonstrated a growth of 9.3% in total new business premium collections owing to its sales weighted heavily towards single premium business. Industry new business performance Star Union Dai-ichi Life Source: IRDAI Weighted new business premium collections of private life insurers (in INR ) ICICI Prudential Life SBI Life HDFC Life Birla Sun Life Reliance Life Max Life Kotak Life Bajaj Allianz Life PNB MetLife Others 0 5 10 15 20 25 April to September 2014 April to September 2015 Comparison of relative market shares of private life insurers in April to September 2015 and April to September 2014 Total private players Q2 FY2015-16 Q2 FY2014-15 48.6% 41.7% Weighted new business premium collections in April to September 2015 and April to September 2014 (in Rs ) LIC 0 40 80 120 160 April to September 2014 April to September 2015-8.9% YoY decline +20.2% YoY growth As per statistics released by the IRDAI, life insurance industry in India collected weighted new business premiums of INR236 in the first half of FY2015-16, representing a modest growth of 3.3% over the same period in FY2014-15. Weighted new business premiums are calculated as 100% of regular premium and 10% of single premium. State-owned LIC witnessed a fall of 8.9% in its weighted new business premium collections leading to a decrease in market share from 58.3% to 51.4%. LIC s weighted individual and group business declined by 11.1% and 3.2%, respectively. Private insurers have, however, continued with their buoyant performance over the first half of FY2015-16 recording a growth of 20.2%, increasing their market share to 48.6%. Both private players as well as LIC have increased focused on group single premium sales, evident by a strong year on year growth of 59.6% for private players and 42.9% for LIC during the half year. ICICI Prudential Life further strengthened its position as the market leader amongst private insurers, with a rise in its market share from 7.8% to 9.5%, year-on-year, owing to a strong growth of 24.7% in weighted new business collections. Except for Reliance Life and Bajaj Allianz Life, all of the top 10 private insurers have recorded a positive growth in their weighted new business premium collections. SBI Life has registered a substantial growth of 59.9% in its weighted new business premium collections. Kotak Life, Star Union Dai-ichi Life, Tata AIA Life, Shriram Life and Future Generali Life have also witnessed significant surge in their weighted new business collections in excess of 80% over the previous year. Shriram Life has reportedly attributed its growth to focus on distribution through micro-finance institutions. As the sector shows signs of recovery and stability, industry experts and analysts expect the growth momentum to continue over the long term. Credit Suisse has forecast that the industry shall remain relatively flat over the short term as the industry stabilises, however it remains poised to grow by 14.6% per annum over the next 10 year period. A marginal decline over the short term horizon is expected due to relatively unstable regulatory regime. Press statements suggest general growth expectations in the industry for FY2015-16 as LIC and HDFC Life have stated expected business growth of 10-20%, while Kotak Life is targeting growth in excess of 20%. Insurers with a smaller base such as Edelweiss Tokio Life and DHFL Pramerica Life have stated targets of up to 40-50%. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 2
Household sector financial assets (in INR ) Year on year growth Financial assets of the household sector in India Life Insurance, as a part of the total household savings in India, has stabilised after facing a decline in 2010 owing to regulatory reforms. A comparison with similar statistics for select developed countries, like the USA, the UK and France, indicate similar proportions of household savings invested in insurance. The following chart represents trend in the proportion and growth of life insurance savings as part of the household sector financial assets in India. The analysis spans over the past 15 years since the privatisation of insurance sector in India. The trend line chart represents the year on year growth in life insurance savings; and the column graph represents life insurance as part of the total household financial assets. 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Household sector - financial assets 26% 19% 22% 21% 15% 21% 18% 16% 19% 14% 14% 16% 13% 15% 14% FY00-01 FY01-02 FY02-03 FY03-04 FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 FY12-13 FY13-14 FY14-15 Life insurance Others Life insurance - YoY growth 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% Source: RBI statistics Life insurance accounts for 19.0% of the total household financial assets in India of INR12,356 for FY2014-15. The Banking sector holds the largest share of these assets with 46.9%, while pension funds contribute 16.3%. The proportion of life insurance peaked in FY2009-10 with 26%, as a result of rapid growth in preceding years and better penetration with opening up of the sector to private insurers, followed by a relative decline in the following years. Similarly, year-on-year growth in life insurance savings reached a peak in FY2009-10 followed by a sharp decline and a rise again in the past few years. During the period of global economic crisis after FY2007-08, life insurance witnessed a rise in its share from 15.0% in 2006-07 to 22.0% in FY2007-08, while savings in banking sector dipped from 56.1% to 50.4%. The following graphs show a comparison of life insurance and pension funds, as a component of household financial assets of India with developed economies like the USA, the UK and France. Growth is calculated as compounded annual growth rate (CAGR). 25% Growth in life insurance and pensions Proportion of life insurance and pensions in household financial assets in 2014 20% 15% 70% 60% 61.3% 10% 5% 0% -5% -10% 2006 2008 2010 2012 2013 France UK USA India* 50% 40% 30% 20% 10% 0% 38.5% 35.2% 34.2% UK France India USA Source: Global Investment Research Report, Goldman Sachs Notes: 2004 has been used as the base year for 2006; latest available data for the USA is as of 2013. *Years on the x-axis represent calendar years, except for India where year represents financial year (where for example, 2013 represents FY2013-14). The graphs indicate that the USA, France and India currently exhibit a similar proportion of insurance (life insurance and pension fund investments) out of the total household financial assets, i.e. around 35%-40%, while the UK holds a relatively higher proportion of insurance with 61.3%. Analysis of growth in insurance savings indicates that France, the USA and India have followed a similar trend over the period considered, with India showing more volatility compared to others. It is noteworthy that even though the proportion of household financial assets invested in insurance funds is similar in India to these countries, the overall insurance penetration remains low in India. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 3
Market update Following increase in the FDI limit in the Indian insurance sector to 49%, many foreign insurers have come further along in the process of increasing their stake in their existing joint ventures. However, the requirement of fulfilment of the recently released management control guidelines and negotiations between partners to reach a mutually agreeable valuation has delayed the process for some insurers. Stake transfers to foreign partners After nearly eight months since the passage of the Insurance Laws (Amendment) Act, which raised the FDI limit in the insurance sector to 49%, only one foreign insurer has so far received regulatory approval for a stake hike in its life insurance joint venture. Meanwhile, most life insurers have expressed public interest in increasing their respective foreign partners share in the joint venture and are at varying stages of this process. The completion of the stake transfer for some of these life insurers has been held up due to clarity sought regarding management control from the regulator. Bharti AXA Life, which was previously asked by the IRDAI to rework its shareholding pattern in accordance with the clarification on management control guidelines released by the regulator, has now received the regulator s nod and has announced that AXA shall increase its stake from 26% to 49% in the joint venture. HDFC Life has applied to the Foreign Investment Promotion Board (FIPB) for approval for Standard Life s stake hike to 35% in the joint venture and is also working to meet the regulatory guidelines. The details of this transaction were covered in our India Market Life Insurance Update, Edition 60. Following this transaction, the HDFC Life has indicated intentions of launching an Initial Public Offering (IPO) by mid-2016. Aegon Life has obtained approval from the FIPB to increase the stake of Aegon to 49% in the joint venture. This proposal had previously been deferred by the FIPB. Aviva Life has obtained approval from Competition Commission of India (CCI) to increase the stake of its foreign partner Aviva from 26% to 49%. Media reports suggest that Nippon Life is in an advanced stage of discussions to raise its stake from 26% to 49% in Reliance Life. The deal is subject to regulatory approvals and is expected to be completed within the current financial year. The joint venture will be subsequently renamed to Reliance Nippon Life Insurance. Sun Life Financial has stated that it will increase its stake from 26% to 49% in its joint venture - Birla Sun Life. The transaction is expected to close by the end of the current financial year. SBI Life has also begun the process to increase the stake of BNP Paribas from 26% to 36% and the joint venture partners expect to reach an agreement on the valuation of SBI Life over the next couple of months. Star Union Dai-ichi Life and DHFL Pramerica Life are amongst the other insurers who have reportedly made progress in their joint venture negotiations and are close to increasing the shareholding of their respective foreign partners- Dai-ichi Life and Prudential Financial Inc. to 44% and 49%, respectively. In addition to this, Max India is reportedly in talks with four private equity firms for sale of a 22% stake in Max Life such that the combined stake held by the private equity investors and the existing foreign partner Mitsui Sumitomo in the joint venture would increase to nearly 49%. The chart presented below summarises the current state-ofplay for various life insurers in their respective stake transfer process at the time of releasing this newsletter, based on information available in the public domain. Key transaction figures, where available have also been included. Source: Towers Watson analysis of company disclosures and press releases Notes: 1. As reported in the media or calculated as implied valuation divided by most recent available EV disclosure Copyright 2. 2014 Outstanding Towers # Watson. shares All is the rights total reserved. number of shares of the insurance company from 30 September 2015 public disclosures towerswatson.com 4
Company news Aegon Religare Life Insurance has been renamed to Aegon Life Insurance after the exit of Religare Enterprises from the joint venture. Religare Enterprises exited the life insurance company by selling its 44 per cent stake to partner Bennett, Coleman and Company Ltd (BCCL) for INR9.7. ICICI Bank has reportedly agreed to sell a 6% stake in ICICI Prudential Life in two separate deals. 4% stake will be sold to Premji Invest, an investment company of Azim Premji, and 2% stake will be sold to Compassvale Investments Pte Ltd, an arm of Singapore government-owned Temasek Holdings. This will reduce the shareholding of ICICI Bank in the joint venture to approximately 68% while the foreign partner Prudential Inc will maintain its stake of 26%. The reported total transaction value of the two deals is INR20, which put the valuation of the company at INR325 with an implied EV multiple of 2.4x. India First Life has received a capital infusion of INR1.5 from its three promoters Bank of Baroda, Andhra Bank and Legal & General, in line with their existing shareholding pattern of 44%, 30% and 26%, respectively. Hence, the total share capital of the firm has risen to INR6.25. The additional capital would be primarily used for technology and new business growth. The IRDAI has reportedly granted permission to the UK-based reinsurer Lloyd s to set up its branch office in India. The modalities of approval were announced as an exposure draft by the IRDAI which would also serve as a basis for other applicants in future. Following key regulatory reforms, various life insurance companies are looking to reorient their strategic direction and are investing in devising better customer value proposition, better risk management processes and technology adoption to reduce cost. In particular, the firms are looking to expand their growth with the help of digitisation, data analytics, and other technological advancements. As per press reports, the Indian insurance industry is expected to spend INR141 on IT services and products in 2016, a 9.6% increase over 2015. Q2 Financial results FY2015-16 19 private players have made their financial results available* at the end of Q2 FY2015-16. Twelve amongst these have reported a profit over the first six months of the current financial year. Out of these, only 4 have witnessed a positive year-on-year growth in their profit after tax compared to the end of Q2 FY2014-15. These are Bajaj Allianz Life, DHFL Pramerica Life, Kotak Life and ICICI Prudential Life. Bajaj Allianz Life is the only insurer to have observed a growth of more than 100% in its profit after tax from INR2,179 million from the corresponding period last year. ICICI Prudential Life has reported the highest absolute profits of INR8,118 million in the period under study, followed by Bajaj Allianz Life with a net profit of INR4,566 million. On the other hand, Aegon Life has witnessed a year-on-year increase in its losses from INR268 million to INR539 million. Other insurers who have witnessed a year-on-year increase in their losses include Edelweiss Tokio and Star Union Dai-ichi Life. India First Life, which reported its maiden profit in FY2014-15 followed by losses in Q1 FY2015-16 has continued to report a loss of INR102 million at the end of Q2 FY2015-16. The total profit after tax for private insurers has fallen by 9% from INR26,709 million over the first six months of FY2014-15 to INR24,296 million in the corresponding period of FY2015-16. ICICI Prudential Life and Max Life have declared interim dividends of INR3,007 million and INR1,823 million respectively for the half of FY2015-16. Source: Towers Watson analysis using public disclosures data. *Figures for Aviva Life, Sahara Life, Bharti AXA Life and Canara HSBC OBC Life are not available as at September 2015 Credit Information company Experian India, whose presence until now had primarily been within the banking industry, has been selected by Indian life insurance companies to build a data repository and fraud monitoring framework. It will collect data from all life insurers and conduct micro segment scrutiny of location segments and demographics where fraud instances are high. Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 5
Embedded Value (EV) disclosures by private life insurers Although only a limited number of life insurers currently disclose their EV, there has been a gradual increase in the number of companies disclosing EV as well as the frequency of disclosures, thus signalling greater acceptability. Life insurance companies in India who have disclosed their EV as at the end of FY2014-15 include Bajaj Allianz Life, Birla Sun Life and ICICI Prudential Life while others who have provided their EV as at 30 September 2015 include Exide Life, HDFC Life and Max Life. The most recent information available for these life insurance companies, is summarised below: Exide Life HDFC Life Max Life Bajaj Allianz Birla Sun Life ICICI Prudential Reported as at 30 September 30 September 30 September 31 March 31 March 31 March Reported EV INR 16.58 INR 95.5 INR 53.63 INR 93.02 INR 32.6 INR 137.21 Capital* INR 17.50 INR 21.60 INR 19.87 INR 12.11 INR 21.01 INR 48.16 EV / Capital ratio 0.9 4.4 2.7 7.7 1.6 2.8 Reported new business margin (pre expenseoverruns) not disclosed 22.5% 20.2% 18.1% 14.1% 13.6% Methodology used ~ MCEV ~ MCEV ~ MCEV ~ IEV not disclosed ~ IEV Source: Towers Watson analysis of company disclosures and press releases Notes: *Capital presented above includes paid up share capital and share premium account as per Company disclosures Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 6
Appointments and key role changes Aviva Life has appointed Anjali Malhotra as Chief Customer, Marketing and Digital Officer. Jyoti Vaswani has succeeded Nirarkar Pradhan as the Chief Investment Officer (CIO) of Future Generali Life. She was previously working with Aviva Life as CIO and Director - Fund Management. Dana Yussupova has been appointed as Senior Vice President Internal Audit at Future Generali Life. Rushabh Gandhi has replaced Mohit Rochlani as the Chief Marketing Officer (CMO) of India First Life. Karni Arha, Chief Financial Officer (CFO) and Ranjan Dhawan, Chairman - Board of Directors have resigned from their roles at the company. Bharat Kannan has been appointed as the Chief Distribution Officer of PNB MetLife for Asia. He had joined the company in 2005 as the head of Employee Benefits for Asia. R Radhakrishnan has been appointed as the CMO of Shriram Life. He is succeeding Narendra Kulkarni. Yuichiro Abe has taken the role of Chief Risk Officer (CRO) at Star Union Dai-ichi Life. Akira Yamashita, who was earlier managing this role, has now been appointed as the Head - Financial Planning and Budget Control at the same company. Adit Trivedi has been appointed as the CRO of Tata AIA Life. Update on social security schemes The three social security schemes - Pradhan Mantri Jeevan Jyoti Beema Yojana (PMJJBY), Atal Pension Yojana and Pradhan Mantri Suraksha Bima Yojana (PMSBY) launched by the Prime Minister in May 2015 have continued to witness large number of enrolments. As at the end of November, total enrolments for these schemes were in excess of 121 million with enrolments in PMJJBY at over 28 million and PMSBY at over 91 million. State Bank of India and Punjab National Bank have continued to lead banks with maximum enrolments of over 21 million and 8 million members, respectively. As per a circular issued by the Ministry of Finance, the last date for enrolling under PMJJBY and PMSBY, without selfcertificate of good health for PMJJBY, has been further extended until 30 November 2015. Persons enrolling in PMJJBY after this date will be required to submit prescribed self-certification of good health while those enrolling in PMSBY are not required to do so. The National Insurance Company has reportedly tied up with the Department of Posts for marketing of policies under the PMSBY. In addition to this, Boxing India (BI) has reportedly decided to facilitate PMJJBY for medal-winning women boxers from this year. Shriram Life has reportedly tied up with SEWA bank to offer PMJJBY to the rural population in Gujarat. The total number of policies sold by the insurer as at the end of November was over 5,000. Reportedly, the IRDAI has approved the Life Insurance Council s appeal to offer 50% rebate on reinsurance rate on PMJJBY in an effort to help minimise potential losses to life insurers from these low premium schemes. In addition to this, the Life Insurance Council has made an appeal to several state governments to waive the stamp duty of INR40 for selling this product. As per the official website for these schemes, the total number of claims reported until the end of November were in excess of 7,800 for PMJJBY and 1,540 for PMSBY. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 7
Regulatory update Pursuant to the Insurance Laws (Amendment) Act 2015, the regulator has issued a number of new regulations, exposure drafts and guidelines. The most significant developments during the quarter have been the publication of recommendations of the committee that examined extant life insurance regulations and subsequent release of exposure draft by the IRDAI on ALSM of life insurance business. Additionally, the IRDAI has mandated all insurance companies to comply with the requirement of Indian Owned and Controlled by January 2016. IRDAI (ALSM of Life Insurance Business) Regulations, 2015 A committee formed by the IRDAI to examine existing life insurance regulations, with a focus on actuarial aspects has submitted a detailed report on its findings and recommendations. The committee recognised the need to align regulatory framework to the International Association of International Supervisors (IAIS) Core Principles. Furthermore, it recommended adoption of a Risk Based Capital (RBC) framework of solvency assessment with a smooth transition over a period of few years during which a concurrent framework could be in place. Upon further consultation of the Insurance Advisory Committee, the IRDAI has released an exposure draft on valuation of assets, liabilities and solvency margin of life insurance business. While most amendments are in line with the recommendations of the committee on review of life insurance regulations, the IRDAI has been silent on the transition towards a RBC framework. Key highlights include: The regulations have introduced the requirement to maintain Available Solvency Margin at a level, which is not less than 50% of the amount of minimum capital and 100% of required solvency margin, whichever is higher. Introduction of Control level of Solvency, i.e. the minimum solvency ratio on the breach of which the Authority shall take action. Such a breach would be where the solvency ratio falls below 150%. The regulations allows an insurer to raise money through preference shares, debentures and other subordinated debt, subject to a cap of 25% of the total paid up equity capital. Amongst other inadmissible assets, value of leasehold improvements and service tax unutilised credit to be considered inadmissible. The specific requirement of depreciation of computer hardware and software has been excluded, instead the value of computer equipment stated in the financial statements should be used for the calculation of solvency margin. individual products should be higher of gross premium valuation reserve and unexpired premium reserve. The regulations have further detailed the valuation methodology of variable insurance products. If valuation basis allows for the lapse decrement, then it should be based on past experience of the product or similar products, allowing for the expected future experience based on the nature of the products, target market and distribution channel. The mathematical reserves shall be the highest of reserve computed under Gross Premium Valuation method, Guaranteed Surrender Value and Special Surrender Value. This best practice has been followed by most of the Companies currently, it has now been formalised in this regulation. Requirement of additional reserves to be held for expenses if the valuation assumptions for expenses do not reflect the current expense experience of the insurer. The IRDAI has further released an exposure draft with guidelines on the procedure for preparation of Actuarial Report and Abstract (ARA). The statement of assets (Form AA) has been moved to ARA from the ALSM regulations. It also states that the statements should be prepared separately for participating and non-participating business. IRDAI (Other Forms of Capital) Regulations, 2015 Our India Market Life Insurance Update, Edition 60 covered the exposure draft on other forms of capital. The draft guidelines have now been issued as regulations and amongst other minor updates, the minimum redemption period of preference shares and debentures has reduced to 10 years from previously stipulated 15 years as per the exposure draft. Regulation stipulates the calculation of reserves for one year renewable group term assurances including riders attached to group business should allow for unexpired risk, premium deficiency and incurred but not reported claims. Furthermore, reserves for riders attached to Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 8
IRDAI (Minimum Limits for Annuities and other Benefits) Regulations, 2015 The regulator has issued minimum limits for annuities and other benefits secured by policies offered by life insurers, where benefits are not less than: Annuity of INR1,000 per month, Gross sum of INR1,000 for micro-insurance and health insurance business, Gross sum of INR5,000 for other life insurance policies. However, the IRDAI may approve lower annuities and other benefits in extraordinary circumstances. The Insurance Laws (Amendment) Act 2015 - Guidelines on Indian Owned and Controlled While the passage of Insurance Laws (Amendment) Act 2015 allowed increase in FDI limit in the Indian insurance sector to 49%, it also provided for a stipulation that insurance companies be Indian owned and controlled. Our India Market Life Insurance Update, Edition 59, covered the clarifications issued by Ministry of Finance in this regard. The IRDAI has subsequently released guidelines providing further clarity. Key tenets of the guidelines include: Control can be exercised by virtue of shareholding or management rights or shareholder agreements or voting agreements. Indian promoter shall nominate majority of the directors, excluding independent directors. The Chairman of the Board with a casting vote shall also be nominated by the Indian promoter. The Board shall appoint key management person including the CEO. Control over significant policies of the insurance company should be exercised by the Board. Quorum (i.e. minimum number of members necessary to conduct the business of a group), should include presence of a majority of Indian directors irrespective of whether a foreign investor s nominee is present or not. The right of a foreign investor s nominee to constitute valid quorum for meetings shall be considered a protective right. Guidelines on remuneration of Chief Executive Officer (CEO)/ Whole-time Director (WTD)/ Managing Director (MD) of Insurers Under the current regulations, there are no limits set by the IRDAI on the remuneration of CEO/WTD/MD of life insurance companies apart from the clause of remuneration beyond INR15 million should be debited to shareholder s fund. The IRDAI has issued guidelines outlining a framework of the compensation of top-level executives. It suggests formulation of a comprehensive compensation policy and an annual review thereafter. The key recommendations are: Compensation should be adjusted for all types of risks, compensation outcomes should be symmetric with risk outcomes and the pay-outs should be sensitive to the time horizon of the risk. Asset mix of compensation in terms of cash and equity must be consistent with risk alignment. The fixed and variable pay components must be reasonable and balanced. Employee Stock Option Plan (ESOP) may be excluded from the variable pay but the extent of ESOP should be reasonable. The variable component must be attached to the financial performance of the insurer. Sweat equity should be governed by the regulations of the Sweat Equity Regulations issued by Securities and Exchange Board of India (SEBI). Anti-Money Laundering (AML)/Counterfinancing of Terrorism (CFT) Guidelines The IRDAI has issued guidelines on AML, requiring life insurers to establish an AML programme for guarding against insurance products being used to launder unlawfully derived funds or to finance terrorist acts. The regulator has laid emphasis on know your customer norms, due diligence, risk assessment and implementation of Unlawful Activities (Prevention) Act. The programme envisages submission of reports of certain transactions to Financial Intelligence Unit- India. Suspicious Transactions Report (STR) is another measure to ensure that all complex, unusually large transactions with odd patterns are scrutinised for their authenticity. All the existing insurance companies irrespective of their intention to increase foreign stake-holding, are required to comply with these guidelines by January 2016. Reports suggest that with the new norms, multinationals can no longer enter into agreements which give them a veto power in the management of the insurance business. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 9
IRDAI (Issuance of Capital by Indian Insurance Companies transacting Life Insurance Business) Regulations, 2015 The IRDAI has issued exposure draft on issuance of capital by life insurance companies allowing life insurance companies to go for an IPO subject to compliance of the lock-in period specified in the certificate of registration. The key highlights of the exposure draft are: IRDAI (Preparation of Financial Statements and Auditors Report of Insurers) Regulations, 2015 Pursuant to the notification of the Insurance Laws (Amendment) Act, 2015 the IRDAI has released exposure draft to amend the existing Preparation of Financial Statements and Auditor s Report of Insurance Companies Regulations, 2002. The key highlights include: It gives the IRDAI the authority to direct a life insurance company to issue its IPO within one year, if the circumstances warrant so. Revised formats to capture other forms of capital and head office account (applicable to foreign reinsurer operating through branch office established in India). It has removed the prerequisite condition of the EV to be twice of the share capital plus securities premium. Stipulation barring any investment in property for selfuse using funds of participating business. The insurer would be required to provide additional disclosures on agent productivity, investment in equity and bonds, value of new business, reinsurance strategy and significant accounting policies. In addition to the existing, the draft exposure has introduced a few other accounting principles for treatment of forward exchange contracts, preliminary expenses and catastrophe reserve. Reports suggest that large insurance companies ICICI Prudential Life, SBI Life and HDFC Life, with Assets Under Management (AUM) of more than INR600 might be directed by the IRDAI to issue IPO so that the sharing of risks and returns are not concentrated in one or two partners. It is expected that this would result in greater transparency and accountability required for efficient management of companies. IRDAI (Registration of Corporate Agents) Regulations, 2015 The existing regulation on corporate agents followed a tied agency model, in which a corporate agent could have a tie-up with only one insurer from the same line of business. As covered in our India Market Life Insurance Update, Edition 59, an exposure draft on registration of corporate agencies was issued allowing a life insurance corporate agent to have arrangements with a maximum of three life insurers to solicit, procure and service their life insurance products. The exposure draft has now been formalised as a regulation with some additional guidelines for the corporate agents that intend to undertake telemarketing activities. The corporate agent is required to file with the IRDAI the names of authorised verifiers engaged by the telemarketer, for them to be issued a certificate. Reports suggest that the IRDAI is further planning to strengthen the norms against mis-selling by corporate agents by making the intermediaries accountable for the policies sold by them. Each policy will have to be mapped to the person selling it such that the person responsible can be tracked easily in the event of any complaint. The draft also lays down the instructions for preparation of financial statements for unit linked products and group insurance business. IRDAI (Obligations of Insurers to Rural and Social Sectors) Regulations, 2015 Our India Market Life Insurance Update, Edition 59, covered draft regulations on the Obligation of Insurers to Rural and Social Sectors, 2015. The IRDAI has now finalised the regulations that shall be applicable from FY2016-17. Key highlights of the regulations: The rural sector obligation has been defined as a percentage of the total policies written in that year. The percentage is dependent on the number of years the insurer has been in business. The obligation ranges from 7% in the first financial year to 20% from the 10th financial year onwards. The regulation also stipulates insurers during the second year of business to sell a minimum of 0.5% of total business procured in the preceding financial year in socially backward areas, this would gradually increase to 5% from year ten onwards. Every insurer is required to have effective operational procedures for accurate classification of business obligations into the rural and social sectors. In addition to this, insurers are required to submit an annual certificate, furnishing the actual business details of the fulfilment of these obligations. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 10
Others It has been reported that some insurers have been found to not fully comply with claim settlement orders passed by judicial or quasi-judicial bodies such as the consumer forum and insurance ombudsmen. The IRDAI has issued a circular directing all insurers to comply with such orders or appeal against the order within the stipulated time or within 60 days if a time frame is not explicitly provided. In line with the Government of India s Digital India Initiative, the IRDAI is rolling out an online system to track product development and approval process. Insurers would be asked to provide the required information in a prescribed format and the platform would also be used to resolve any queries that the IRDAI might have. This process is intended to provide greater transparency and accelerate product approval timeframes. Our India Market Life Insurance Update, Edition 50, reported the proposed regulation mandating life insurance companies to reinsure up to 30% of sum assured on each policy with domestic reinsurer - General Insurance Corporation of India (GIC Re). However, following further deliberations, in particular with respect to presence of other domestic reinsurers, it is reported that the IRDAI is yet to finalise the quantum of risk to be transferred and the proposal has been put on hold. The IRDAI has issued regulations regarding Maintenance of Insurance Records, directing life insurance companies to maintain electronic records of all policies and claims completely and accurately with necessary security features. It is also mandatory to provide access to these records to the Authority for both onsite and offsite inspections. The Board is required to frame a policy for the manner and maintenance of the records, such policy should be reviewed once in a year, within 90 days after financial year end. Once finalised, the insurer is required to submit its board approved policy on maintenance and storage of such records to IRDAI. The IRDAI recently issued guidelines for the general and health insurers on the Point of Sales Person, an individual who solicits and markets only certain pre-underwritten products approved by the Authority. The IRDAI recognised that the individual marketing such products requires a lesser degree of training and level of examination. Reportedly, life insurers have approached the regulator to allow for the same provision in the sphere of life insurance as well. Reports suggest that such a move will increase insurance penetration and reduce the overall cost of distribution. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 11
Distribution update The reporting period saw an increased focus on developing IT enabled and online presence by life insurers. The industry also witnessed some changes in the bancassurance tie-ups for a few key insurers. In this edition, we have also included our study of the growth in new business premium income by different channel in the first half of FY2015-16 which is driven largely by the bancassurance channel for the majority of the top ten private life insurers by weighted new business premium collections. Bajaj Allianz Life has renewed its bancassurance partnership with Dhanlaxmi Bank. As per the new agreement, the bank will continue to be its bancassurance partner for nine years. The insurer expects to leverage the bank s pan India presence with a network of 280 branches to sell its life insurance policies. Bharti AXA Life is planning to open five branches in FY2015-16, as a part of its strategy to expand its presence in the north east and tier three cities. As a further enabler to its expansion plans, the insurer is targeting to strenghten its active sales force by adding 200 to 300 personnel. Future Generali Life is reportedly aiming to drive its growth by entering into various bancassurance partnerships along with an addition of 8,000 to 10,000 agents to its agency force in FY2015-16. Additionally, the insurer is also working towards launching simplified underwriting products that can be sold easily and quickly over the counter. insurance penetration by spreading insurance awareness among the large rural and semi urban population. Reportedly, the insurer is also planning to open about 30 new branches in the country,with a major focus on Gujarat, in the FY2015-16 and is targeting a 30% hike in its new business revenues by this move. Tata AIA Life has tied up with IndusInd Bank to provide life insurance cover through the bank s branches. As per reports, a wide range of protection, savings and wealth creation plans will be offered through the banks network of 854 branches. Reportedly, this is the second largest bancassurance tie-up for the insurer. Prior to this, IndusInd Bank was a distribution partner of Aviva Life. To leverage online distribution channels, insurers are focussing on strengthening their online presence through various initiatives as below: Paytm is partnering with insurance companies in order to facilitate the cashless payment of renewal premiums through smartphones. It has started with three insurers HDFC Ergo, Religare Health Insurance and ICICI Prudential Life. With this facility, policyholders can log on to a mobile application and pay premiums using the Paytm wallet. Kotak Life aims to strengthen its distribution network with emphasis on bancassurance. It expects a growth of 25% in gross written premiums in the current financial year, increasing the contibution from bancassurance channel to 50% from the current 45%. In additon to this, the insurer plans to expand its active agency force, and increase digitisation so as to ease the process for both the bancassurance channel and agents. Bharti AXA Life aims to launch more online specific products in the next two to three years. Future Generali Life has launched an online portal to digitise its customer service procedure. The portal provides all the necessary details pertaining to the products and gives the customer an easy to use platform. The insurer is also planning to launch a new online term plan followed by an online endowment and an online unit linked product. SBI Life recently bought 100,000 sq ft office space in Navi Mumbai, with the aim of developing its IT resourcing. LIC, is planning to hire 0.2 million agents in FY2015-16 as a part of its recruitment drive for agents. The insurer expects nearly 85% contribution towards the business by its agency force. Shriram Life has entered into a partnership with Telenor Communications India, with the aim of providing insurance services to the telecom customers. The tie-up will increase India Post is reportedly planning to expand its life insurance business by offering a range of savings and insurance products to the general public, apart from its existing offering to the postal staff and government officials. It plans to leverage on its wide reach of 160,000 post offices, 45,000 postmen and 250,000 extra employees to offer a multitude of products and increase its insurance segment by 500%. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 12
Growth in individual unweighted new business premium income by channel during April to September 2015: New business momentum driven by bank-led distribution models. An analysis of public disclosures by life insurers show an overall decline in the individual new business premium collections for April to September 2015 compared to the same period in the previous year. The individual unweighted new business premium collection reduced by 10.1% in the industry, a fall which can largely be attributed to the sluggish performance of the agency channel, which witnessed a decline in new business collections of 14.4%. This decline in the agency channel contrasts with a growth of 3.6% for bancassurance and a marginal 0.7% growth for other channels. The following chart sets out relative contribution of each agency, bancassurance and other channels to overall growth in individual unweighted new business. Masked within the overall decline in individual unweighted new business collections for the industry is experience of the private players which combined witnessed a grown of 16.2% from first half of FY2014-15 and that of LIC which witnessed a fall of 23.5% year-on-year. The growth of 16.2% for private players was largely driven by growth in new business from bancassurance of 12.7% with growth in agency remaining relatively flat for private players as a whole. The relative channel performance is evident as 7 out of top 10 private insurers that have registered a year on year growth in individual new business premium are either bankpromoted insurers or have significant bancassurance tie-ups, whilst the three insurers that experienced fall in the unweighted individual new business premium income are all agency led. This is represented in the chart through relative contribution of each channel in the overall growth for each company. Amongst the top 10 private insurers, Kotak Life and SBI Life witnessed the highest growth in unweighted individual new business premium income for the half year. Whilst the growth for SBI Life was largely bancassurance driven, Kotak Life demonstrated a balanced performance of its bank and agency channels. The only other insurer with relatively balanced performance across these two channels was Max Life with all other insurers witnessing starkly different outcomes across channels. This is represented in the chart through blue/black markers showing the absolute year-on-year growth in bancassurance/agency channel for first half of FY2015-16. Birla Sun Life, which saw its bank-distribution partner, Citibank move to Tata AIA earlier in the year is the only private life insurer among those represented under the study to register a decline in its individual new business sourced through bancassurance channel. Source: Towers Watson analysis using public disclosures data. *Figures for Aviva Life, Sahara Life, Bharti AXA Life and Canara HSBC OBC Life are not available as at September 2015 and hence have been excluded from the above analysis. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 13
Products update There was an increased focus on unit-linked products with nearly two-fifths of the new product launches during September to November 2015 being linked products. Insurers are also looking to launch online insurance plans covering both savings and protection products - to strengthen their presence in the digital space. There has been a renewed interest in unit-linked products, driven by a positive economic outlook, leading to a 20% to 30% annualised gains in unit-linked funds over the past three years, as well as a resurgence in sales of unit-linked policies. We have observed a relatively higher number of unit-linked product launches during the current reporting period as compared to the previous quarter. Meanwhile Exide Life is reportedly planning to re-align its strategy to shift its new business mix towards a greater proportion of unit-linked products from its current portfolio dominated by non-linked products. SBI Life however has stated that it intends to maintain a business mix as diversified as possible. To improve policy persistency, PNB MetLife has launched a reinstatement drive which would enable the customers to avail waiver on reinstatement charges. Bajaj Allianz Life has also announced a special revival campaign to help policyholders renew their lapsed traditional life insurance policies. As per media reports, under the campaign, customers would be given a 50% waiver on the interest amount payable since the policies lapsed. Select company-wise new product launches during the period September to November 2015 are summarised in the table below: Company name Product name Product description Aviva Life Aviva Dhan Vriddhi Plus Non-linked; participating limited pay endowment plan. It provides flexibility to choose the premium payment term from 5, 7 and 11 years. It offers a maturity benefit of 100% of premiums paid along with accrued bonuses. Bharti AXA Life Bharti AXA Life Child Advantage Non-linked; participating endowment child plan offering two benefit pay-out options. It also provides waiver of future premiums on death. Birla Sun Life BSLI Wealth Aspire Plan Unit-linked; non-participating endowment plan. Loyalty additions are accrued at the end of every fifth policy year, starting from the fifth or tenth policy year depending upon the amount of premium paid. DHFL Pramerica Life DHFL Pramerica e-save Plan Online non-linked; non-participating endowment plan offering annual guaranteed additions based on the amount of annualised premium. DHFL Pramerica Rakshak Gold Non-linked; non-participating limited pay endowment plan offering annual guaranteed additions at the end of policy year that will increase after every three policy years. Edelweiss Tokio Life Edelweiss Tokio Life Dhan Labh Non-linked; non-participating limited pay endowment plan offering assured additions every year starting from the 13th policy year. Future Generali Life Future Generali Jan Suraksha Non-linked; non-participating single premium term insurance. Future Generali Flexi Online Term Plan Online non-linked; non-participating term insurance that offers flexibility to choose the form of death benefit from three options lump sum benefit, monthly pay-out or a combination of lump sum benefit and monthly pay-out. HDFC Life HDFC Life Click2Retire Online unit-linked; non-participating pension product offering a guaranteed vesting benefit. It has no entry/exit and policy administration charges associated. It provides single and limited pay options. Copyright 2015 Towers Watson. All rights reserved. towerswatson.com 14