Protection for protectors

When the life insurance industry was thrown open to the private sector in 2001-02, it was expected that new entrants would make money in seven years. That, they said, was the thumb rule. Today, however, to describe the financial position of most of the 17 private insurers as worrisome will be an understatement. The net loss reported by private insurance firms in 2007-08 has more than doubled to Rs 4,324 crore from Rs 1,950 crore in 2006-07.

According to the Insurance Regulatory Development Authority (IRDA)’s annual report, only two private players—SBI Life and Shriram Life— have been able to break even. In fact, experts tracking the industry warn of an imminent shakeout as private life insurers struggle to get their strategy right. “A number of insurers are heading for disaster. Their asset base is disproportionate to the capital infused. Many companies will soon be on the block,” cautions R. Ramakrishnan, retired Executive Director (actuarial), LIC, and a former member of the Malhotra Committee, which laid the roadmap for the privatisation of the sector.

N.S. Kannan

One-upmanship
So, how did these firms find themselves in such a mess? One big reason is the “market share at any cost” game plan, which backfired. It meant several capital infusions, which naturally pushed back the break-even levels. Despite their growing base, private sector premium income jumped 228 per cent between 2005-06 and 2007-08.

“It is easier for companies with lower capital to show returns. In the last two years, the number of insurance office networks has doubled from 5,000 to 11,000, and the field force has gone up from 1,15,000 to 2,48,000 to cater to new business. While this enhanced premium collections, it called for higher capital investment and delayed profits,” says S.B Mathur, former Chairman of LIC, and currently Secretary General, Life Insurance Council.

The fact that many of the private players enjoyed an over-hyped valuation, also didn’t help matters. ICICI Pru Life, for instance, was valued in excess of $12 billion in 2007, despite its accumulated losses. In fact, such high valuation sometimes encouraged or even forced private insurers to chase growth by pumping in more capital, causingfurther damage to their books.

In the end, sustained liquidity crunch did force some firms such as Bajaj Allianz Life to do a midcourse strategy correction. “We stopped expansion 18 months ago as we felt that the expense per person was going up while revenues were coming down. The business model just wasn’t sustainable,” says Kamesh Goyal, Country Head, Allianz and CEO, Bajaj Allianz Life.

Failure to break even, though, is not the sole cause for worry for private players. Efficient capital deployment is another parameter where most of them have failed. Only three major players—SBI Life, Bajaj Allianz and HDFC Standard Life—score here. “Companies with a huge capital base relative to gross premiums will have to realign business soon, or break-evens could get pushed to 2015,” warns Goyal.

Also, profits come from the type of products sold. Term insurance products, credit loan insurance products and investment return participating policies (also known as Endowment policies) are capital efficient. “Many insurers, however, emphasised on Unit Linked Insurance Products (ULIPs) and are now caught on the wrong foot,” says R. Krishnamurthy, Managing Director, Distribution Practice, Watson Wyatt Insurance Consulting, a global consulting firm. ULIPs typically take a longer time to generate income for the insurer. Bajaj Allianz did report profits a couple of years ago on an Actuarial Funded ULIP product—a complex product which involved lowcapital outgo. But after IRDA banned the sale of these products, the company lost out.

Mathur also feels that rural obligations that most firms have, though sustainable in the long run, are a strain in the short-term. However, N.S. Kannan, Executive Director, ICICI Prudential Life, begs to differ. “Our average rural premium collected is only slightly lower than urban collections. But our infrastructure costs are much lower. In trying times, rural focus will provide the fillip for steady growth,” he says.

Contrarians
Yet, not everyone has lost out. Some firms continue to post small but significant profits. For instance, the ability to leverage their parentage has helped players such as SBI Life and Shriram Life to stand out. SBI Life was not seen as a contender for the top slot even as late as 2005-06. Its claim to success is its unique Bancassurance model, which takes full advantage of the State Bank of India’s resources. “We have successfully implemented this low-cost model,” explains U.S. Roy, Managing Director & CEO, SBI Life. So, while other players have to shell out two sets of commissions—one to the bank for the referral and one to the agent, in SBI Life, bank employees themselves sell policies directly and SBI Life saves on an agent’s commission. Also, such a set-up brings about huge manpower and infrastructure savings.

As of March 2008, SBI Life had just 180 branches of its own compared to over a thousand branches of some of its peers. These branches focussed largely on processing papers and paying commissions, while the SBI branches did the front ending and sales. “Our insurance advisors don’t have to explain the company’s antecedents to customers and can focus more on products. So, their productivity level naturally goes up,” says Roy.

In September-October 2008, SBI Life added 250 more sales offices in areas where SBI branches don’t exist, but it got them far better returns than their competitors. “Our investment of Rs 1,000 crore brought as much business as some of our competitors who had a capital base double or triple that value,” Roy says.

Realising the success of this model, HSBC Canara Oriental Bank of Commerce Life, the latest player on the scene, is now looking to replicate it. “SBI Life’s model is hard to beat because of its ready-made captive base. We, too, plan to utilise our parental advantage—the existing 4,000-branch network,” says Harpal Karlcut, CEO, HSBC Canara Oriental Bank of Commerce Life.

The other “winner”, Shriram Life, on the other hand, decided to use the Chennai-based Shriram Group’s existing base of 20,000 agents for its chit and truck financing companies, who had a ready base of customers. “We did not face problems with agents, but had to deal with issues relating to increasing their productivity and business,” says Akhila Srinivasan, Managing Director, Shriram Life. The company decided to follow a policy of managing a sustainable growth. It has a capital of just Rs 125 crore and does not foresee further infusion in the next two years. Shriram spent very little on publicity and has an average premium of Rs 18,000 per policy.

The Cure
Despite the losses, however, most players were investing aggressively till the sudden downturn late last year stumped them. “The distress signs were evident but we thought growth would stabilise to a reasonable 30 per cent from the high of 90 per cent. Instead, there is actually a negative growth,” rues Kannan.

The situation, in fact, may worsen for smaller players if the government doesn’t relax FDI guidelines from 26 per cent to 49 per cent as some of the domestic partners are not inclined to pump in more capital in the current environment.

So, is there any hope? Many see an opportunity in the downturn. With negative growth and tightening of belts, some predict that the break-even will happen faster—probably in the next two to three years. The slowdown may well prove therapeutic to an industry used to a scorching pace of growth.