For the first time in the last five years the life insurance industry has witnessed negative growth in gross written premium for the nine-month period from April to December 2008. Ulips,which sold well when equity markets were rising,are not finding too many takers nowadays. Rajesh Relan,managing director of MetLife India Insurance,spoke with Suneeti Ahuja on how the slowdown is affecting the industry.
How badly is the life insurance industry affected by the slowdown?
During the last nine months (April to December 2008) private sector insurers gross written premium (GWP) has grown by 20 per cent,but that of the entire industry has declined by 2 per cent compared with the same period last year. During this period MetLife has grown by 68 per cent.
The impact of the slowdown will be seen at four levels: immediate,short,medium and long-term. The immediate impact will be felt by consumers. Consumer behaviour is driven by priorities. The first priority is to pay off the house mortgage,second is the car EMI,third is premium on car insurance,fourth is credit card outstanding,and fifth is health-related expenditures. Only after these come personal investments like the life insurance policy. If the consumer has already bought a life insurance or a pension policy,he is unlikely to opt for another one.
Going forward,for this year we think the life insurance business will be flat. We not only anticipate a slowdown in first-year premiums,but there is also a likelihood of many existing policyholders not being able to pay premiums. This is the short-term impact.
Over the medium-term,the profitability of companies will be affected. Statutory premium (a combination of first-year and renewal premium) is going to be lower. While variable expenses tend to fall in line with the drop in new business,fixed expenses continue to be the same. Companies,therefore,will end up incurring higher losses.
In the long-term,the breakeven of some companies will get deferred.
With lapsation on the rise,do you think companies will change the commission structure for agents?
Remuneration of agents is regulated by Section 40 A of the Insurance Act. This Section limits the ability of the industry to structure commission payouts as per the market needs. Once the Insurance Bill is passed,it will empower IRDA to make changes to commission payouts. This will provide the required flexibility in commission structuring and will lead to better persistence rates.
IRDA is working on merger and acquisition guidelines. What is the relevance?
For the last eight years,all insurance players have been growing organically. In my opinion,there has to be a major event that will trigger mergers,acquisitions and consolidation within the life insurance industry.
A recent report by McKinsey substantiates my point. According to their research,India will need $1.3 trillion of capital by 2015 to sustain healthy growth. One-third of this capital is expected to come from financial services,which includes life insurance. Now,to reach such a level of growth,we need to have enough capital. If this capital is not coming from within the country,then it may have to be brought in in the form of FDI (Foreign Direct Investment).
Do you see the New Pension System as a challenge to life insurance companies?
We see NPS as complimentary rather than contradictory to life insurance. Even with NPS,life insurance companies will continue to market their pension plans. The only difference that one could see would be the add-ons to help differentiate it from NPS. For example,there could be a life cover with the pension plan,where,in the event of death of the principal policy holder,the sum assured itself becomes the corpus and the nominee could get the annuity.
We have always been propagators of financial reforms. I have been associated with NPS since the beginning. Unfortunately,I do have a disconnect with the way NPS is planned. It might have been better if NPS were not restricted only to pension fund managers. It could have been more broad-based with participation from banks,life insurance companies and mutual fund companies.
In my view,life insurance companies will continue to play an active role in providing annuities. Going forward,more life insurance companies will get into the business of immediate annuities. At present,it is not so due to low demand and low supply of long-term bonds in the financial market. Once these happen,customers will be able to buy a variety of immediate and deferred annuities from insurance companies. The ability of life insurance companies to offer both immediate and deferred annuities is what differentiates us from NPS,which is present only at the accumulation stage.
Recently,the industry has seen a shift from Ulips to traditional products. Why?
This shift towards traditional products could be because of several reasons: it could be because of the lowering of solvency margin which has freed up some capital,or it could be due to the current market volatility which is encouraging buying of guaranteed products. We would like to attribute this trend to current market volatility combined with the introduction of new innovative traditional products by several insurers.
Do you think banks should be allowed to have tie-ups with multiple insurers to ensure greater penetration?
It is high time we free the market of such restrictions and allow the intermediary to recommend the right product to the customer. Multiple tie-ups will improve competitiveness and provide better products and services to customers.
At the same time,freeing up does not necessarily mean that intermediaries should be allowed a free hand to push products with the highest commissions. We need to encourage competition in the interest of the customer and at the same time ensure disciplined execution. u