Business Standard

Among the least profitable across Asia

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At a time when the country’s life insurance industry is facing a downturn in premium collection, it has earned itself a dubious distinction of being one of the “least” profitable market across Asia.

According to a study by McKinsey, the returns and profit margins in India are one of the lowest in the region. The study shows, the return on reserves from the life insurance sector in the country is the lowest, at — 27 basis points, whereas it is 110 basis points in China. Similarly, the profit margins or the new business adjusted profit (NBAP) margins are at 18 per cent, faring poorly with China, where the in the same period stood at 30-60 per cent.

“In the past decade, ending 2010-11, the total capital invested by private sector life insurers was over $7.5 billion, of which 50 per cent or close to $4 billion was invested to fund accumulated losses, which have largely been incurred to create distribution capacity,” the report said.

WHERE WE STAND
  GWP 
(in bn $)
Estimated
CAGR 
GWP in %
(2010-15)
Share of 
global GDP
growth in
 %
(2010-15)
NBAP 
margins
ROR 
(2004-09)
in basis
points
Japan 378 -1 2.8 NA 25
China 114 18 28.3 30-60 118
Taiwan 64 2 1.1 18 5
South Korea 52 5 2.8 20-44 74
Australia  33 5 1.7 10 166
India 57 13-14 10.3 18 -27
GWP: Gross written premium till 2010        NBAP: New business adjusted profit
ROR: Return on reserves Net profit divided by statutory reserves
  Source: McKinsey

Therefore, it is not surprising that a few of the 22 private life insurance companies operating in India have been able to achieve their break-even targets set out in their original business plan.

Till March 31, only three private life insurers have registered accounting profits for five years of their operation while a further four players have registered profits in three years of their operations.

“In the early years there tended to be a land grab, and we went into second, third, fourth tier cities. Everyone was trying to build a scale. So, the new regulation was just a pull back of that earlier land grab strategy where we did build some scale, but didnit get the value. What we are seeing in India is a natural transition,” Mark Tucker, group chief executive and president, AIA, recently said during an interview with Business Standard.

Accordingly, most private life insurance companies have dropped their expansion drive and and adopted various rationalisation exercises in terms of branch network, agency force and distribution network, to cut cost and preserve capital.

The report expects the current slowdown in premium collection in the to continue for another 12-18 months, as insurers are looking to adapt their business model in accordance with the regulatory changes.

However, it indicated, in the medium to short-term prospects for the Indian life insurance sector remain attractive. It is estimated a growth rate of 13-14 per cent on a cumulative basis over 2010-2015, taking the total industry gross written premium at $110 billion.

Since the new regulatory norms were introduced in September 2010, the sector has been witnessing a drop in the premium collection. During October-September last year the first year premium collection for the industry was down by seven per cent.

This slide continued in the first six months of the financial year as well, when insurers witnessed a 21.35 per cent drop in premium collection.

Given the changes in the regulatory stance, expects that the Indian life insurers will shift their focus towards desigining products providing long term savings and protection for the economy.

“The current low levels of protection in India indicates that the upside for growth in the industry remains significant. This will entail a significant shift in the proposition of the industry — from deriving short-term investment linked products to increased focus on meeting the long term savings and protection objectives of the economy,” the report said.

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