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| Insurers talk profitability ahead of IPOs |
| Shilpy Sinha / Mumbai Mar 31, 2010, 00:36 IST |
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The focus has changed from the pursuit of new business to reducing cost, improving efficiency and building sustainability.
These days, insurers make no bones about the fact that they are cutting costs. After all, 10 years into the business, most life insurers are yet to break even and general insurance companies have racked up their own share of losses when they went about seeking more business.
Ten years ago, a survey had projected that the life insurance industry would see its premium income grow at a compounded annual growth rate (CAGR) of 18.9 per cent. However, growth has been much faster: from Rs 21,581 crore in 1998-99, annual premium income rose to Rs 221,688 crore in 2008-09, translating into a CAGR of 23.58 per cent.
The Life Insurance Council estimates that the current financial year will close with a total premium income — renewal premium plus that from new sales — of Rs 255,000 crore, which means a CAGR of 25.16 per cent since 1998-99.
Income grew faster than expected, but most companies that have been in operation for seven to eight years missed their break-even target dates, as they focused on market share. Partly driven by the financial crisis and also because of capitalisation requirements, profit is the new buzzword for insurance companies.
In the last one year insurance companies have shifted focus gradually to reducing cost, improving efficiency and effectiveness and building sustainability, indicating that the industry has entered into the next stage of its lifecycle.
There has also been a clear enhancement in focus on existing customers through improved customer service, ease of premium payments and robust complaints redress mechanisms, which are aimed at boosting collections of existing business premiums and reducing lapsation.
Most players now have a fair-sized existing book and well established distribution, operational and product-related capabilities. At the same time, in line with the industry’s increasing maturity, the regulator has been indicating a move towards a landscape of higher transparency for customers and greater visibility and management of operating, including distribution costs.
While managements are pushing for profit, promoters are eagerly awaiting passage of the Insurance Bill, which proposes to increase the ceiling on foreign investment to 49 per cent, from 26 per cent fixed a decade ago. A higher foreign investment cap will help lower the burden on Indian promoters, since life insurance companies need to maintain a solvency margin of 1.5 times.
“Fuelled by the global economic crisis, the last 18 months have seen the focus gradually shifting to cost optimisation, efficiency and effectiveness and sustainable and profitable growth. This very clearly indicates that the industry has entered into its next lifecycle stage,” said T R Ramachandran, managing director and CEO of Aviva India.
For the insurance industry, most expenses are front-loaded and incomes are back-loaded. The break-even period, therefore, is a function of how income growth accelerates and expenses decrease.
During the initial years the focus of the sector was on pursuing a high rate of new business growth, but that has changed after the industry recognised the importance of its existing book.
In the initial high growth phase, most companies invested in developing people, processes, systems and distribution capabilities. These investments have helped create large book sizes, ensuring steady long-term income streams. The investments have also resulted in an ability to underwrite new business at marginal cost, thereby decelerating the rate of expenditure growth.
Moreover, most players have a fair-sized existing book and well-established distribution, operational and product-related capabilities after 10 years of operation. Since it costs more to acquire a new customer than it is to retain an existing one, insurers are focusing on renewal premium income. At the same time, losing an existing customer can impact profitability adversely.
“To ensure persistency we have introduced features like loyalty additions and maturity additions, encouraging customers to stay invested through the policy term and help them meet the long-term objectives (such as child’s higher education, retirement, etc) for which they bought the policy and also provide for the family, even if something were to happen to them,” said Ramachandran.
The high growth rate witnessed in the initial phase has pushed back the break-even period by a few years, but depending on the individual companies’ business models and associated cost structures, they may take 10-12 years to break even.
While the government also proposes to dispense with the requirement of mandatory listing after completion of 10 years, some companies are also exploring the option of having more than one foreign partner.
“Broadbasing the equity should be preferred over hiking the foreign investment limit. There are issues relating to management control if the foreign investment limit is raised. The whole metrics have changed and valuation will be influenced by new business income. The foreign partner of the top five insurance companies will benefit by initial public offers (IPOs). Depending on the financial performance of the insurers, the Insurance Regulatory and Development Authority (Irda) and the Securities and Exchange Board of India (Sebi) will allow insurers to list,” said Ashwin Parekh, a partner at consulting firm Ernst & Young.
Meanwhile, belt tightening is the order of the day. Companies are renegotiating rents, closing unprofitable offices and asking employees to switch off the electricity before they leave, while office stationery comes at a premium.Private life insurers are focusing on rationalising sales forces, consolidating infrastructure and retaining old customers.
So far, only a handful of the new players, such as SBI Life, Bajaj Allianz, Kotak Life and Sahara Life, have broken even. But even these have been inconsistent, partly due to the vagaries of the stock markets, since Ulips account for most of their sales.
SBI Life was the first life insurer to turn profitable (which it did in 2005-06), but reported a loss last year. What has helped the SBI-BNP Paribas joint venture is the low cost of distribution. Unlike others, which get 20-25 per cent of business through the bancassurance channel, SBI Life piggybacks on the 15,000-odd branches of State Bank of India and its associate banks.
With companies focusing on profitability, expansion has — for the moment — nearly come to a halt. Insurers have shifted their attention to boosting channel productivity and carving out new distribution relationships. Over the last 12-15 months they have either reduced the number of branches or stopped adding new ones, resulting in an addition of just 86 branches across an industry with 22 players.
“If companies are not making profits after eight or nine years of operation, it’s high time they look at profitability,” said Kamesh Goyal, country manager, Allianz.
Learning from the experience of the older, better entrenched players, the newer players are moving with caution.
“We are going into smaller towns, mainly Tier-II and Tier-III, and we find the same business volume as in urban areas. To differentiate themselves, companies will have to focus on one distribution channel, one product type and a particular geographic segment. We will pull out excess costs, set up branches carefully and make more use of technology,” said Kapil Mehta, managing director and chief executive officer of DLF Pramerica Life Insurance, which is looking to break even in eight to 10 years.
The story is much the same in the general insurance segment. While general insurance companies started reporting profits several years ago, even they are focusing on making risk underwriting more profitable.
So, discounts, the main element of their strategy post-detariffication, are a dirty word now. Covers such as group health insurance — which used to be offered free with fire and engineering policies — are suddenly being withdrawn, to ensure profitablility.
“The key challenge is to ensure robust underwriting practices with right underwriting practices,” said ICICI Lombard managing director and CEO Bhargav Dasgupta.
“Competition between private and public players is good for the industry. The challenge for the industry is to bring in innovative covers at affordable prices and sell through innovative channels,” added General Insurance Council secretary-general S L Mohan.Compared to life insurance, the non-life industry is less capital-intensive. There is therefore less pressure on the Indian promoters to sell or to tap the markets. But with penetration at just 0.06 per cent, it is still a challenge for the industry.
There are players who are just beginning to offer a stake in their companies or exit. But that is a different story that will unfold over the next three years, said insurance company executives.
Insurance companies are, however, not just focusing on trimming their expenses on a standalone basis, but are re-engineering their business models to significantly boost efficiency and effectiveness, with a focus on increasing productivity across all levels and channels.
Insurers said that penetration of insurance will be driven by an increased focus on underpenetrated areas in metros and urban locations, and an enhanced focus on creating capabilities to reach out to rural and semi-urban markets through multi-distribution models and customer segment-specific product propositions.
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