Pure-play protection plans second fiddle to savings plan for life insurers

Growth in recent times is led by savings products, poised to give better returns that bank FDs

Stocks of listed life insurance companies have been relative underperformers on a year-to-date basis even as monthly premium inflows are firming up in the recent months. A closer look at the numbers suggests that investors may not be pleased with much growth coming from savings-led products rather than pure-play life insurance plans.

With bank fixed deposit (FD) rates at rock bottom, life insurers appear to be front-ending savings, guaranteed return and annuity products to customers which not offer higher yield compared to FDs (minimum of six per cent as against a taxable average FD rate of 6.5 per cent) but also come with tax benefits in certain cases.

Based on January 2021 data, analysts at Elara Capital note that the individual protection business appears to be still moderating from Covid-19 highs seen from May to July last year. While the segment is gradually stabilising as is visible from 12 per cent year-on-year decline in individual non-single sum assured for January as against 14 per cent year-on-year decline in December, it may still take a while for protection plans to stage a comeback. Increasing resistance from reinsurers to underwrite protection plans without medical check-up is restricting growth.

Insurance companies in the December quarter (Q3) investor interactions noted that customers too are wary of physical medical examination and opt for products which don’t require extensive physical contact. This is another reason for savings-related products which have less than 20 per cent of protection component to fare better than protection plans.

Suresh Ganapathy of Macquarie Capital feels that the moderation of protection premium inflows is likely to persist given the demand and supply side constraints. “There is competition and aggressive pricing by players in the market. So, some are happy to let go off some business”, he adds. Soft FD rates are further adding to the advantage of savings products.

What needs monitoring is the value of the new business (VNB) margin, which showed signs of softening in Q3. While savings products are margin accretive, with competition gathering pace in this segment, VNB margin may moderate. “For now, the Street isn’t factoring margin compression, but that is likely if focus on savings plans increase in the coming quarters,” said a senior analyst at a domestic brokerage.

With the dynamics changing in the near-term and not entirely justifying valuations, booking profit may be prudent for investors, given the recent rally in life insurance stocks.