Covid-19 to hit life insurers for now, but may boost long term gains

Although the covid19 spread and the subsequent lockdown imposed will adversely impact the life insurers business in the short term, but with likely a change in consumer behavior and rise in demand for pure protection products given the uncertaninties, the medium term to long term impact may turn out to be positive for them.

“Based on past regional experiences, it has been observed that such pandemics provide tailwinds to protection and guaranteed products. We foresee some shift towards such product forms which are healthy from a margin perspective too,” said Prashant Tripathy, managing director and chief executive officer at Max Life Insurance.

Covid-19 is expected to result in improved awareness and importance of life insurance as a risk cover rather than a mere investment product and this would propel the overall life insurance penetration in the country.

“The last quarter of the year is quite significant for life insurers and with the sudden lockdown in place, there was an impact on new business. However, the impact on profitability will be relatively less as the product mix shifted more towards protection products. I believe, these are short-term impacts and the need for insurance may be felt much more intensely by consumers in such times of uncertainty”, Tripathy added.  

Post SARS (Severe Acute Respiratory Syndrome) outbreak in 2003, there was a sharp uptick in new business sales in Hong Kong due to increasing demand for protection, as per Macquarie Research. It expects the same positive demand shift for life insurers post Covid-19.

In fact, even in the current situation, Santosh Agarwal, CBO, Life Insurance at Policybazaar.com say there has been a rise in demand for pure life insurance, which has gone up by 30 per cent (mainly due to online capabilities), in our case.

What would also support protection demand is the new lower tax regime, under which tax payer has to forgo the tax exemptions. Many experts/analysts believe that since new tax regime lowers the attractiveness of life insurance as an investment product, demand for protection products, which are priced relatively lower, could go up going ahead. However, all this would come at a cost of near-term business.

Extended lockdown, social distancing, lower contribution of digital channel (3-4 per cent of overall business) etc. are expected to hamper new business of life insurers in the near term. “Existing business would continue but new business would suffer at least for next 6-9 months. So, this would hurt life insurers’ overall value which is to a good proposition, governed by new business,” says Ashvin Parekh, managing director, Ashvin Parekh Advisory Services.

Top management of a private life insurance company also echoes similar views saying, “The whole unexpectedness of the current environment and the fear around this will push the demand for insurance products as it’s the standard mentality of people. We expect substantial hit on new business premiums.” The lower new business premium in turn would hurt value of new business (VNB) which is a key performance indicator of a life insurer. Thus, insurance premium data for March 2019 would be crucial to watch.

Not only VNB, the impact could also be there in terms of persistency with a likely delay in premium payment. Even during SARS outbreak, as per a report by Kotak Institutional Equities, persistency ratio in Singapore had declined significantly and remained weak over the next 2-3 years. In fact, given the market volatility, some industry experts believe the existing policyholders may surrender their ULIP (unit-linked insurance policy) policies and we would see a good change in product mix over a medium term.

Avinash Sing, analyst at SBICAP Securities believe that "life insurance companies would see near term pressure on VNB owing to sluggish new business growth post Covid19. However, overall margin should be broadly stable as high margin protection should continue to outgrow savings." The jury is out on this.

• Life insurers business will get impacted in short term

• New business will get hit as insurance biz depends on agency distribution

• Online biz is doing well but has small share in overall business

• Demand for pure protection product will rise given uncertainties around

• New tax regime to support demand for protection products

• Persistency ratio of insurers may suffer