The capital reason for break-ups

The capital-intensive nature of the life insurance business is the one of the key causes for insurance companies exiting from markets. Insurance businesses require high level of capital especially in the growth phase when they are not churning out profits.

Hence it is not possible for every insurance entity to be in each market. Organisations have to decide where they want to apply the capital, said Peter Akers, chief operational officer, Birla SunLife Insurance Company.

AMP Life, the foreign partner of AMP Sanmar Life Insurance Company, has decided to exit the life insurance venture in India as it has decided to focus on its home turf "" Australia and New Zealand. It had last year also exited from its UK operations even after significant acquisitions there.

"Essentially companies decide to stick on in a market where they see maximum value and best return on capital," said Akers.

Scale of operations is another key aspect when companies decide whether or not to expand in a particular market, said Shikha Sharma, chief executive officer, ICICI Prudential Life Insurance Company.

AMP Sanmar has been relatively a very small entity in India as compared to its private sector peers. AMP Sanmar has 0.36 per cent market share in terms of new premium income as on March 31, 2005.

Similarly during fiscal 2005 it managed to secure just about 0.13 per cent of the total policies sold by the life insurance industry. Though it saw a 220-odd per cent growth in premium income, the number of policies sold fell by over 23 per cent.

"India is a very price-sensitive market, and scaling up operations is very important. If an insurance company is unable to scale up, it will not find it viable," said Sharma.

Insurance companies are bound to make losses in the initial years. Life insurance companies will take another two years at least to break even, said Sunil Kakar, chief financial officer Max New York Life. This is because overheads are very high in the initial years.

"We are growing and have to provide for costs upfront. This is why promoters keep infusing capital to support the business growth," said Sharma. ICICI Prudential Life, the largest private insurance company, has had 11 infusion of capital over the last four years, taking its total paid up capital to Rs 925 crore.

ING Vysya Bank recently decided to exit the life insurance business of ING Vysya Life Insurance Company, as there was a perpectual need to induct capital.

During the last round of capital induction, the private sector bank failed to induct fresh capital, thereby bringing down its stake considerably. In the end it decided to sell its holding to the cash-rich Gujarat Ambuja Cements, which picked up 14.87 per cent in the life insurance venture.

Worldwide, life insurance companies make losses in the first 6-8 years of operations because large sums of money are spent on setting up infrastructure, training advisors, sourcing business and building the brand.

Premium income on the other hand, flows over the duration of the policy, which can extend to as long as 20-25 years and beyond.

"The faster the business grows, the greater the initial losses, as larger amounts are spent on these expenses. However, post the breakeven period, the profit streams will also be higher," said Sharma.

Focus of shareholders in various markets is imperative for the success of any venture, said Akers. Allianz, SunLife and Prudential Plc among a host of other global majors view their respective Indian joint ventures as crucial to their growth in the Asian-Pacific region.