Insurance consolidation

Too many small players help nobody

The proposed merger of HDFC Life with Max Life Insurance is the first major consolidation in the 16-year-old private-sector life insurance industry, which has been passing through a tough phase since the 2008 financial downturn. The merger will create the country’s largest private sector insurer with assets under management of over Rs 1 lakh crore and premium income of nearly Rs 26,000 crore. Though the numbers are of no great significance considering the 70 per cent market share of Life Insurance Corporation, the merger is welcome as there are strong product synergies (HDFC Life is strong in unit-linked insurance plans or ULIP, while Max Life has a higher share of non-ULIP products). But more importantly, the merger could encourage other large companies to take similar steps to drive economies of scale, thereby serving customer needs better.

This is required as the industry is too fragmented now, with the top four of the total 23 private entities constituting 65 per cent of the private life insurance market. Some of them have less than one per cent market share and they risk irrelevance at a time when the need is to build scale and a better distribution network. That is because the expenses are still to come down to international levels and the scale is not seeing a significant rise — in fact, the life insurance industry, which was growing at a compounded annual growth rate of 35 per cent from 2000 to 2008, has slowed down to six-eight per cent in the past few years. To find growth capital in such a situation is never going to be an easy task. Well-planned mergers will reduce costs and lead to more efficient use of capital to support solvency margin requirements. The merger, which will eventually lead to the listing of HDFC Life, will also help immensely in price discovery or unlocking of valuation in the market. Large insurance companies, born through such consolidation, will have the wherewithal to increase insurance penetration, which has stagnated at about two per cent of gross domestic product. India, in fact, accounts for less than 1.5 per cent of global insurance premia despite having 17 per cent of the world population.

India’s life insurance industry has its work cut out also in areas such as low consumer awareness, lack of trust, absence of innovation across products and channels, slow digitisation and poor persistency as on average, less than 60 per cent of the policies get renewed after a year of buying the policy. In fact, at the end of the fifth year, the industry on average is unable to retain even a third of its customers. Globally, the first-year persistency is around 90 per cent. Also, as a McKinsey study showed, most private life insurers have chased volume by building large sales forces with significant fixed-cost infrastructure and who focus on selling low-margin ULIPs. And rather than trying to build the skills of agents to sell higher margin-protection products as affluence rises, many companies continue to chase top-line investment-focused growth instead of protection products in the hope of building scale and growing their way out of the profitability challenge. This is a pity considering the huge potential — after all, the proportion of people having insurance cover in India is just 15 per cent of the total population compared with 62 per cent in the US. Only large private insurance companies with well-tuned operating procedures and scale-based cost-efficiencies can ride the wave.