After growth, it's a phase of consolidation

After almost a decade of robust growth, premium collections of the life insurance industry are down. In this backdrop, R K Nair, member Finance and Investments of the Insurance Regulatory and Development Authority (Irda) and CEOs of five insurance companies— P Nandagopal, MD & CEO India First Life, Gaurav Garg, MD & CEO, Tata AIG General, Amitabh Chaudhary, MD & CEO, HDFC Life, Bhargav Dasgupta, MD & CEO, ICICI Lombard, M N Rao, MD & CEO, SBI Life – discussed issues facing the industry at the Business Standard Insurance Round Table. The discussion was moderated by Shyamal Majumdar. Excerpts:

Moderator: The insurance industry seems to be caught in a cleft. While the life insurance industry is grappling with growth pangs (there has been a fall in growth by 15 per cent), the non-life sector, though growing at 24 per cent, are facing some issues as well. Some of it is due to the bad economic conditions, but the industry has its peculiar problems, like regulatory flip-flops and excessive micro-management. How does the regulator see this? 

R K Nair: The life industry has shown a decline in growth in its first year premium by 17.01 per cent as against a growth of 28.16 per cent (Dec 2011). On the other hand, the general insurance industry has shown a robust growth. But if you analyse the growth of the life insurance industry, there is a huge fall in the unit linked insurance plan (Ulip) segment and the pension segment; on the other hand, pure life insurance products have shown very robust growth.

Last year, there were amendments to the regulatory architecture of the Ulips and the commission structure was altered considerably. I do not know if that is the only reason for the lack of growth in pushing that product because the market conditions have been also not too good. Therefore, the sentiment of the investor has also been affected in a big way. There could be one more reason: high inflation leading to high interest rates. Since banks have been offering fairly attractive interest rates, both on short and medium term deposits, a lot of money has moved into banks. Probably, one can see the link in case of asset management companies who have not seen much growth in the equity segment.

But, by and large, many insurance companies are showing signs of profitability and some of them have started giving dividends after 10 years of their performance. This year many more companies would declare profits so if you look at the overall net profit of the industry in FY11 it was 2,657 crore as against a net loss of 989 crore in FY 10. That number may increase in FY12. ;

In case of general insurance companies, there have been lot of disasters across the world, so there could be some losses in their books. But from next year, we could see better performance from them particularly with reference to the third-party pool losses which they have been suffering from in the last two years.

Moderator: Bancassurance has been much talked about. However, banks themselves do not seem too keen and have raised some objections with Irda. 

M N Rao: There has been a constant debate on which would be the better channel – the bancassurance or the agency. Given the pre-eminence that LIC enjoys, obviously, the agency channel was preferred. But there were some companies including SBI Life, which decided that the bancassurance channel gave us a fair amount of advantage. Since 2009, we have been discussing whether we should open up this channel and how. The committee appointed by IRDA had recommended the partial opening up of the channel in 2011.

But there were some who said there should be one insurance company per bank; there were some of us who said that it could open up partially to have two insurance companies per bank and there were also a point of reference that multiple insurance companies can come in. Since then, there have been representations by various stakeholders and Irda would be going through them. I understand that a final decision would be taken sometime in the next year.

Moderator: Till September 2010, the industry's sales from pension were about a third and now suddenly there are no collections. We are told that there were no new pension schemes that have been approved by the regulator. 

Amitabh Chaudhury: The requirement of the pension product was to provide a certain definite return to the policy holder, basically, giving a guarantee which was a very, very risky proposition for the insurance industry. In India, you can't hedge for the long term as there are very few instruments which can provide these returns. Even from a customer perspective, it would not be the relevant product so they will not buy it. So except LIC, no one launched any products. The regulator, after about 12 months, came up with a revised guideline on pension. But it was still tough because there was still a guarantee involved. But the insurance companies took a bet and about 26 or 27 products were filed with the IRDA. But they were all rejected because Irda said that the insurance companies did not understand the guidelines they had in mind. So, the Life Insurance Council has gone back to the regulator. Hopefully something will come up.

On one side, the regulator is very concerned about some of the guarantee products and has stopped approving them. But on the other side, there are schemes to give a guaranteed return on some of the products. So there is a contradiction.

Even in case of bancassurance, there are contradictions. At present, bancassurance accounts for only about the 24 to 25 per cent of the overall premium income, the rest is from agencies and obviously dominated by LIC. On one side, we are trying to open bank assurance because you know you are saying add one more person or add two more insurance companies, but why is the same thing not being attempted on the agency side. Why is an agent tied to one insurance company?

R K Nair: When the Ulip regulations were rationalised, we found that some of the pension products being sold did not provide any guarantee. They were like pure investment products. So after three-four years, when the market rose, one could just sell them. So there was no element of annuity or payment involved from the policy holder point of view. Therefore, the regulator, at first, thought that in order to protect the policyholder some kind of guarantee was required.

And so, a minimum of 4.5 per cent or something similar. Though only LIC came out with pension plans, they sold a lot of policies even during that period. But none of the private sector companies launched a product with a guarantee. I believe a representation has been made after which the regulator said that at least the principal should be protected. I think it is fair enough.

At present, the market structure is such that companies sell pension product but when it comes to buying annuities everybody goes to the Life Insurance Corporation. No other life insurance company is giving annuity products and that’s the core of pension product. We want more and more players to emerge and there should be more and more people writing annuity products.

Also, we do not have a very deep and long bond market and there are many structural reasons for the lack of issue of long term corporate bonds; it’s been debated over by so many committees. I believe that we will be shortly coming out with guidelines for hedging for the long term.

P Nandagopal: I can say that people do have an appetite for buying a long- term financial product but without the protection because of the formalities of medical examination. So that actually brings us back to the fundamental debate what kind of business we are in; if we are in the business of long-term financial savings mobilisation and we are in the business of ensuring that those long-term financial savings are used to meet various lifetime goals, then the life insurance industry can have an realistic role to play in that particular domain. And let the customer decide whether he would like to use that particular accumulation which comes either through an endowment plan or through adjusted standalone plan without any annuity or life insurance cover.

Giving the customer choice is the fundamental requirement; to say that we decide on their behalf what they should have bought is actually ignoring the fact that for the last 10 years about 30 per cent of population have bought that particular plan with their eyes wide open.

Moderator: There is this feeling that the non-life industry has been under pricing. Is it true? 

Gaurav Garg: It’s a worldwide phenomenon that after free pricing is introduced, prices drop first and the cycle time ranges from anywhere to average of four to five years. We would be completing four years since free pricing was allowed. Going forward into next year, with the hardening of the reinsurance market, markets will also see price rises. So I think we are now moving towards getting the right price.

But let me also tell you one more interesting fact is that once the market hardens and then the price goes up, there will be another soft cycle. Prices will correct when companies make money and then, they start losing money and again the cycle will harden.

Moderator: If you see the first 10 years of the insurance industry, innovative products have been largely responsible for its growth. Suddenly there is a perception that there is no innovation any more. Do you feel that the regulatory role has also stopped you from being innovative? 
P Nandagopal: Let’s say maybe the life insurance industry is guilty of ignoring innovations, as compared to other financial services businesses industry. To my mind, the insurance industries is always stuck in a legacy mindset and never really put its best efforts in trying to innovate, not just the products but also the process. But I must say that Ulip is one of those important innovations that have taken place. But of late I do see that there is a little bit of slowdown in acceptance of a particular innovative behaviour on the part of insurance companies.

Moderator: There were a lot of expectations about health insurance portability... 

Bhargav Dasgupta: It’s not as if the industry lost interest after health portability guidelines came to help customers. The fact that they are not porting could actually mean that the service standards are not that bad. Fundamentally, a lot of these changes are distribution driven and not so much customer driven. So whatever change that you see is probably driven by the agents and distributors, and not so much by the customer. Having said that, it’s too early to say. It’s really a few months that you have seen portability and as we go along, we will probably see whether it gathers pace. From the long term perspective, it’s obviously a very good development because it gives choice to customers to move to a company which provides better service.

Moderator: Is the regulator doing too much of micro management? 
R K Nair: If you look at the overall penetration levels of the life insurance industry, we are almost at par with developed countries. So it’s been a significant growth in the last 10 years. And if there is a period of consolidation, one should not worry too much.

India is probably the 8th or 9th largest market in the world, in terms of the total premiums collected when measured against GDP and if you look at the purchasing power parity see we are number 4. So we are not doing too badly.

That’s why companies are coming in because they see opportunity in India. There is growth opportunity as well. Fifty per cent of the Indian population does not have a bank account and once they get bank accounts, probably, they would come into insurance as well.

In terms of non-life, I certainly agree that we are behind as far as the Asian or global markets go. But non life insurance is not a priority unless you have certain basic needs satisfied. Only after that, people start buying protection for your house, or health.

As far as regulations go, it’s a debate whether you need more or less. If you look at the 2008-09 financial crisis, it was because some people said no to regulation. Therefore, to say that you need less or more regulation is a policy debate. In my own view, insurance is more like a social thing. If you are able to meet an accident claim in time or you are able to pay health insurance in time, I think you are doing the job by giving social security. The ability to offer social service at the right time is going to be a key driver in my view.

If you look at the role of the regulator it says that you need to have an orderly growth. There has been substantial growth but now I believe we are now moving into a phase of a more orderly growth and I am very optimistic.