Private players struggle to catch up with LIC in group business

A conservative investment approach and stranglehold on public sector business have allowed the state giant to stay far ahead in this segment

The group life insurance business grew by 36 per cent year-on-year (Y-o-Y) in the first quarter of the current financial year, according to provisional data from the Life Insurance Council. The Life Insurance Corporation of India's (LIC) group business premium grew 40 per cent, while private players registered a growth of only 20 per cent.

Private players' market share in group business stood at 21 per cent, down from 23.4 per cent in the past financial year, which means LIC has a market share of almost 80 per cent here.

The difference in market share in individual (retail) business is not as stark. According to data from the Council, private players' share in retail policies stood at 41 per cent in the April-June period, unchanged from last year.

Why is the public sector life insurer way ahead of its private sector peers in the group business? An official from LIC attributed this to trust and good servicing. That doesn't tell the entire story.

The group segment consists largely of two kinds of policies: Funds-superannuation and gratuity plans, and protection-term life plans. The main reason why private players are playing catch up with LIC in the group business is that they burnt their fingers by promising guaranteed and above-market returns in the pre-2009 period, when markets were buoyant. "Portfolios of most private players at that time had heavy exposure to unit-linked insurance plans (Ulips), a move that backfired," says Anil Lobo, India business leader (retirement), Mercer.

"Private life insurers took a short-term view. To garner employees' retirement and superannuation funds from corporates, they offered guaranteed and high returns. It is true that retirement funds should have some exposure to equity to be able to beat inflation. But, when the equity markets fell, the value of many of these funds, which had huge Ulip exposure, fell below the opening balance. Officials of many large companies had to answer their boards. This saw companies move back to LIC, which continued to have a larger share of traditional plans,'' Lobo says.

LIC, being a government-owned company, also has easier access to the retirement funds of other public sector undertakings, points out R M Vishakha, managing director (MD) and chief executive officer (CEO), IndiaFirst Life Insurance. IndiaFirst saw a growth of 79 per cent in its group business and has a market share of 7.3 per cent.

"We are strong in both group funds and protection. We want to enhance group protection substantially through the Pradhan Mantri Jeevan Jyoti Bima Yojana,'' she says.

In the group segment, there is concern regarding the capital requirement norm laid down by Insurance Regulatory and Development Authority of India. "We believe there is not as much risk in this business and, therefore, the capital requirement can be lower. The industry will soon make a representation to the regulator in this regard," she adds.

Group segment requires scale

According to P Nandagopal, founder and chief mentor, Insurance Inbox, and former CEO of IndiaFirst, margins are thin in the corporate/group segment as compared to the individual business but it is not unprofitable. "When you have bulk customers, you always offer discounts. But, group business makes sense only if the insurer crosses a threshold, for example, Rs 10,000 crore fund mark or a million members. Only those able to cross this threshold of viability do well in the group business. It is not profitable for small players,'' he says.

Are yields lower in retail policies?

LIC does a lot of cross-subsidising between individual and group portfolios and gives good deals to corporate customers. So, its group customers get better yields on their investments, according to Nandagopal.

"Ideally, if you go by the principle of social justice, smaller customers should get better returns. With LIC, it is the other way round. Individual customers get lower returns than group customers. Corporates are savvy customers and understand yields. So, from its common pool of traditional policies, LIC gives better returns on its corporate funds. An individual policyholder in LIC will always get a raw deal,'' he says.

Vishakha says funds perform similarly across both group and individual segments. Returns are impacted due to expenses. "In group business, there is no expense, as it is a direct business.

Ticket sizes being larger, policy administration costs are lower. Selling and switching costs are also lower. Taken as a percentage, expenses become insignificant because of the large ticket sizes. In retail, because of the smaller ticket sizes, expense as a percentage looks higher,'' she explains.