Insurers have been grappling with a host of regulatory changes the last couple of years. Here’s a look at what lies ahead.
Life Insurance Regulatory changes, volatile capital markets and decline in financial savings have impacted the performance of private life insurers in the last five years. In 2010, the focus of the insurers was on first year premium growth and market share gains. However, post the regulatory changes in product structures, particularly ULIPs, companies have been focussing on cost rationalisation. The operating expenses as a percentage of total premium have been trending lower in the last four years.
Looking ahead, increase in financial savings and low insurance penetration vis-à-vis other countries should drive growth. Coming out of the regulatory overhang, players are looking at a more balanced product portfolio. Life insurance policies are broadly categorised into traditional and ULIPs. Within traditional policies, life insurers sell participating (bonuses declared at the discretion of the insurer) and non-participating policies (bonuses clearly defined; pegged to an index).
Non-par products, though a smaller portion of traditional polices, typically provide higher margins. Due to regulatory changes in 2013-14, many life insurers, had to withdraw non-par policies and shifted the product mix towards par policies. Players are now rebalancing their portfolios, with focus on higher margin non-par policies and ULIPs. This should aid margin improvement. ICICI Pru and HDFC Life have a higher proportion of ULIPs, while Reliance, Max Life and Bajaj Allianz have a traditional (policies) heavy portfolio. Max Life has a sharp focus on participating policies, while SBI has a balanced mix between participating policies and ULIPs. However, diversification will be important as dependency on a single product — ULIPs in 2010 and NAV guaranteed products in 2013 — can be risky.
Also, distribution mix will be critical. Over the last four years, bancassurance has come into focus as agency distribution became less cost efficient. Insurance players will continue to improve the productivity of agency channel and build a diversified distribution channel. Besides, given that the top seven players account for over 70 per cent of the private insurers’ markets, there could be consolidation of the small players who are yet to achieve scale.
General Insurance The Indian non-life insurance sector, which was opened to the private sector in 2001, has also gone through various regulatory changes. The sector’s performance can be tracked in two phases — 2001 to 2007 before de-tariffing, and post de-tariffing in 2007. Pre-2007, premium rates of policies were fixed by the regulator except for marine and health. The private insurers had an excellent run between 2001-02 and 2006-07 — their gross premiums growing at more than 70 per cent annually during this period. In 2007, the Insurance Regulatory and Development Authority of India (IRDAI) decided to de-tariff most of the policies except for motor third party pool. This triggered a price war amongst players. Between 2007-08 and 2014-15, gross premium for private insurers grew 17.8 per cent annually. Growth has been healthy, thanks to the strong prospects in the health and motor insurance space.
However, the main overhang for this sector has been the losses on account of the motor third party pool. In 2007, while IRDA deregulated the premium for all other general insurance products, it continued to fix the tariff for third party motor insurance. The third party pool was created to make available Third Party Insurance to all commercial vehicle owners at reasonable rates. Hence, players did not have the leeway to price in the higher risk but the claims were unlimited. This led to huge losses for insurers on account of this portfolio.
In 2011, the IRDAI dismantled this pool and set up a declined risk pool. Insurers are given a minimum quota of standalone third-party policies that they have to underwrite in their books. If the quota is not met, then the shortfall has to be met from the declined pool (policies rejected by individual insurers).
However, the losses in the motor segment continue to persist because the pricing is still regulated. In the long run, however, implementation of the Road Transport and Safety Bill of 2014 which, among other things, proposes stiff penalties and streamlines the process for dealing with accidents, may help to bring down the frequency and severity of accidents. This, in turn, should help reduce claims cost.
Insurance companies have been generating losses in recent years, mainly due to the third party motor pool. But there are some signs of improvement in profitability of players. Besides, insurers have been delivering healthy growth in premiums driven by retail products, such as health and motor insurance.
Importantly, prices have dropped substantially since 2007, post de-tariffing. However, insurers believe that given the experience of players in the last couple of years, there is likely to be more sanity in pricing of products and premium rates are likely to recover from here. This should bring more value and margins to the business.