India's Life Insurance Market Slowing Down

Posted on Jan 30, 2012 by Sergio Ulloa (G+)

India's life insurance industry, once one the strongest performing sectors in the country, has seen its growth prospects curtailed in the past year due to regulatory restrictions, competition, and limited investor activity, according to a new report. New data released this week by the Insurance Regulatory and Development Authority (IRDA) reveals that new business premium income for India's 24 active life insurance companies fell by a considerable 17 percent to INR719.53 billion (US$14.49 billion) in the first nine months of the 2011-2012 fiscal year. Excluding sales of group policies, the drop would be even more severe at 33 percent to INR391.3 billion (US$7.8 billion), down from INR866.9 billion (US$17.46 billion) a year prior. The data indicated that there had been a fall in the overall number of life policies sold over the past year. While the life insurance industry sold 30.68 million policies in FY2010-11, it has only been able to sell 27.24 million so far this fiscal year, an 11.21 percent decline. The rate of increase in renewal premium income also dropped from 10 percent to 4 percent this year. India's private life insurance companies have largely born the brunt of this decline in premium volume. According to the IRDA statistics, the number of new life policies issued by private sector insurers has fallen by almost 30 percent over the past three quarters, from 7.9 million issued in 2010 to 5.6 million this year. This has occurred while the number of sales by India's largest public sector life insurer, Life Insurance Corporation (LIC) of India, dropped by a more modest 4.6 percent, to 21.67 million new policies this fiscal year. During the April-December reporting period, the IRDA noted that LIC's premium collection had fallen by 15.86 percent, while the private sector cumulatively saw their premiums drop 20.34 percent. While LIC reported INR520.5 billion (US$10.48 billion) in new written premiums, private insurers only collected INR199 billion (US$4 billion). Almost every insurance company in top 20 registered a drop in premium income, with the larger private insurers like SBI Life and ICICI Prudential reporting a decline of 19 percent and 33 percent, respectively. According to the IRDA data, the only private sector insurer to register a marked increase in income over the past fiscal year has been Metlife, a relatively new market entrant. Indian insurance market analysts have blamed this industry-wide drop in premium income on a host of factors, including the continued absence of adequate pension products in the life market, investor indifference on once popular unit-linked insurance products, volatile market conditions, and delays on necessary product and distribution innovation. India's life insurance sector has seen numerous regulatory developments over the past few years, not all of them welcome by market participants. The IRDA's recent rulings on charges and agent productivity have made underwriting profitability and distribution even bigger challenges for life insurance companies going forward. New regulations that restructured unit-linked pension products in the third quarter of 2010 have certainly impacted the life sector in a negative way. In November 2010, the IRDA unveiled new guidelines for unit-linked pension products offered by life insurers, which governed what kind of guaranteed-returns they must provide to policyholders. This caused quite a commotion in the life insurance market, with insurers arguing that they wouldn't be able to provide such products as there are not enough long-term fixed instruments with adequate maturity available to match the tenure of Indian pension plans. After much furor, the IRDA relented and revised their norms in November 2011. The new guidelines allowed life insurers to set their own minimum guarantees on pension products but also mandated that these rates be applied irrespective of when the policyholder chose to surrender his policy. As a result, pension policies that conformed to the old norms had to be discontinued by December 31, and with no new pension products yet approved the IRDA, there is now a tremendous vacuum in the market with no pension products on offer from any Indian life insurer. As the IRDA imposed their stiff norms on unit-linked policies, the life insurance industry moved towards conventional products. Conventional policies, such as money back or traditional pension policies, are different from unit-linked insurance policies as they are not linked to equity market behavior, with investments guided by regulations not annuities. The profitability on these single premium products is however much lower for companies, as it is a one-time sale and the insurer does not earn premium on a regular basis. This has forced companies to slow down their expansion strategies and work with thinner margins. Unit-linked pension products (Ulips), which accounted for over 30 percent of the life insurance industry's premium income in FY2010, now amount to little over 2.6 percent of life insurer bottom lines. Given these regulatory issues, ongoing global economic volatility and inflationary pressures, sales of unit-linked policies are not expected to pick up in the short term. Overall, analysts expect fewer Ulip products to sell as people look for more concrete guarantees during these tough economic times after seeing the net asset value of their investment decline in the past year. While Indian life insurance companies may battle with regulatory and profitability issues in the short term, the longer term forecast for their market of course remains quite bright. According to a recent Bricdata report, India will likely become the third-largest life insurance market in the world by 2015, behind only their fellow Asia-Pacific rivals China and Japan. At present, India is the 12th largest life insurance market in world and 4th in Asia. According to Bricdata, India's population growth and low insurance penetration rate combined with the rising awareness of the need for sufficient protection and savings services, especially amongst the younger generation, will be the key growth factors for the domestic insurance industry going forward. Furthermore, India's domestic life insurance companies could look to make a major mark on the international insurance industry if they are able to improve their business models and capitalize on the tremendous potential available in their perhaps lucrative home market.