Capital Gains for Life Insurance
It's good news for the insurance industry. For a sector that feeds on capital, the proposed hike in the FDI limit in insurance JVs to 49 per cent is a boon.
Foreign players, whose stake is now capped at 24 per cent, can now bring in more money; most of them would love to own a larger stake if not the whole venture.
As Stuart Purdy, managing director, Aviva Life Insurance, has indicated, Aviva Plc will up its stake in the Indian venture to 49 per cent.
The transactions will be keenly watched because, for the first time, we will have some valuation benchmarks for private-sector players. That should give investors a better idea of the opportunities in the sector, which they can play through the Indian parent.
That private life insurance players will grow at a faster pace is not in doubt. They should race ahead like their counterparts in the banking and mutual fund industry, who left their public-sector competitors far behind.
The record is impressive in FY04, while the life insurance industry grew at 18 per cent to Rs 1,800 crore, the share of private-sector players in the total new business premiums jumped to 13 per cent from 6 per cent in FY03.
The share of the total annualised premium equivalents (APEs) of Rs 1,400 crore stood at 15 per cent. APEs are considered to be the most appropriate proxy for sales and, therefore, for market size and shares of life insurance companies. At the top of the heap is ICICI Prudential which has garnered a retail market share of 36 per cent of the new business premium.
In an under-insured market like India where the premium to GDP and the penetration are abysmally low, the market is there for the taking.
Moreover, in India, life insurance products have been bought for the wrong reasons - more to save tax rather than as a long-term savings product.
This trend is yet to show any major reversal because even in FY04, 60 per cent of the sales happened in the last quarter. With assured return policies dying out, the platform for selling products is changing as has been seen in the phenomenal popularity of linked products.
Awareness levels are higher and this is reflected to some extent in the higher ticket sizes; last year these were as high as Rs 24,000.
The league table for FY04 shows that some players forged ahead primarily on the back of unit-linked insurance policies (ULIPs) which accounted for around 65 per cent of the business of the private sector (for Birla Sunlife it was as high as 97 per cent).
According to Nani B Javeri, chief executive officer, Birla Sunlife Insurance, the strategy of using a ULIP platform has worked well for the company and Birla Sunlife will continue to focus on these market-linked products which are considered to be more transparent than traditional policies.
"ULIPs are capital-efficient, that is, they use relatively less capital and deliver more or less similar margins as other products," he says. ICICI Prudential is the other player for whom linked policies contributed a high percentage - as much as 84 per cent of total business.
HDFC Standard Life, which moved down the order last year possibly because it did not push ULIPs aggressively, also plans to focus on these.
According to Deepak Satwalekar, managing director and chief executive officer, HDFC Standard Life, the company chose to launch these products later than others since they are relatively sophisticated and harder for customers to understand.
"We are asking customers to make choices which they may not fully understand," he says.
However, since HDFC Standard launched ULIPs in January this year, 20 per cent of the business in the last quarter of FY03 came from linked policies. For the current year, Satwalekar expects that 50 percent of the HDFC Standard's business will come from these products.
In the case of group policies, Birla Sunlife's share was significantly high at 37 per cent while SBI's was higher at 44 per cent.
While it is believed that group policies in general command low margins, Javeri points out that what the company is focusing on is not group term products, which typically offer lower returns, but fund-management products which earn it management fees in the region of 0.6 to 2 per cent.
Apart from using agents as the main distribution channel, bancassurance seems to be working well, too. For HDFC, which has relationships with four banks, 20 per cent of the business came from this channel while for Birla Sunlife, which has tie-ups with eleven banks, the percentage was at similar levels.
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