Life insurers struggle to achieve profitability: Study

With economic growth expected to be slow in 2013 and a weakening global economic outlook as well, insurers will have to contend themselves with another year of weak investment returns

May 14, 2013 2:33 IST | India Infoline News Service
The insurance industry players have been struggling to achieve profitability in the face of high operating losses primarily on account of distribution and operating models, according to a report by KPMG and Bengal National Chamber of Commerce and Industry.

The report, Insurance Industry — Road Ahead, said cumulative losses for private life insurers are in excess of Rs. 187 billion till March 2012, majority of which have gone towards funding losses rather than for meeting solvency requirements.

Since the opening of the sector in 2001, Indian life insurance industry has gone through two cycles -- the first one being characterised by a period of high growth (CAGR of approx. 31% in new business premium between 2001-10) and a flat period (CAGR of around 2% in new business premium between 2010-12).

During this period, there has been increase in penetration (from 2.3% in FY01 to 3.4% in FY12), increased coverage of lives, substantive growth through multiple channels (agency, banc-assurance, broking, direct, corporate agency amongst others) and increased competitiveness of the market (from four private players in FY01 to 23 private players in FY12).

The profitability is dependent on operating activities (selling new policies and servicing existing policies i.e., difference between premium revenue and total cost of insurance and operations) and financing activities (investing the policies’ premium i.e., difference between actual investment returns and the returns credited to the policies and surrender and lapses of policies).

Life insurance premiums generally decrease as sales of investment-linked and single premium life saving products decline and there is an increase in surrender and lapses. The industry in these two cycles has faced structural challenges that have adversely affected both aspects of operations and consequently overall profitability. Firstly, demand was created for a product that transferred the investment risk, along with its return, to the customer. Secondly, in an economy that is undergoing a slowdown, investments have provided limited returns, the report said.

The change in regulations had shifted the premium mix in favour of traditional products over the linked products. Generally in case of life insurance companies, the capital infused during the initial years is utilised in the initial set up costs and acquisition costs thereby leading to a gestation period of 7-8 years after which life companies may turn profitable.

Periods FY08 and FY09 witnessed heavy equity inflows primarily to fund the growing business with boom in the economy and also on account of four new private players entering the life insurance industry.

The periods FY11 and FY12 had a consolidated positive movement in the reserves. However, this positive movement was majorly driven by lapse profits on linked policies issued earlier. Insurance rules before September 2010 allowed insurance companies to write back the lapsed money as income in the books over a period of time.

Estimates by an October 2012 Goldman Sachs Global investment research report for just six companies show lapse profits of Rs. 31.89 billion for two years ending 2011-12. The quality of earnings can be affected by non recurring items such as profits from lapsed policies. The industry is at critical juncture wherein it has to identify the right models for long term viability.

With economic growth expected to be slow in 2013 and a weakening global economic outlook as well, insurers will have to contend themselves with another year of weak investment returns. Moreover with the challenges faced by insurance companies with the high cost of distribution and operations, it is important that life insurers find a sustainable model in the long term.

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