Open architecture expanded; may have low impact on insurance companies: IIFL Capital Services

28 Nov 2022 , 10:46 AM

Among others, it approved raising the maximum number of tie-ups for Corporate Agents and Insurance Marketing Firms (IMF), to nine/six insurers in each of Life, General and Health segments – up from three/two insurers previously.

Analysts at IIFL Capital Services believe open architecture can benefit customers with wider choice, though do not see a material shift in market share of private insurers with Banca partners. Some insurers with better technology platforms and product innovation, may take advantage of this to replace sub-scale players. Analysts at IIFL Capital Services do not see any material risk to SBI Life Insurance and ICICI Prudential Life’s exclusive tie-ups with SBI and ICICI BANK; HDFC Bank is already well penetrated. Hence, listed players may not see any material share shift.

IRDAI also approved easier solvency norms, enhancing capital raise limits through subordinate debt and improving promoter holding-related provisions to simplify setting up Insurance firms.

Will this imbalance the strong Banca tie-ups?

Banca partnerships in life insurance are more valuable than non-life for sourcing business, as reflected in their share of overall premiums. Although the increase in tie-up limit is a move in the right direction, historically, open architecture has mostly benefited insurers with stronger product or technology prowess, or those willing to pay higher commissions. Hence, larger insurers may not face major threat from higher number of tie-ups. Increasing the number of tie-ups may require superior execution on technology integration; while some insurers may be able to replace other incumbents, analysts at IIFL Capital Services do not believe this will change share concentration away from the top 2 or 3 insurers in each Banca. Adopting up to nine insurers may be an integration challenge for employees pushing multiple products from several insurers at the same time. So, while the move is positive, they do not see it as a game changer in the industry.

Large insurers remain dependent on Banca

Corporate Agency (including Banca) forms average ~55% of the listed Life Insurers’ premiums, while for Non-Life Insurers, this is limited to low double digits. Players like SBI Life and BALIC have seen robust performance in their Corporate Agency channel (including Banca), which grew 32%/94% YoY in Retail NBP in FY22. HDFC Life has also been expanding footprint through tie-ups with Corporate Agents in rural areas. Although Max Life lost some share to BALIC at Axis Bank after adopting open architecture, it has stabilized at ~70%. Contrary to this – even though IPRU has barely grown its overall Banca channel in past four years, there is sharp reduction in dependence on IBANK, with shift towards other Banca partners. Therefore, analysts at IIFL Capital Services do not see any material risk to Banca partnerships of large insurers.