Once new regulations kick in from Wednesday, the biggest challenge for life insurance companies will be to cut costs to prop up margins, which experts say are likely to fall as much as 25-30 per cent for new business.
After doing business at very high costs for a decade, the life insurance industry will have to ensure greater volumes.
The Insurance Regulatory and Development Authority has pulled out all stops to position unit-linked insurance productsas long-term contracts.
In the process, it has cut various charges. It has capped the difference between gross and net yields, reduced the surrender penalty and mandated a higher risk cover.
These changes are set to change the entire industry.
In addition to the drop in margins from new business, the capital requirement will also rise. Insurers say the cap on charges will affect the penetration of insurance.
"If companies are not able to cut costs while improving their top lines, their capital requirement will rise," said G V Nageswara Rao, MD and CEO, IDBI Federal Life Insurance.
Industry experts expect margins to fall by 25-30 per cent.
According to a study by Edelweiss, the new business strain could rise by 40 per cent and the solvency requirement by 25 per cent.
The report said monitoring of sensitivity drivers like persistency would ensure that expenses would become more critical than ever. It expects volumes to fall 5-10 per cent over the next financial year.
Changes in distribution
Insurance executives said service, brand, product design and agents' training would be the key differentiators. The commission on new business was likely to fall to single digits from an average of 12-15 per cent at present, they said.
"There will be some realignment of the distribution model. We have to realise that Ulip is a serious product and requires a trained intermediary.
"There will be more need-based selling now. Variabalising expenses will keep business lean," said Rajesh Sud, managing director and chief executive officer, Max New York Life.
"Insurance companies will have to help agents sell more. The products should also be well structured. I expect the commission on new business to fall by 1/3rd on new sales," said a senior executive of a life insurance company.
He added the norms would change the mindset. While the commission to distributers will fall, they will find opportunity in selling more products. The total commission earned by them would be the same, he added.
"Companies will now strictly supervise their sales force. Earlier, they were benevolent unless there was anything criminal. Now, they will act against all wrong-doings," said S B Mathur, secretary, General Life Insurance Council.
Maintaining margins by driving volume is the game. Insurers would have to ensure renewal premium growth along with the rise in new premium income, he added.
Alternate channels
Companies will also try to push simple products through the internet. "They will sell plain vanilla products through the internet and pass on the benefits to policyholders," said Mathur.
While new players will have the opportunity to enter alternate distribution channels, the older ones will have to focus on the productivity of their existing branches and the agency force.
Product mix to change
The product mix will also change. Since Ulips have higher margins, companies will continue to push these products."There will be a better balance between traditional plans and Ulips. Earlier, it was too much dominated by Ulips," added Rao.
It is important for companies to develop a traditional range of products. The Ulip and traditional mix would fall to 65-35 per cent, he added.
