India's insurance industry is set for a makeover as it seeks to survive and grow in a changed environment that dawned on September 1. With a three-month spat over who will regulate unit-linked insurance plans (Ulips) settled, the Insurance Regulatory & Development Authority (Irda) in July announced sweeping changes to the way insurance companies do business.
The enormity of the change is evident from the fact that Ulips account for more than three-fourths of all products sold by a life insurance company. Irda says the new investor-friendly policies will help cut costs and commissions, as well as improve returns for policy buyers. The regulator, which last month approved 51Ulip plans, has so far approved only two to three plans per insurer, from up to a dozen, thus helping investors avoid a maze of schemes.
But for insurance companies to survive in a regime that squeezes margins and forces lower costs, they will have to ensure greater volumes to sustain margins. The key differentiator for policyholders would now be the brand of the company, service offered, innovative fund options offered and investment performance of these funds.
The industry will have to realign its distribution model as well, analysts said. Margins are likely to fall by as much as 25-30 percent for new business, and companies will have to squeeze costs to prop up margins, said an industry official.
Irda has now repositioned Ulips as long-term protection contracts. In the process, it has eliminated excess charges in the system. It has capped the difference between gross and net yield, reduced surrender penalty, mandating higher risk cover and increased the lock-in period.
"Realignment in the distribution model is taking place. Now, we have to realise that Ulips serious products and require a trained intermediary. There will be more need-based selling now. Variable expenses will help to keep business lean," said Rajesh Sud, managing director and chief executive officer at Max New York Life.
"These changes will result in an increase in persistency. Looking at cost is always desirable. Major changes are in terms of lock-in and surrender charge," said Malay Ghosh of Reliance Life. Persistency is the number of policies for which premium continues to be paid. Persistency levels for some companies are as low as 10 per cent, Irda Chairman J Hari Narayan said yesterday.
"If companies are not able to cut costs while improving their topline, their capital requirement will go up," said G V Nageswara Rao, MD and CEO at IDBI Federal Life Insurance.
New private sector insurers, almost all of them less than a decade old, incurred high costs as they expanded branch network, hired more agents and sought higher sales figures.
Just four of the 22 new-generation insurance companies are profitable. LIC, the oldest, plans to reduce commission to agents, said D K Mehrotra, managing director of LIC.
Minimum size
Policy buyers will now have to pay more, as insurance companies have raised the minimum ticket size to `15,000 a year to meet the ceiling on charges. For instance, the largest insurer, LIC has launched Pension Plus with a minimum investment amount of `15,000. Its previous unit-linked pension plan, Market Plus, had a minimum ticket size of `5,000.
Likewise, SBI Life has launched Smart Performer and Unit Plus Super with a minimum investment amount of `30,000 and `50,000, respectively. Earlier, Smart Performer had a ticket size of `24,000.
Returns for policyholders are set to rise, while commissions are declining. This is yet another instance of the investor-friendly focus of regulators, initiated by abolition of an entry load on mutual funds last year. "Returns will go up, since the amount allocated from the fund will be higher. Companies will have to manage all charges within the limit prescribed," said Vibha Padalkar, CFO at HDFC Standard Life.
As the minimum amount of funds invested rises with the reduction in various charges, the industry expects returns to rise. "Number of units allocated under the funds will rise under the new structure. We have brought down our allocation charges from 15 per cent to 9 per cent. At the same time, commission has fallen from 16 per cent to 10 per cent," said Sanjiv Pujari, appointed actuary, SBI Life.
Easy surrender
Under the new scheme, policyholders now have the option to withdraw from the policy, even during its term, by paying a lower penalty. Earlier, private players used to charge up to 100 per cent as penalty on surrender before the lock-in period and pay the amount after the mandated minimum three years.
Irda has capped the discontinuance charges, both as a percentage of the fund value and premium, as well as in absolute value. At the same time, LIC, which did not have any surrender penalty, now has introduced one under the new regime.
"Against our expectation of a 50 per cent reduction in commission, companies have reduced it by 70 per cent,'' said Sanjiv Bajaj, CEO at Bajaj Capital. "These changes are good for investors. Charges are very low and also evenly distributed through the term of the policy."
"The cost structure has changed dramatically. Ulips sell not because of the high commission, but because the market has performed,'' said Ashwin Parekh, a partner at Ernst & Young. "Agents will continue to push Ulips despite lower commission because the market is performing."
