Wednesday, April 24, 2013

What it takes to wipe off your smug smile

Uncontrolled operational expenses and lack of a sustainable business model have left Indian insurers gasping for air. With huge accumulated losses, they are already in a big mess. Although everyone agrees that the industry has a great growth potential, the question remains: How many of the existing players will even survive?

Imagine having your insurance firm declare bankruptcy just when you were about to file your insurance claim. In other words, have you ever thought of how it would feel to have lived smug under the illusion of insured safety and having that illusion destroyed without notice? A look at the present financial misery of Indian insurers, and the thought simply can’t be ignored any longer. More so when one sees that the glitzy private insurers who never fall short of making a new promise to customers everyday are now struggling with combined accumulated losses of over Rs.150 billion (of all private life insurance companies as on December 31, 2011). Interestingly, as of May 2012, 19 out of 22 private players are in the red. The scenario is more or less the same for the non-life players. Although some may argue that accumulated losses of non-life insurance companies have still not entered the danger zone, the fact remains that they have a market penetration rate of only 0.78% as compared to 5.21% for the life insurance players. Hence, their losses as compared to the size of their businesses are actually big and in turn threaten their existence.

For records, until recently, the life insurance companies have been the driving force for growth in the insurance market. But at the same time they were the ones that jeopardised the future of the industry by relying heavily on unit-linked insurance policies (ULIPs). So when the norms related to ULIPs got restructured in Q3 2010, life insurance players suddenly found themselves in a big mess. Data from the regulator show first-year premium of life insurers fell 19% for the first eight months of the FY2012 to Rs.624.3 billion. Even private sector market leader ICICI Prudential saw its annual premium equivalent sales falling by 56% to Rs.5.8 billion in the first nine months of 2011, compared with Rs.13.3 billion in the same period of 2010. The fall in topline comes at a time when almost all private insurers are suffering from high operating losses. “Almost 75-80% of the capital requirement (for life insurers) has been to fund operating losses and not for solvency requirements,” points a joint report by Boston Consulting Group (BCG) and industry body FICCI.

Further, the entry of more players, which initially was considered as a boon, has ended up initiating a price war affecting the players. For instance, for a 30-year-old, non-smoking male, the premium for a 25-year term policy has come down drastically from about 70 basis points (bps) in 2001 to about 20 bps today – almost 70% reduction in price for the customer. With margin already being a problem, fall in topline due to increased competition has increased problems for private insurers. While Reliance Life’s accumulated losses (Rs.27.77 billion) now stand at 258% of the first year premium underwritten (as on December 31, 2011), for Tata AIG and Birla Sun Life it stands at 216% and 107% respectively.

Non-life insurers too face a similar challenge. While the combined ratio (operating expenses plus claims plus commissions as a percentage of net earned premiums) of all the non-life insurance companies for the past five years has been around 120%, the underwriting losses for the industry have grown at around 13% CAGR in the past five years. IRDA data reveals that underwriting losses of non-life insurance companies shot up 67.72% in FY2011 to Rs.99.69 billion, from Rs.59.44 billion in FY2010. So, who is to be blamed?
 

Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
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