The annualised premium equivalent for the life insurance industry grew by just 1.3% year-on-year in September, the first month after new norms for product pricing were announced by the insurance regulator IRDA. While business for private sector players declined 13% year-on-year, the state-owned LIC managed to do reasonably well. TS Vijayan, chairman, LIC, tells Shobhana Subramanian that sales of ULIPs may not really come down since buyers seem to like the product.
September has been a dull month for life insurers but, traditionally, almost 22% of the first half sales for the industry come in at this time. Are we looking at a degrowth?
August has been an exceptionally good month, so it?s not surprising that September has been slow. This happens in March too, typically a good month for the industry, following which April and May tend to be dull. September is the first month in which the industry operated under the new guidelines and I think it will take some time for people to understand the new products. Ultimately, the distribution happens through the agents, and it will take time for us to introduce them to the new products and train them. I believe that volumes will pick up in 3 or 4 months even in this new regime. This year, at LIC, we are expecting a 25-30% growth in new premiums and the industry too should do well.
But the apprehension is that with distributors? commissions having been reduced, volumes may not be too high…
That may be true for ULIPs on which distributors may not be making too much of a commission but we have traditional products that can be sold. What is really happening is that with the new regulation, the smaller ticket ULIP policies have gone out of the system. Today, the minimum annual premium has to be something like Rs 15,000 while earlier, policies with premiums of even Rs 5,000 could be sold. So an agent who is dependent on customers, who can afford an annual premium of only Rs 8,000 or Rs 9,000, doesn?t have a customer base. ULIPs have accounted for a large share of total premiums; at LIC, the share of ULIPs is around 60%. Maybe the industry has to look at some other products but I don?t see any significant fall in volumes this year because we still have 5 months till March, 2011. At least in LIC, we are not expecting volumes to fall.
So, do you see the share of ULIPs coming down in the overall product mix?
I?m not so sure. The whole system has changed into one that is favouring ULIPs. If you talk to a customer today, he prefers ULIPs. Some of this is due to the media, the stock market indices are going up and the returns from the markets are high; this is a talking point at the dining table of even a small town family. So, I?m sure the new ULIP products too will sell after some time.
Do you believe many agents will go out of business?
Today, there are around 25-27 lakh agents in the system, of which LIC has about 13 lakh. Last year, the system recruited some 4-5 lakh agents and at least 2-3 lakh agents moved out. If an insurer believes that the production level of an agent has to be say x, then people will go out. If I leave it open and say the agent doesn?t need to make an annual commitment, then they will stay. The experience across countries is that there is a high level of attrition in insurance agencies. I recently watched a presentation on the US insurance market that focussed on the recruitment of agencies, their training practices, pre-recruitment counselling and so on. When we asked how many agents actually stayed back, we found their experience was no better than LIC?s.
Endowment products were attractive when AAA paper delivered yields of 17-18%. Today, when interest rates are far lower, how much will savers really benefit from these products?
In our case, endowment policies return around 7% compounded and that should continue. Today, the yield on the 10-year government bond is around 8% and we get a 100 basis points spread over this for AAA paper so one can expect 9%, though one doesn?t always get enough paper. But AA paper is available for a little more and IRDA permits investments in paper up to a rating of AA. The mix is such that getting a yield of 8.5-8.6% is not difficult and that?s enough to sustain a return of 7.5% to customers. Compare this with a PF or a PPF, where the returns are similar at around 8% and you also have the facility of a risk cover. If we approach customers as investors, they may not buy endowment policies but if they are looking for a long-term savings product together with a risk protection cover, they will come to us. It?s a somewhat different philosophy. And we can invest up to about 15% in equities?though at LIC we don?t go beyond 10% because in an endowment policy, which typically has a tenure of 20 years, there is always an element of guarantee and we also give a bonus and we don?t like either of these to fluctuate too much.
So, how does the industry grow volumes?
It?s true that nobody purchases an insurance policy, it has to be sold. In fact, if someone voluntarily buys insurance, you tend to be suspicious. The younger lot is becoming sensible but the propensity of that age group to save is lower. But even here, I still think insurance is a push product. It hasn?t become a pull product so far. It?s true that if private players cannot compensate distributors adequately and these players lose interest, volumes may come down. One of the things that can probably be considered is to reduce fixed costs like salaries.
Would you say that with the new guidelines, LIC has an edge over the private sector?
I am not so sure. If you look at the product portfolios of the private sector players, the ticket sizes of the policies have always been high; some insurers have an average ticket size of Rs 45,000-50,000. LIC?s average ticket size, for non-single premium products, is less than Rs 10,000.
Since they have always concentrated on the top-end, I don?t think private players will be too badly affected. Yes, margins may come down and profitability might come down, but once you get the basics right there should be no worry. Our cost-income ratio today, including commissions, has come down to around 11%; about 10 years back, it was 20%. And the policies serviced per employee have gone up nearly 3 times.
Do you think lock-in periods for policies should be increased?
People don?t usually surrender endowment policies within 3 years because there is a huge penalty and the product comes with a loan facility against the residual value. As for ULIPs, I think a 5-year lock-in period is good enough. LIC never had a surrender charge on ULIPs, so the reduction in surrender charges on ULIPs won?t affect us.
Typically, LIC?s strategy, with regard to ULIPs, has been to sell single premium products?
That was not a conscious strategy. It is very easy for an agent to push a single premium policy rather than a 10-year policy, but the margins on the product have been extremely low. At LIC, we were not too concerned about the margins but private players were not pushing these policies; they prefer the non-single premium policies. Today, some private players are beginning to push single premium products because the margins are improving.
Is there any advantage in LIC becoming a bank?
We need to study this to see if there is any point in starting another bank. We already have a working relationship with, and stakes in, several banks. We have an 11% stake in Axis Bank, a 9% stake in ICICI bank, 6 % in SBI and 14% in OBC. In fact, we have about 10% in almost every public sector bank.