Embedded value: Life insurers need to be wary of Mutual Fund challenge

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July 26, 2019 1:19 AM

If mutual funds turn their focus on those states which have been traditional grazing ground for life insurance firms, the latter could be in trouble

Mutual Fund, Assets under management, LIC, mutual fund industry, financial market, mutual fund investors, ELSS, Group insurance premiumThe MF is young, versatile and therefore attractive; whereas life insurance is the grandfather’s favourite mode of savings.

Assets under management (AUM) of life insurance companies stand at Rs 35,62,385 crore as on December 2018. During FY19, life insurers sold over 2,86,00,000 policies and earned premium of Rs 2,14,672 crore. When LIC was established in 1956, the objective of the government was to mobilise funds for infrastructure development in the country and to enable the common people to secure their life and happiness of their family in case of any unfortunate event resulting in death of the bread earner.

Mutual fund vs life insurance

The mutual fund industry in India was launched in 1963 with the formation of the Unit Trust of India by the Centre. The objective was to attract small investors towards the stock market and encourage them to save and participate in the development of a sound investment climate in the country. During FY19, 32 lakh new investors were added by the mutual fund industry taking the total assets to Rs 23.79 lakh crore, adding Rs 2,43,000 crore over the assets on March 2018.

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Comparison of the two industries appears to be relevant as well as necessary because the purpose of both the industries is very similar. However, at the individual level the objective is widely different. But the fact remains that the money comes from the same pocket. Today, the general public is fast moving towards the stock market, propelled by the slogan “Mutual Funds Sahi Hai” often overlooking the utility of life insurance “Zindagi ke saath bhi zindagi ke baad bhi”.

Geographical reach

The MF is young, versatile and therefore attractive; whereas life insurance is the grandfather’s favourite mode of savings. With all its variations and attractions, it does not thrill the young generation. The battle line in the financial market is being drawn necessitating evolution of innovative products as well as distribution channels in both the sectors.

A closer look at the policyholders and MF investors indicate that MF has not been able to reach as many people as life insurance has been. The ground reality is that insurers have as many policyholders in Jharkhand, Assam or Kerala as they have in Maharashtra, Gujarat or Delhi.

In MF, Maharashtra contributes 41.8% of AUM of the industry followed by New Delhi, Karnataka and Gujarat. Bihar, Jharkhand, Orissa and Chhattisgarh have less than 1% share of the total AUM. But in these states life insurance policies are sold in very high numbers year after year. The per capita AUM is only Rs 1,787 in Bihar but in Maharashtra it is Rs 96,114. Even in Tamil Nadu it is Rs 16,610. If mutual funds focus their attention on those states where people are unaware of the benefits of SIPs or ELSS, the table can be turned against insurers whose traditional grazing ground may turn into a battle ground.

The tendency on the part of the life insurers to celebrate success on the basis of total premium achieved for a year is slightly deceptive. Group insurance premium contributes more than 40-50% of total premium. While group insurance is an integral part of the business it leads to complacency when the emphasis is always on selling to more and more people for long-term protection and savings.

In fact, many companies ranking high in the merit list of life insurers including LIC, need to work hard to penetrate deep into the market for promoting their business otherwise the day is not far behind when the mutual fund will become a spontaneous choice of the people in every part of the country and the life insurance industry, the financial power house, may get relegated to the ‘B’ Division in mobilising people’s savings.

The writer is former MD & CEO, Star Union Dai-ichi Life Insurance

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