Lower Ulips volumes in FY2021E pose risk of lower overall annualised premium equivalent growth.
Our analysis of previous epidemics suggests a sharp rise in demand for term and health insurance policies during these periods. It is difficult to quantify the rise in premium volumes due to Covid-19 as the intensity and spread of this pandemic in India remains unclear. Life and health insurance companies will likely be the key beneficiaries of any rise in volumes.
A few global precedents
SARS (Severe Acute Respiratory Syndrome): A viral respiratory disease, spread in China and Singapore during November 2002 to July 2003. During 2002 and 2003, China Life Insurance Company (CLIC) saw 40% CAGR in short-term health insurance and 34% CAGR in long-term health, whole and term life insurance. This is higher than 3% CAGR and 10% CAGR over FY2004-11 observed in these products. In Singapore, overall individual business (excluding annuity) declined 30% and 23% year-on-year (y-o-y) in 2002 and 2003 compared to 74%-134% y-o-y growth over the past three years led by drop in non-linked business (down 18% to 36% y-o-y).
MERS (Middle East Respiratory Syndrome): Spread rapidly in Saudi Arabia during 2QCY13 to 3QCY14. Bupa Arabia, one of the largest health insurers, reported 44% and 81% y-o-y growth in premiums during 2013 and 2014. Overall industry health insurance premiums increased 22% y-o-y in 2014 compared to 14% CAGR over 2010-13 and 2% CAGR during 2015-19. Overall life insurance premiums increased 7% and 15% y-o-y in 2014 and 2015, respectively as compared to 2%-7% y-o-y decline over CY2010-13 and 3% to 8% y-o-y rise during CY2016-18.
Expect pressure on Ulips
Lower unit-linked insurance policies (Ulips) volumes in FY2021E pose risk of lower overall annualised premium equivalent (APE) growth and more importantly, negative operating variance. This remains the key risk to FY2021E value of new business (VNB) growth. A slowdown in the economy and muted capital markets will likely affect growth in savings policies. In our view, volumes in Ulips will take a severe knock in FY2021E. Weak capital markets, coupled with changes in regulations, led to -12% CAGR in private sector APE during FY2010-14 as compared to 30% CAGR during FY2006-08.
Apart from slowdown in Ulips, increase in surrenders is another risk for the sector. While Ulip volumes moderated post FY2018, decline in persistency has been negligible. However, the decline in persistency post FY2010 was much higher, likely due to higher mis-selling.