The individual/ retail business mix for private insurance companies will gradually shift towards unit-linked insurance plans (Ulips) for savings and pure term for protection. First, post-2010 regulations, Ulips (with stringent cap on surrender charges) offer better proposition to policyholder than traditional par-savings. Second, private insurers catering to upper end of customer segment who have better understanding of equities and at the same time prefer term plans for protection need and third, impending risk of surrender charges being rationalised in traditional par and non-par savings.
In fact, Ulip in its current form (with stringent absolute cap on surrender charges, minimum product lock-ins, lower distributor commissions, regulated charge deductions) offers a better proposition to policyholder than traditional par-savings. While strong capital market momentum drove some of the persistency improvement in Ulips in past few years, a good part of it was structurally driven by stronger product offering and lower surrender charges.
Product focus on unit linked and pure term is comprehensible with impending risk of surrender charges being rationalised in traditional par and non-par savings. Our calculation suggests 35-40% of new business profits from par-savings insurance come from surrender penalties, and it should be even higher for non-par savings insurance. This is a well-recognized concern and was even the primary highlight of Irdai’s product regulation committee meeting last year. Any rationalisation of surrender charges will leave insurers with the option of either increasing premiums (reducing business competitiveness amongst other savings business) or taking a hit on margins.
Dynamics of group insurance business
Group business being written by the life insurance players are broadly of three types—(a) employer-employee fund management business (b) credit protect business (c) pure protection for a group of members. Group business forms more than half of the industry’s new business—about 60% for LIC and 40% for private players. Unlike individual business, group business is primarily sourced through direct channels.
Bank-led players to dominate
Insurance being a push product, the scale and economics of distribution becomes crucial. While individual agency channels remained most effective until 2011, the cap on distributor commissions and surrender charges forced life insurance companies to look for alternate distribution channels—ones characterised by low cost and higher persistency. This is where the importance of bancassurance channel emerged as it gave life insurance companies access to their partner banks’ distribution infrastructure in the most cost-effective way. Bank-led insurance players continue to gain market share within private players.