Pitfalls of insurers: Elusive profits, expensive distribution

Cumulative losses of the top 10 private players in the past decade is in excess of Rs 16,000 crore.

Industry was privatised about a decade back, but profit returns are still tough for most of the life insurers. 

Several insurers are still trying hard to reach the break-even point.

Insurers have shut about 1,000 branches and released about 4 lakh inactive agents after the regulatory changes.

Source: Indian Express

Life insurance industry is struggling to find the right selling channel which can increase their profitability. The industry was privatised about a decade back, but profit returns are still tough for most of the life insurers. Several insurers are still trying hard to reach the break-even point. According to the Life Insurance Council, as on March 31, 2011, there were about 32.54 crore in-force insurance policies in India, one of the highest in the world. However, if we look at the profit and loss account of the industry, the cumulative losses of the top 10 private players in the past decade is in excess of Rs 16,000 crore, according to the IRDA annual report. The biggest issue of finding the “right” distribution channel by the industry remains unresolved, leading to low productivity.

Agency model

The expense ratio for the agency model is high due to

the fixed compensation for agency managers. In most of the countries, agency compensation is variable rather than fixed. The high fixed cost of agency management pushes the break-even point of the insurers even higher.

Boston Consulting Group (BCG) did a detailed analysis of the life insurance market in the top 1,000 towns in India. The report finds that out of the 1,000 towns, owned branch infrastructure in only top 150-200 towns is economically viable for the life insurers. What is surprising is that nearly 40 to 45 per cent of the life insurance market is beyond these top 150-200 towns, the report says.

Most companies are struggling to raise productivity per sales manager beyond Rs 1 lakh of premium collected per month. However, industry experts estimate break-even levels of Rs 2-3 lakh per month per sales manager. As per the Life Insurance Council, it is apparent that companies continue to trim cost and “the number of direct employees has reduced from 2.67 lakh to 2.42 lakh Y-o-Y. The number of agents has also reduced by 29.78 lakh to 26.47 lakh y-o-y, with a view to professionalise agency force and to ensure informed decisions are taken.

Bancassurance model

In the early years, the bancassurance model excited every other life insurer as they had found the success mantra of selling policies through tie-ups with various banks. According to the BCG report ‘India Insurance’, “once banks realised their value and clout, they renegotiated more attractive terms for themselves, making the economics for insurers less favourable. Several banks are exploring an optimal deal for themselves.”

The large corporate agents including banks are known to insist on high payout which has made the corporate agency model less viable. Although life insurance industry in India is fragmented in its sales practices, the experience of bancassurance and corporate agency model is no more as exciting as insurers anticipated few years back. Vinay Taluja of Bajaj Capital says, “The contracts of the banks with insurers is short term. This is a weakness of the contract. It should be a long term contract. Some banks are entering into equity relationship with the insurers.”

Chasing topline Industry experts believe that life insurance industry did not follow the oft used cliché that “topline is vanity; bottom-line is sanity”.

MN Rao, CEO, SBI Life, says it was “gold rush phenomenon” after the sector was opened for private players with insurer’s fascination for the topline growth at any cost. This resulted in large branch offices with high pay outs to the sales managers which ideally should have been agent-servicing locations. The limited attention to the lean staffing and variable compensation model further inflated costs. “Opex ratios (operating expenditure / total premium) for the top 10 Indian life insurers are in the 15 to 30 per cent range, compared to international benchmarks of 10 to 15 per cent. The smaller companies are even worse,” says the BCG report.

However, SB Mathur, Secretary General, Life Insurance Council, defends insurance companies. “India is a difficult market. There are places where infrastructure is needed which involves investment. Once operating expenditure comes down, it will reflect in the pricing,” he said.

Paradigm shift

Rajesh Sud, CEO and MD, Max New York Life says, “Life insurance industry is currently going through the process of adapting their business model to suit the new environment created mainly due to change in regulations.” The regulatory changes introduced since September 2010 have significantly reduced the new business premiums for ULIPs. Companies have been forced to reduce commission payouts and explore means to reduce operating expenses.

According to BCG estimate, insurers have shut about 1,000 branches and released about 4 lakh inactive agents after the regulatory changes. Jyoti Vij, Head-Banking and Insurance Division, FICCI says, “insurance companies are becoming more comfortable with the profitability issues. Capital has indeed become an issue post regulatory changes.”

According to the Life Insurance Council, India has moved from the 20th place in 1999-2000 to the 9th position among the 156 countries and is expected to grow at a fast pace in the next few years. However, capital remains a big issue for the industry which has long been demanding FDI cap to be raised to 49 per cent from 26 per cent. The step, whenever taken, would infuse large amount of long term capital into the companies. Allowing bank multi-tie ups would increase competition and help improve offerings. Currently, only one tie-up is allowed which puts banks in a better negotiating position.

Industry experts believe that gradually the ind ividual agent model would come down and bancassurance along with corporate agents would gain prominence. The online and telemarketing channels are also expected to grow fast. However, about 40 per cent of the sales still comes through the agency model and involves maximum cost for the insurance companies. The key challenge going forward would be to optimise the agency model along with development of alternative channels.