MUMBAI: A change in regulations is forcing life insurance companies to give marching orders to thousands of agency managers. The industry expects a 20% shrinkage in workforce following the new Ulip guidelines which force insurance companies to work with margins that are a fraction of what they are today.
The decision to cut costs overnight follows a July 20 meeting with the Insurance Regulatory & Development Authority (Irda), where the regulator refused to give companies more time to meet the new guidelines. According to those present at the meeting, a senior Irda official is understood to have told the companies: “Every party comes to an end and your party is over”.
The private life insurance industry has on its rolls around 3 million agents. As in end-December, private life insurance companies had 1,52,874 employees. Over three-fourths of these are executives involved in sales. Insurers estimate that a million agents will drop out. This will lead to a proportionate drop in the number of agency managers.
In HDFC Standard Life, there are talks of large layoffs, particularly in sales. In response to a query, HDFC Standard Life said, “In the run-up to meet the September 1 deadline of the new Ulip guidelines rolled out by Irda, we are currently assessing its impact on our product range, cost structure and incentives/commissions.
So far, we have not undertaken any step on rationalising our workforce. As an organisation, we continue to monitor under-performers/poor performers, which is a regular exercise carried out by the organisation, irrespective of the market condition”.
“The recent Irda circular would not lead to an incremental change but to a fundamental change in the way we do business. Overall, I see a 20% workforce reduction in the insurance market over the next 6-10 months,” said Rajesh Relan, managing director, Metlife India. He adds that while the customer is the clear winner, insurance companies will have to cut operating expenses drastically to be able to provide for the stipulated yield to the customer.
“This would require companies to cut costs at all levels, including investments for growth. Current sales models would need to be reoriented. It will also lead to dramatic reduction in commissions and put many small agents out of business. The new Ulip regulations go against the grain of financial inclusion as they restrict insurers from selling lower ticket size Ulips,” said Mr Relan.
The math is simple. The new norms require that insurance provide policyholders whatever returns their investments earn even if the policies are surrendered early. The maximum margin that an insurer can charge is a deduction of up to four percentage points from the percentage returns earned. “At this point of time, besides the LIC and SBI Life Insurance none of the life insurance companies would be able to continue with their present cost structure,” said the head of a private life insurance company.
Some companies will have to rationalise staff far less than others because they had discharged thousands of employees immediately after the financial crisis in 2009. The companies that had reduced headcount earlier include the likes of ICICI Prudential, Bajaj Allianz and Aviva. In some cases the headcount is coming down because of a freeze in recruitment. Insurance companies are also closing down branches. However, this is not an easy proposition is small centres because the regulator insists that companies cannot shut offices in places where they have sold policies without making arrangements to service policyholders.
The decision to cut costs overnight follows a July 20 meeting with the Insurance Regulatory & Development Authority (Irda), where the regulator refused to give companies more time to meet the new guidelines. According to those present at the meeting, a senior Irda official is understood to have told the companies: “Every party comes to an end and your party is over”.
The private life insurance industry has on its rolls around 3 million agents. As in end-December, private life insurance companies had 1,52,874 employees. Over three-fourths of these are executives involved in sales. Insurers estimate that a million agents will drop out. This will lead to a proportionate drop in the number of agency managers.
In HDFC Standard Life, there are talks of large layoffs, particularly in sales. In response to a query, HDFC Standard Life said, “In the run-up to meet the September 1 deadline of the new Ulip guidelines rolled out by Irda, we are currently assessing its impact on our product range, cost structure and incentives/commissions.
So far, we have not undertaken any step on rationalising our workforce. As an organisation, we continue to monitor under-performers/poor performers, which is a regular exercise carried out by the organisation, irrespective of the market condition”.
“The recent Irda circular would not lead to an incremental change but to a fundamental change in the way we do business. Overall, I see a 20% workforce reduction in the insurance market over the next 6-10 months,” said Rajesh Relan, managing director, Metlife India. He adds that while the customer is the clear winner, insurance companies will have to cut operating expenses drastically to be able to provide for the stipulated yield to the customer.
“This would require companies to cut costs at all levels, including investments for growth. Current sales models would need to be reoriented. It will also lead to dramatic reduction in commissions and put many small agents out of business. The new Ulip regulations go against the grain of financial inclusion as they restrict insurers from selling lower ticket size Ulips,” said Mr Relan.
The math is simple. The new norms require that insurance provide policyholders whatever returns their investments earn even if the policies are surrendered early. The maximum margin that an insurer can charge is a deduction of up to four percentage points from the percentage returns earned. “At this point of time, besides the LIC and SBI Life Insurance none of the life insurance companies would be able to continue with their present cost structure,” said the head of a private life insurance company.
Some companies will have to rationalise staff far less than others because they had discharged thousands of employees immediately after the financial crisis in 2009. The companies that had reduced headcount earlier include the likes of ICICI Prudential, Bajaj Allianz and Aviva. In some cases the headcount is coming down because of a freeze in recruitment. Insurance companies are also closing down branches. However, this is not an easy proposition is small centres because the regulator insists that companies cannot shut offices in places where they have sold policies without making arrangements to service policyholders.
Insurance companies have two options, bring down agency commissions to single-digit levels or bear a portion of the commission expense from shareholder funds. In both cases they will be forced to curb expenses. Reducing agency commissions would lead to increased dropouts from the agency force as selling insurance would cease to be viable for many.
Also, now there is far less incentive for shareholders to bring in money given the sharp reduction in margins. According to a research report by India Infoline, “Our analysis shows that new business margin would decline from 18-20% to negative or low single digits assuming no change to key operating metrics.”
India Infoline has revised its recommendation to reduce for Max India, Bajaj Finserv, Reliance Capital and ICICI Bank because of the lower valuations of their insurance arms. The company is reviewing its recommendation for Aditya Birla Nuvo and has recommended a buy for SBI Life Insurance. HDFC continues to be an ‘Add’. However, insurance is a much smaller portion for ICICI Banks’ and HDFC’s valuation.
Also, now there is far less incentive for shareholders to bring in money given the sharp reduction in margins. According to a research report by India Infoline, “Our analysis shows that new business margin would decline from 18-20% to negative or low single digits assuming no change to key operating metrics.”
India Infoline has revised its recommendation to reduce for Max India, Bajaj Finserv, Reliance Capital and ICICI Bank because of the lower valuations of their insurance arms. The company is reviewing its recommendation for Aditya Birla Nuvo and has recommended a buy for SBI Life Insurance. HDFC continues to be an ‘Add’. However, insurance is a much smaller portion for ICICI Banks’ and HDFC’s valuation.
Source: ET
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