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What it takes to wipe off your smug smile
Uncontrolled operational expenses and lack of a sustainable business model have left Indian insurers gasping for air. With huge accumulated losses, they are already in a big mess. Although everyone agrees that the industry has a great growth potential, the question remains: How many of the existing players will even survive?
Issue Date - 30/05/2012
Imagine having your insurance firm declare bankruptcy just when you were about to file your insurance claim. In other words, have you ever thought of how it would feel to have lived smug under the illusion of insured safety and having that illusion destroyed without notice? A look at the present financial misery of Indian insurers, and the thought simply can’t be ignored any longer. More so when one sees that the glitzy private insurers who never fall short of making a new promise to customers everyday are now struggling with combined accumulated losses of over Rs.150 billion (of all private life insurance companies as on December 31, 2011). Interestingly, as of May 2012, 19 out of 22 private players are in the red. The scenario is more or less the same for the non-life players. Although some may argue that accumulated losses of non-life insurance companies have still not entered the danger zone, the fact remains that they have a market penetration rate of only 0.78% as compared to 5.21% for the life insurance players. Hence, their losses as compared to the size of their businesses are actually big and in turn threaten their existence.

For records, until recently, the life insurance companies have been the driving force for growth in the insurance market. But at the same time they were the ones that jeopardised the future of the industry by relying heavily on unit-linked insurance policies (ULIPs). So when the norms related to ULIPs got restructured in Q3 2010, life insurance players suddenly found themselves in a big mess. Data from the regulator show first-year premium of life insurers fell 19% for the first eight months of the FY2012 to Rs.624.3 billion. Even private sector market leader ICICI Prudential saw its annual premium equivalent sales falling by 56% to Rs.5.8 billion in the first nine months of 2011, compared with Rs.13.3 billion in the same period of 2010. The fall in topline comes at a time when almost all private insurers are suffering from high operating losses. “Almost 75-80% of the capital requirement (for life insurers) has been to fund operating losses and not for solvency requirements,” points a joint report by Boston Consulting Group (BCG) and industry body FICCI.

Further, the entry of more players, which initially was considered as a boon, has ended up initiating a price war affecting the players. For instance, for a 30-year-old, non-smoking male, the premium for a 25-year term policy has come down drastically from about 70 basis points (bps) in 2001 to about 20 bps today – almost 70% reduction in price for the customer. With margin already being a problem, fall in topline due to increased competition has increased problems for private insurers. While Reliance Life’s accumulated losses (Rs.27.77 billion) now stand at 258% of the first year premium underwritten (as on December 31, 2011), for Tata AIG and Birla Sun Life it stands at 216% and 107% respectively.

Non-life insurers too face a similar challenge. While the combined ratio (operating expenses plus claims plus commissions as a percentage of net earned premiums) of all the non-life insurance companies for the past five years has been around 120%, the underwriting losses for the industry have grown at around 13% CAGR in the past five years. IRDA data reveals that underwriting losses of non-life insurance companies shot up 67.72% in FY2011 to Rs.99.69 billion, from Rs.59.44 billion in FY2010. So, who is to be blamed?

The Indian Motor Third Party Insurance Pool (IMTPIP), which was created in 2007 to allow the insurers to share the risk on account of third party insurance, remained the largest contributor to these losses. Interestingly, by FY2010 the pool’s loss ratio had already reached 194.2% as compared to a loss provisioning of 126%. Result: IRDA had to dismantle the pool effective March 31, 2012 stating that “the current framework of the pool was severely affecting the financial viability of the general insurance sector due to alarming capital depletion in the sector.” Although it’s anticipated that rates could rise, as insurers would have greater freedom to set premiums based on claims experience, the impact of the changes is still unclear, as it will take months for the total liabilities of current policies to be calculated.

Another big issue that questions the sustainability of the general insurance industry is the high operational expense. While a 20% operating expense ratio is ideal for a viable business model, some players are currently operating at as high as 40%. Moreover, the combined ratio for the industry stood at 132% last year representing a spend of Rs.132 for Rs.100 earned as premium.

All this has forced private insurers to resort to desperate measures including exit plans. The latest being the US-based insurer New York Life which exited from India in April 2012 by selling its 26% stake in Max New York Life (a JV with India’s Max group) to Japan’s Mitsui Sumitomo for Rs.27.31 billion. Earlier, in 2007, European insurer Chubb had also left the country abandoning its partnership with HDFC.

It’s not that only foreign players are in dilemma, the Indian partners too are facing a predicament. While Reliance Capital sold 26% stake in life business to Japan’s Nippon Life for Rs.30.62 billion last year, Bharti Group too made an unsuccessful attempt to sell off its 74% stake, both in life and general insurance businesses of Bharti Axa (a JV with French insurer Axa), to Mukesh Ambani led Reliance Industries. In fact, this might be the trend going forward. Agrees a senior official from United India Insurance as he tells B&E, “We may see some more players exiting as well as entering the industry. However, we won’t see a serious wave of consolidation sweeping the insurance industry. Although the industry is going through a rough phase, it has tremendous growth potential. Thus, most players are trying to just run through the phase with least possible damage.” But then what about the majority of players in the general insurance domain who still lack scale as well as a sustainable business model. For them the only way out of the quandary is to get absorbed by a big player... or merge with another smaller player to create scale and in turn sustain in the long run. A case in point is Bharti AXA. The company’s accumulated losses now stand at 1,233% of first year premium underwritten (till December 21, 2011). Reason: The insurer’s first year premium for the first nine months of FY2012 have fallen by 50%, from Rs.2.60 billion in FY2011 to Rs.1.37 billion in FY2012. If this continues, there are chances that the insurer itself might run for cover.


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