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Running for cover

The years of burning cash to get traction are over: players across sectors are busy cutting costs and looking for efficient distribution models as they focus on renewals instead of growth.

Clifford Alvares        Print Edition: August 23, 2009

When V. Vaidyanathan moved from ICICI Bank to take charge at ICICI Prudential Life in May this year, it wasn’t exactly the kind of grand entry he was looking for. The private insurance behemoth had just posted a loss of Rs 780 crore in fiscal 2008-09—new business growth was tapering off and costs seemed to be out of control. Vaidyanathan promptly set out to map cost cuts and improved efficiencies.

Today, he says, “We are completely focussed on improving our business efficiency, looking at the branch structure, and cutting costs.” Vaidyanathan reckons when growth goes back to 8-9 per cent, the need for insurance will grow, too. A similar story is being played out across the industry. Throughout the 2000s, the new players burned crores of rupees as capital without showing much by way of profits as they fell for the allure of the under-insured Indian middle-class. It took the sudden recession to stun them into thinking of cost controls and policy renewals.

The growth bug had pushed insurers to splurge on building distribution networks for getting new business and training armies of agents which saddled them with high labour costs and low productivity in the first years. Their costly chase for new customers continued till last year.

Says T.R. Ramachandran, MD and CEO, Aviva Life Insurance: “The highly competitive environment and the overall slowdown have made it a challenging six months for the industry.”

Life insurers competed with one another to offer higher upfront commissions to agents and so marking up ULIP costs. These costs were recovered from investors and could go as high as 4.5-5 per cent of gross yields. It took the Insurance Regulatory & Development Authority (IRDA) to step in and put a limit on what insurers can charge ULIP customers. Insurers will now have to re-price their products.

The slump in new business is making matters worse. The growth in new-business premiums decelerated sharply from the rates of 30 per cent plus till 2008, and is now contracting. Growth in new business fell 16 per cent in the first two months this year (2009-10). New premiums include those from unit-linked insurance products— which look scary in the backdrop of the ravaged stock markets.

The second-half of the year could see an uptick, but the days of rapid growth are clearly over. Says Sanket Kawatkar, Head of Insurance Practice at Watson Wyatt: “For insurance companies, the average growth rates could stabilise at 10-15 per cent.”

Riders for growth
To steer clear of danger, the insurers have to ditch their mantra of rapid expansion in branches and growth at any cost. Who’s going to pay for the battalions of extra support staff and new agents? Besides, agents themselves demand their pound of flesh when they sell insurance products.

Turnaround Champs
Bajaj Allianz
FY 2008: Rs 16 crore loss
FY 2009: Rs 45 crore profit
How: Focussed on profitable businesses
Kotak Mahindra Life
FY 2008: Rs 72 crore loss
FY 2009: Rs 14 crore profit
How: Improved its cost structure, focussed on productivity

Says Pankaj Desai, Executive Director, Kotak Mahindra Old Mutual Life Insurance: “The agency distribution model is expensive in initial years and not very efficient. Agents need to be trained intensively, but their performance may vary.”

Up to last year, life insurers were covering their losses with capital infusions seemingly there for the asking. But the global financial meltdown has dried up capital sources. Vaidyanathan reckons the industry still needs around Rs 12,000 crore in the next few years.

While some like Reliance Life are looking at alternative sources of capital, including a share issue, cautious ones like Kotak Mahindra are fuelling growth with internal cash generations instead of capital infusions. Says Kotak Mahindra’s Desai: “We will be able to sustain our expansion plans with our internal cash generations. We do not require capital infusion.”

With capital requirements easing, the industry is poised for profitability. When the industry was opened up in 2000, life insurers expected the industry to make profits in 7-8 years. As the industry grew, players extended that horizon to 10 years. Now, insurance companies are looking at a 12-13 year timeframe.

Says Paresh Parasnis, Principal Officer and Executive Director, of HDFC Standard Life Insurance: “The fast growth called for more capital. We are now looking to break-even in the next two years.”

Money back?
A few insurers have already turned in a profit. Life insurers that built strategies on realistic mix of bancassuarance and agency model are earning good returns, especially if they also had tight cost controls in place. Last year, Kotak Mahindra Life turned a profit of Rs 14 crore against a loss of Rs 72 crore in 2007-08.

Among others, Bajaj Allianz Life managed a tidy profit of Rs 45 crore in 2008-09 against a loss of Rs 16 crore the year before. Last year’s profit-making company, SBI Life, would have also shown a profit had it not been for mark-tomarket losses and provisioning. It made a provision of Rs 97 crore, and reported a loss of Rs 26 crore against a profit of Rs 34 crore in 2007-08.

As insurers tune in to the slowgrowth environment, the focus is shifting to renewal premiums. Says Aviva’s Ramachandran: “This is perhaps the first year when most players are changing their focus from new business to renewal business.”

IRDA’s new regulation will pull down upfront commissions for agents and streamline costs to customers.

So, while the industry may have slowed, it’s not to say the growth opportunities are limited: Indians are still heavily under-insured and the industry accounts for just 4.4 per cent of GDP. The bet is on companies that balance growth and costs in the long run.

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