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Endowment policies were once the rage; now
ULIPs are popular with investment advisors who are hawking
their dual benefits of protection and returns
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Insurance
and returns, a popular refrain among investment advisors goes,
should never be mixed up. Most people buy insurance as an instrument
that can save some tax, another refrain, this one popular among
private sector life insurance firms four, five years ago went,
not as 'protection'. In a volte face of sorts, investment advisors
cannot have enough of unit-linked insurance plans, and private
insurers are now vending the dual benefits of protection and returns
(not very different from the protection plus tax savings' model
they decried). The returns can come from equity and debt, and
with the stock market having been on a hot streak this past year,
equity-based ULIPs are all the rage. That, say some analysts,
isn't good: "If the stock market plummets, ULIP holders will
be the hardest hit," they say. Not so, counter execs in the
industry. "In 15 of the last 25 years, the return on equity
has been 13-22 per cent," says Gaurang Shah, Managing Director,
Kotak Mahindra Old Mutual Life. "If someone takes a long-term
view and stays invested in an ULIP, he or she will definitely
gain."
For companies like Kotak Life (it boasts less
than a 1 per cent share of the market and has sold a mere 32,404
policies between April 1 and September 30 this year), ULIPs are
potential market equalisers, instruments they can use to catch
up with other private sector insurance firms. Kotak Life, for
instance, has launched a ULIP with a capital guarantee. Many customers,
explains Shah, stay away from ULIPs because they fear an erosion
of capital. "That's where we make a difference by offering
capital guarantee even in our growth fund where equity allocation
could go up to a high of 80 per cent." One way of looking
at ULIPs is that they are not very different from the endowment
plans that were popular in the 1990s; LIC would offer significant
returns on these based on its investments in government securities,
corporate bonds, and the money market, but with interest rates
headed South in the 2000s, that is no longer possible. However,
ULIPs are susceptible to stock market volatility, especially in
the short term. Are customers evolved enough to make a call? Yes,
say most executives in the industry. "We ensure that our
agents make consumers aware of the risks and return in ULIPs,"
says Ian J. Watts, MD, Tata AIG Life Insurance. "In fact,
we further enhance this process by a separate call from the company
to advise prospective customer to take a long-term call on ULIPs."
HEADED FOR CONSOLIDATION
Both the life and the non-life segments
are ripe for M&A activity. |
 In
June this year, AMP Sanmar exited the life insurance business
by selling out to the Anil Ambani- controlled Reliance Capital.
A month later, the Bangalore-based GMR Group sold its 49.13
per cent stake in ING Vysya Life Insurance to Exide Industries.
The delay in increasing the ceiling on foreign direct investment
in insurance firms from 26 per cent to 49 per cent is one
reason for this. To grow the equity-intensive business (for
instance, in the 12th hike in its equity since December 2000,
ICICI Prudential brought in Rs 160 crore to take its capital
to Rs 1,085 crore), the Indian partner may have to bring in
more money. Some companies may not have the deep pockets required
to do so; others may believe the money is put to better use
in their other businesses. In August this year, insurance
regulator IRDA scotched the plans of insurance companies to
raise capital through preference shares or hybrid instruments
other than equity. Strangely enough, that hasn't dimmed the
desire of companies wishing to enter the space. From AXA-Bharti
to IDBI Bank to Bank of Baroda to Allahabad Bank, a clutch
of worthies are waiting to plunge into the business. "The
market can support only half-a-dozen players," believes
Shikha Sharma, Managing Director, ICICI Prudential Life. SBI
Life's Deputy CEO, Pier-Paolo Diapola disagrees: "There
is a space for everybody. Different insurance companies can
focus on different market segments." |
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| NEW ARRIVALS |
| »
Bharti AXA Life Insurance Company, a joint venture
between Bharti Enterprises and AXA APH. The latter is part
of the AXA Group, #13 in the Fortune 500
» A
joint venture between Shriram Group and South Africa's Sanlam
Group for life insurance; the latter is one of SA's largest
insurance firms
» Allahabad
Bank has roped in a UK-based non-life insurer as a partner
for a non-life business. Its other partners may be Karnataka
Bank, Indian Overseas Bank and Bank of Rajasthan
» Bank
of Baroda is considering a foray into the life insurance
business
» IDBI
Bank is wooing foreign companies, including Italy's Generale
for its life insurance foray
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In developed markets such as the US, ULIPs
are the preferred insurance instruments. Globally, ULIPs account
for some 80 per cent of all life insurance policies. Shikha Sharma,
MD, ICICI Prudential, sees them as "an irreversible trend".
That may be the case, but ULIPs seem to have succeeded at the
cost of endowment policies, where the average premium is much
lower. That's an opportunity lost, rues Pier Paolo Dipaola, Deputy
Chief Executive Officer, SBI Life Insurance. "In the rural
market, a low-premium endowment product could be a hit."
Then, in the noise about ULIPs, that's a voice of reason that
hasn't found many listeners.
INTERVIEW: SHIKHA
SHARMA/MD/ICICI PRUDENTIAL
"Consolidation Is Inevitable"
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 ICICI
prudential life insurance Company has remained the country's
largest private sector life insurance firm over the past
five years. Supported by the country's largest private sector
ICICI Bank, ICICI Prudential believes that size and scale
are essential to succeed in the Indian life insurance business.
Excerpts from an interview with Shikha Sharma,
MD, ICICI Prudential:
The five-year-old private sector life insurance industry
has little over a dozen players. Is there room for more
players?
I think the market can support half-a-dozen players in
the next five years. Some will go and some will come.
Do you expect some sort of a consolidation to happen
in the market?
People say the Philippines, Thailand and China have over
two dozen companies and the Indian market too, can support
more players. I think what we forget is that the Indian
customer is very value conscious. That results in a lower
profit margin for the insurance provider. Today, scale is
more important for long-term viability of the insurance
business in India. When scale becomes important, you are
either big or you die out. In a market like the Philippines,
you can survive with as low a market share as 2-3 per cent
because the profit margin is large enough to support you.
But in India, the profit margin being low, the big guys
make normal profits while the small ones will gradually
die out.
So, there is a possibility of acquisitions and mergers
going forward?
Consolidation is inevitable. I don't know when this will
happen, but it has to happen.
Will you look at buying out some company?
If something is available to us at a price that makes sense
to us from a value perspective, we will be definitely interested,
provided it also fits into our expansion strategy. We won't
buy a company just for its product. We would definitely
be looking at gaining access to new customers and distribution
channels.
In a price-sensitive market like India, will it take
longer for companies to break even?
Profit margins are lower in India. How do you combat that?
You combat that by acquiring scale and managing your expenses
well. We have to be selective about the quality of business
we write.
Capital is a big issue confronting the industry. Any
plans for an initial public offering?
For a company of our size, we have to do a domestic as
well as an international offering. A pure domestic issue
will not be a good idea because Indian investors will not
understand a business as long term as insurance. But things
could change in the future.
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