December 30, 2011: The life insurance sector has witnessed robust growth in the past decade with

private players entering the fray. But rapid changes in the regulations and highly volatile equity markets were duly mirrored in the new business premium for the industry in the last one year. According to the Insurance Regulatory and Development Authority (IRDA), the first-year newbusiness premium (single and regular) underwritten by the life insurance companies declined on an average by 40 per cent in the last seven months. The total premium collected by the life insurance industry marginally decreased by 2 per cent to Rs 1, 22,661 crore from premium. Rs 1, 25,179 crore for the six months period ending September 30, 2011, despite healthy renewal According to a Life Insurance Council report, total premium (new business and renewal) underwritten by the life insurance sector was Rs 2,86,766 crore in 2010-11 against Rs 2,65,449 clocked in 2009-10. Although the top-line of the insurers grew at double-digit rates till 2009-10, the bottom-line of several private insurers are in the red, despite a decade of operation. The total accumulated losses of private life insurers were over Rs 15,482 crore by March 2011. However, the silver lining is that, according to an I-save.com report, as many as 11 of the total 22 private insurers turned the corner and made profits for the year ended 2010-11, and helped them reduce their accumulated losses. Distribution For any business, distribution is the key to success. Prior to 2000, LIC operated only through the tied agency (individual agents) model and it continues to account for more than 90 per cent of their business. Private insurers too banked on individual agents to market their product, but over time they diversified their distribution channel to bancassurance (insurance sold through banks), brokers and corporate agents. Currently, for private players, tied agency accounted for just 50 per cent of the overall business. This is likely to go down further mainly on account of the regulatory changes which rationalised the commission structure for the agents. Further slowdown in tied agency business is anticipated following the IRDA guidelines that came into effect from July 2011. The guidelines stipulate that agents who fail to achieve a persistency rate of 50 per cent will lose their licences. Two years from now, agents will have to ensure that at least three-fourths of their policies sold in the previous year are renewed to qualify for licence renewal. This regulation will pave way for only serious agents to stay in the business. Going forward, the bancassurance

channel is likely to contribute a chunk of new business premium. This, in turn, will reduce the operating expenses and may help improve the profitability of the insurers. Profitability focus After chasing the new business premium for several years, insurers have recently turned their focus on profitability rather than top-line growth. The major reason for poor profitability was the higher operating expenses of life insurers. Life insurance companies' operating efficiency is measured by the ratio of operating expenses to gross premium income. According to the latest available IRDA data, in 2009-10, operating expenses of private life insurers was down to 20.86 per cent of the premium collected against 25.99 per cent incurred in 2008-09. Although the operating expenses moderated, the ratio remains in the 15-30 per cent band for individual insurers. Private insurers which have focussed on building distribution channels, branch offices and other infrastructure had to bear higher expenses. Among the private players, SBI Life's operating expenses is among the lowest at 6.3 per cent. In contrast to private sector insurers, LIC's operating cost was 6.58 per cent of the premium in 2009-10, which is far lower than the international standard of 10-15 per cent. However, with an average cost ratio of 21 per cent, other Indian private insurers are a long way off from meeting international norms. By reducing operating costs, already 11 of the 22 private players such as SBI, ICICI Prudential, Bajaj Allianz, Max New York Life and Aviva India have turned profitable in 2010-11. However, the sustainability of profits depends on persistency. Persistency is the per cent of policies that are continued for a specified period, which varies between 13 months and 25 months. Persistency is denoted in conservation ratio. The conservation ratio (renewal premium collected in the current year to total new business premium plus the renewal premium of last year) of the top five private life insurers is, however, not encouraging. According to an I-save.com 2011 report, SBI Life's conservation ratio is at 47.9 per cent, Birla Sun Life's 56.3 per cent, and ICICI Pru's, HDFC Life's and Bajaj Allianz's were all below 70 per cent. Way forward For life insurance companies, having multiple offices in metros is unnecessary as customer footfalls occur mainly for paying renewal premiums. After spending huge money on office infrastructure, several insurers are now moving towards rationalisation of the offices.

Consolidation is visible in the insurance industry in the form of private players ceding stakes to foreign partners. The Bharti group, whose agreement to sell its business to Reliance Industries failed, is scouting for new buyers. On the other hand, Reliance Capital sold a 26 per cent stake in its insurance arm to Nippon Life for over Rs 3,000 crore. Max New York Life sold 4 per cent stake to Axis Bank and had a marketing tie-up too. After witnessing double-digit growth for most part of last decade, the industry witnessed negative growth for a major part of 2011. But the changes that will have the biggest impact on costs are the use of technology to offer products online and expanding the products mix by launching health insurance products. With cost consciousness and divergent distribution channels, more insurers are likely to achieve profits, and the industry may head for brighter days ahead. Keywords: Life insurance, volatile equity markets, new business premium

1) The claim settlement ratio is decreased to 84.15 in 2010-11 over 87.11 in 2009-10. 2) Aviva has decrease in claim settlement ratio while the other players have growth in the same period. 3) I.e. the other players got the advantages over Aviva on selection basis by the customers due to the above reasons. 4) The other companies give variety in their online term than aviva 5) The new policies sold were decreased in 2010-11 over 2009-10. 6)