It has been five exciting years for the domestic private life insurers. The industry witnessed impressive growth rates, entry of more players and even had some promoters cashing out their stakes. The industry also saw the insurance regulator cracking the whip where needed.

Chennai: Establishing around 2,550 offices and pumping in a total capital of around Rs4,660 crore, the new insurance companies have changed the industry's face.

Speaking about the industry's growth post liberalisation the Insurance Regulatory and Development Authority's (IRDA) chairman C S Rao says, "The first year premium of the life insurance industry has grown by 260 per cent to Rs25,350 crore for the year ending 31st March, 2005 as compared to Rs9,709 crore in the year 2000-01." (See )

Adds Birla Sun Life Insurance Company Limited CEO Nani B Javeri, "The industry has grown more over the last five years than its average growth over the earlier five years. Interestingly in this short period, private players have cornered nearly 26 per cent market share." (See )

According to S V Mony, secretary general, Life Insurance Council, the private life insurers have proved wrong the prophecies of the pundits predicting not more than 10 per cent market share in a 10-15 year time frame. (See )

Much of the industry's growth is driven by the unit linked insurance policy that has caught the policyholder's fancy. As a matter of fact some insurers sold mutual fund schemes in the garb of insurance policies with a small amount of risk cover thrown in.

In order to curb such practices the IRDA has recently come out with its norms specifying the sum assured based on the premium paid and the minimum lock in period. It will be interesting to note that in their initial days the new insurers sold traditional policies on the risk cover plank. They claimed that life insurance was for covering the risk and not a savings avenue.

One of the reasons for the private sector pushing the unit linked insurance is not only its simplicity and the booming stock market but the shift in the investment risk to the policyholders. This in turn reduces the burden on the bonus payout and the provisions towards solvency norms.

Looking back, the arguments for opening up the life insurance sector were (a) Choice for the customers in terms of insurers, products and pricing (b) Spread of insurance in rural areas (c) Increasing the insurance penetration and (d) Mobilising funds for infrastructure development. The achievements of the private players on the above fronts are mixed.

A prospective policyholder has a choice of 15 life insurers (14 private and Life Insurance Corporation of India-LIC) and comparatively wide choice of basic covers as well as the riders to choose from. Today customers are looking at term and whole life policies, which were not sold earlier.

The industry also saw traditional products like endowment policy packaged on unit linked platform (e.g.Flexi series products of Birla Sun Life) and vice versa (Jeevan Saral of LIC). The latter is truly an innovative product, as it does not take into account the age of the prospect and period of insurance-the two essential aspects of a life insurance policy.

However in terms of pricing, nothing much has changed for the individuals. Only the HDFC Standard Life Insurance Company Limited went aggressive on the pricing of its term insurance product. On the other hand the group insurance segment- policies bought by the corporates-saw intense price war.

On the issue of spreading the message of insurance except AMP Sanmar Life Insurance Company Limited, all the others focused on the urban centres. Now the trend is changing with companies moving towards small towns and rural areas. Many companies have appointed non -governmental organisations (NGO) and self help groups (SHG) to distribute life insurance policies in rural areas.

According to IRDA's annual report for the year 2003-04, while the new insurers have complied with the rural sector obligations, a couple of players like Kotak Mahindra Old Mutual Life Insurance Limited and Tata AIG Life Insurance Company Limited have failed on their social sector obligations. The IRDA has issued micro-insurance regulations to increase the spread of insurance in the country.

Remarks ICICI Prudential Life Insurance Company Limited chief executive officer Shikha Sharma, "We recently crossed the five lakh policy mark for rural and social sector policies. This is a testament to the scalability of the rural operations we have built up." (See ).

According to IRDA's Rao, the insurance premium per capita in India has increased to $16.90. "The overall penetration in India stood at 3.28 per cent of the gross domestic product (GDP) in the year 2003. India's overall world rankings in terms of total premium volumes improved from 23rd in 2000 to 19th in 2003 and its share in the world market increased from 0.41 per cent to 0.59 per cent during the same period. We expect the industry to improve the insurance penetration to at least 5 per cent in the next five years."

However there are some who say measuring the penetration factor, as a percentage of GDP is not a correct. The accurate measure is to see the increase in the number of first time policyholders. While this number is not available, the market share of the private players in terms of number of policies issued is not an impressive one as their premium growth. For the FY 2005, the private players were able to get a mere 8.50 per cent of the total number of policies sold. (See table below)

According to Mony, companies are selling group insurance policies and that in turn results in increased insurance penetration.

The IRDA chairman also expressed his worry about the high lapses of policies and frequent churning of number of agents. "These are not good indicators for the industry."

The churn is not only in the case of individual agents but also in the bancassurance segment. As bancassurance agreements are entered normally for five/six years, many such deals are coming up for renewal.

Some banks have changed partners thereby putting the after sales service in jeopardy. For instance Bank of Rajasthan divorced its relationship with Birla Sun Life and tied up with LIC.

Speaking about the funds mobilised towards infrastructure development Mony says, "The regulations provide that 15 per cent of the investments should be in infrastructure bonds. This is being complied with." While agreeing that there is still some way to go he adds, "We need sufficient number and spread of long-dated government or quality corporate bonds. Five years is too short a period to come to specific conclusions; but the trend is positive and adequate."

Adds Javeri, "About 30 per cent of the total investible funds in the life insurance industry (Rs4,28,000 crore) is invested in the capital markets. The largest share of 59 per cent is into government securities. Finally about 11 per cent of the total investments are in the infrastructure sector directly. Going forward with the growth in the assets under management of the life insurers one can expect a significant portion being invested into the infrastructure sector directly."

The government's tinkering with the tax laws is the one issue that reined the industry's growth. According to Sharma, "The imposition of a service tax has been a minor setback for the industry. Also, the cap of the pension limit at Rs10,000, and its recent merger into the 80C limit has been a downer for the industry." The one positive tax measure is the increase in the exemption limit under section 80C of the Income Tax Act to Rs1 lakh.

Going short in long term business
Insurance is said to be a long term business. It is more so in the case of life insurance. However looking back at the happenings in the five year old private sector life insurance in India, one might think otherwise.

The industry saw promoters of two companies-AMP Sanmar and ING Vysya Life Insurance Company Private Limited- cashing out their stakes. And more such events are predicted to happen.

In a matter of three years, the Chennai based AMP Sanmar which started with a bang ended with a whimper. (See ) On the other hand Reliance Life Insurance Company Limited that went dormant is resurrecting itself by taking over AMP Sanmar.

In the case of ING Vysya Life, two of the three original Indian promoters -ING Vysya Bank and GMR Industries Limited- sold their stakes to Gujarat Ambuja Cements and Exide Industries respectively.

While the AMP Sanmar's enterprise value is kept secret, the ING Vysya Life was valued at Rs413 crore when GMR Industries sold its 49.13 per cent stake to Exide Industries. Gujaraj Ambuja Cements bought ING Vysya Bank's 14.87 per cent holding in the life insurance company for Rs60.9 crore.

Speaking of valuations, ICICI Prudential Life is the country's first life insurer to declare the embedded value-the present value of the future profits embedded in the policies. According to Sharma, the company's embedded value is Rs312 crore.

The past five years also saw some companies sticking to ethical marketing and many activating their dirty team. The most glaring was the misuse of the Keyman Insurance Policy by almost all the players. Though IRDA does not do mystery shopping to know what is happening at the ground level, it does put a stop to the malpractices. The regulator brought in new norms for Keyman Insurance Policy.

Though all the life insurers have said that it would take them atleast seven years to break even, whether they would be able to achieve this is a question. The cash burn is very high. Besides, all the players have exceeded the stipulated expense ratios. This has resulted in promoters infusing funds at regular intervals.

Meanwhile the promoters of private life insurers have started moves to recover their capital infusion. One of the proposals is to treat the funds infusion for declaration of bonus as a notional loan with a first charge on the future surplus. (See: ). Their other demand is the reduction in the income tax rate for the insurers.

Future trends
Looking forward, the new generation insurers predict pension, health insurance segments growing at good pace. Mony forsees the average term of life insurance decreasing.

Adds Birla Sun Life's Javeri, "The current trend towards setting up a multi channel of distribution will continue to increase penetration. We expect an increase in the use of Internet to service customers and to effect sales of policies. The role of an insurance advisor will also evolve with rapid convergence being witnessed in the life insurance sector."

On the regulatory side Mony is of the view that the current system of training agents and the robustness of the examination and certification systems are issues that need a relook. "The IRDA has wide variety of important work and it needs more qualified staff."