V Jagannathan interviews Nani B Javeri, CEO, Birla Sun Life Insurance Company Limited.
Chennai: The honour of being the trend-setter amongst the Indian private life insurers undoubtedly goes to the Mumbai-based Birla Sun Life Insurance Company Limited.
For the company not only showed the industry the potential in the unit-linked insurance policy (ULIP) segment by launching traditional products on a unit-linked platform. The company also set the trend in other areas as well. In many instances the company's concepts have become a statutory norm.
The company pioneered the concept of 14 day 'free look' period that later became the statutory norm. For instance, Birla Sun Life was the first to introduce the practice of written illustrations explaining the projections on the returns to the policyholder and signed by the agent and the client. Further, the company pioneered the bancassurance model in the country and others latched on to it only later. And, when the industry was selling ULIPs like a pure mutual fund product with minuscule life insurance cover, Birla Sun Life pioneered the concept of a minimum percentage of life insurance risk cover in its ULIPs. This too recently became a statutory norm.
Looking forward, Nani B Javeri, chief executive officer, Birla Sun Life, predicts, "The segments which will see increasing growth are children's plans and retirement. In light of the discussions on reduced capital requirements for the health insurance sector one can expect a lot of activity on the health insurance front."
According to him, 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 the rapid convergence being witnessed in the life insurance sector." Excerpts from an interview:
How do you view the performance of the life insurance industry in the last five years and the performance of the private players?
The industry has grown faster over the last five years than in the preceding five years. Interestingly in this short period, private players have cornered a nearly 26-per cent market share within the industry. With the advent of the private players there has been a distinct shift from traditional plans to ULIPs.
Customers are considering even pure protection plans such as term plans. Bancassurance as a channel, which was non-existent, has today become a very important channel of distribution. A segment of customers albeit very small currently is open to purchasing policies on the internet.
One of the biggest beneficiaries of the opening up of the life insurance sector has been the customer. Today he has ample choice. The increased competition and robust regulations have resulted in a higher level of transparency (and disclosures). It has also meant new practices such as free-look periods, illustrations, etc, besides adding a new meaning to financial advice.
Looking back what have been the ups and downs of the life insurance industry after it was opened for private participation?
The ups are the growth in the industry and gain of market share by the private players. The entry of the new players has meant more choice for the customers and an increasing awareness of life insurance as a financial planning tool. The advent of ULIPs has increased transparency in the system through higher disclosures. The downs are frequent changes in tax laws, unethical sales practices by some players to gain market share.
What was the initial strategy of the private life insurers and the changes that took place later?
Initially, most of the private players launched their business with traditional participating products. Birla Sun Life Insurance was the only company to launch with ULIPs. Our success in the market led to most competitors switching to ULIPs. Now a large proportion of the sales of the top private insurers come from unit-linked policies. Some companies focused on a particular niche of products like whole life but market dynamics have forced companies to offer a whole range of products to meet customers' needs.
The three main reasons for opening up the life insurance sector were (1) funding infrastructure (2) increasing insurance penetration (3) increasing the spread of insurance in rural areas. Do you think they have been achieved satisfactorily?
While it is early days yet the opening up of the economy has had its positive impacts as reflected in the growth in some of the indicators such as total premium as a percentage of gross domestic product (GDP). The percentage has gone up from about 1.5 per cent of GDP to about 2.32 per cent while the average in the developed markets world-wide is around 5 or 6 per cent of GDP.
In terms of investments in infrastructure, currently about 30 per cent of the total investible funds in the life insurance industry (Rs428,000 crore) are invested in the capital markets. The largest share of 59 per cent goes into government securities. Finally about 11 per cent of the total investments go into 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.
With the Insurance Regulatory and Development Authority (IRDA) revising the definition of rural areas and bringing it in line with the census definition vistas of opportunities have opened for life insurers like Birla Sun Life, who have painstakingly built their rural infrastructure over the last few years. Additionally the guidelines on micro insurance issued recently by the IRDA will see private life insurers upping the ante in these high potential areas.
With insurers aggressively selling ULIP s a major share of the funds mobilised do not go towards infrastructure investments as investments are mandated by the policyholders. Your views.
The funds offered under ULIPs also invest in the financial markets. If infrastructure projects are worth investing in from a credit perspective for debt instruments and from a growth / value perspective for equity instruments, even ULIPs can invest in these instruments. And investments of money mobilised under traditional schemes or ULIPs have nothing to do with where the money is invested.
Prospective policy holders seem to prefer the ULIPs of private insurers as they can exit in a shorter term… they seem willing to take a short-term risk whereas in the case of traditional policies they favour LIC. Your view.
The bonus rates of LIC have fallen over the last few years. This is because of the falling interest rates. Customers favour ULIPs as they are transparent and allow customers to choose the assets that match their risk-return profile. Add to this the flexibility of switching between the fund options depending on the market performance and the life stage and risk profile of the customer.
Do you see the average premium per policy going up in the traditional policies?
As incomes rise, customers need to adjust their life covers. The product through which they choose to do it has nothing to do with the change in their financial situation. Our internal analysis of the trends in the industry indicates that customers are increasingly looking at life insurance as an investment-planning tool. Given this trend the amounts invested by customers into life insurance products should see an upward trend.
Do you agree that the high expense overrun and declaration of bonuses force private insurers to bring in fresh capital at regular intervals - especially since ULIP requires less capital vis-a-vis traditional policies.
It is true that ULIPs have a lower solvency margin requirement than participating policies. This is good for customers because if more capital has to be set aside, the returns on the participating products will be lower as the return on the additional capital will be taken as higher premiums or as lower returns.
Every private life insurer would have done the necessary projections and assessed the need for capital. A large portion of the capital has been used in building the infrastructure since distribution reach plays an important role in the success of any life insurer. At the same time IRDA's stringent solvency norms have meant that life insurers have to provide for increasing solvency margins with the growth in business. These margins are also a function of the loading structures in the plans and any guarantees that are offered to the customers.
Large players back almost all the private life insurers and every company would be making strategic readjustments based on the opportunities/ changes in the environment. Some of the life insurers would be declaring bonuses to be in line with the market and also to emphasis their commitment to the business. Birla Sun Life Insurance has been achieving high efficiencies in managing its capital.
What is your equity base, expense ratio and capital efficiency ratio? When do you hope to break even?
Birla Sun Life Insurance is currently capitalised at Rs400 crore. Operating expenses as a percentage of premium stood at 19.4 per cent as on March 31, 2005. Birla Sun Life Insurance's capital efficiency is one of the highest in the industry as reflected in the low capital base for the level of business underwritten. In terms of break-even we are in line with the plans.
What is the market size for bancassurance and how do you plan to capture a sizeable share?
There is tremendous potential for life insurance through the bancassurance route, while it is difficult to define the market size. However one of the yardsticks that could be used to evaluate the potential is the depositor base in the banking sector. Moreover the banking sector has a higher penetration level as compared to the life insurance industry.
Birla Sun Life Insurance has one of the largest banking tie ups in the industry with 10 of the leading banks in the country.
What is the premium income from bancassurance and the average policy size, the average premium per policy from bancassurance compared to policies from other channels?
Bancassurance has been contributing close to 45 per cent of the premium income in individual life insurance segment. Our experience indicates that the average policy size and hence the average premium per policy in bancassurance is higher. For us the average premium per policy and the average sum assured been Rs34,550 and Rs3,86,400 respectively.
What is your branch network and what are your expansion plans?
We have a network of 55 branches in 44 cities besides the presence through our channel partners (banks and corporate agents) in over 250 locations. We will grow our network based on the business plans. At the same time our policyholders are spread across 1000 cities and towns in India.
Where do you see the industry in the next three years?
In light of the discussions on reduced capital requirements for the health insurance sector one can expect a lot of activity on the health insurance front. 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 the rapid convergence being witnessed in the life insurance sector.
Looking forward, what in your view are the short, medium and long term issues that the government or IRDA and the Life Insurance Council should address?
There is a dearth of Indian promoters with deep pockets and this may hamper insurance penetration and the growth of the industry. The foreign direct investment (FDI) percentage should be increased at the earliest to allow more companies to come into the country.
Insurance is a long term savings instrument and should have more tax advantages than a shorter term savings instrument. All long term instruments should have the same tax treatment. The government should continue the current EEE (exempt-exempt-exempt) policy for taxation of life insurance products. The tax on life insurance companies needs to be reviewed as they were framed a long time ago for just one insurer and market dynamics are much different from what they were earlier.
Greater freedom should be given to insurers to manage their investments as they have the experts. The work of changing the insurance regulations should be completed at the earliest.
Do you think that IRDA should restrict itself to macro matters?
The IRDA has played an extremely important role in the opening up of the industry and building it into a robust sector. Going forward IRDA should continue to focus on facilitating the growth of the insurance industry and monitor the move towards further deregulation of the industry with the interests of the customer in mind.
The entry of new players will result in poaching of agents. How do you plan to hold on to your agents?
In any industry, which is opened up, some amount of poaching, does happen. However the market for life insurance is sufficiently large to accommodate all the existing players and the new entrants besides providing income opportunities for the agents. Additionally the entry of new players has improved awareness about life insurance selling as a career.
When do you think companies would come out with an IPO?
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