Life insurers find their mojo but experts sound cautionary note
The data for August life insurance premium collection, released recently, may have brought some optimism, but it has also given reasons to remain cautious.
The 8-per cent decline in August seems better when compared to the lockdown period, when premia collected declined 23-28 per cent year-on-year (YOY). However, it is important to dissect the data before turning optimistic.
Consider this: Much of this rebound has come from group insurance premium (up 30 per cent YOY) and single premium products (up 60 per cent) for private insurers, and less from the retail (individual) business. Group insurance is a corporate-centric business and tends to do well in the June and September quarters in every financial year. The growth in August might be indicative of pent-up demand.
As for single-premium plans — often tax-saver instruments and similar to fixed deposit schemes — analysts at Jefferies warn that guaranteed returns businesses could raise risk (for life insurers) from volatility in interest rates. These products tend to make up bulk of the growth, given they are easy to sell during a falling interest rate cycle and when capital markets are volatile.
“While leading private players are taking steps to hedge such risks, and are investing in government securities or Aaa-rated corporate paper, any miss could also affect the availability of hedging instruments,” the analysts add.
It also suggests that the cost of rebalancing the portfolio will rise.
Yet, the disturbing aspect of the August data is that there is a clawback in trend when compared to July’s flat premia growth. It could, hence, be too soon to see normalisation in business.
Analysts at Jefferies expect growth to return only by FY22.
There are also other factors that need to be considered — claims and pricing.
Covid-19 has emerged as the fourth largest category of claims based on the data from April to August, according to news reports. In a recent life insurance sector round table organised by Business Standard, several industry leaders said that while life insurers were fast to introduce products to cover the pandemic, such products might not have been priced accurately. Therefore, the impact of these claims on financials will become evident from the September quarter.
It also needs to be seen if life insurance companies have the bandwidth to pass on the cost of higher reinsurance in a sustained manner.
For instance, among the listed players, ICICI Prudential Life Insurance (I-pru Life) has hiked its price for term products by 10-41 per cent, followed by a 6-39 per cent increase by HDFC Life, and 9-18 per cent revision by Max Life. These hikes have been implemented during April-august, according to a report by ICICI Securities. SBI Life hasn’t implemented any hikes so far. However, when I-pru Life introduced a new product this month, it was a lower-priced product with fewer features, according to a note by ICICI Securities.
Product launches will be critical for companies to sustain the momentum this financial year, especially in the termprotection segment. “Insurers will face a volume-versus-margin conundrum. Those that experience weaker volume growth can lower pricing, and vice versa. Absolute value of new business will depend on a combination of growth and margin,” say analysts at ICICI Securities.
Analysts at Kotak Institutional Equities say growth in the protection business, too, might have moderated after the rate hikes.
Like in the banking sector, premia growth is the foundation of insurers’ business. The sector was growing at less than 5 per cent even before Covid-19 and came under pressure because of weak economic conditions since January.
Yet, brushing aside multiple concerns, life insurance stocks have appreciated significantly in the past six months. At present, they are close to or higher from the February levels. Given the run-up in valuations, it might be prudent to pause and wait for better fundamental cues before taking exposure to these stocks.