Protection plans take a back seat for life insurers
Recent growth led by savings products, poised to give better returns than bank fixed deposits
Stocks of listed life insurance companies have been relative underperformers on a year-todate basis in 2021, even as monthly premium inflows are firming up. A closer look at the numbers suggests that investors may not be pleased, with much growth coming from savings-led products rather than pure life insurance or protection plans.
With bank fixed deposit (FD) rates at rock bottom, life insurers appear to be front-ending savings, guaranteed return, and annuity products to customers, which not only offer higher yield compared to FDS (minimum of six per cent as against a taxable average FD rate of 6.5 per cent), but also come with tax benefits in certain cases.
Based on data for January, analysts at Elara Capital note that the individual protection business appears to be moderating from Covid-19 highs seen from May to July. While the segment is gradually stabilizing, as is visible from the 12 per cent year-on-year (YOY) decline in individual non-single sum assured for January as against 14 per cent YOY decline in December, it may still take a while for protection plans to stage a comeback. Increasing resistance from reinsurers to underwrite protection plans without medical check-ups is restricting growth.
In the December quarter (Q3) investor interactions, insurance companies noted that customers are wary of physical medical examination and opt for products that don’t require extensive physical contact. This is another reason for savings-related products faring better than protection plans, though they have less than 20 per cent of protection component.
Suresh Ganapathy of Macquarie Capital feels the moderation of protection premium inflows is likely to persist, given the demand and supply side constraints. “There is competition and aggressive pricing by players in the market. So, some are happy to let go off some business,” he adds. Soft FD rates are further adding to the advantage of savings products.
What needs monitoring is the value of the new business (VNB) margin, which showed signs of softening in Q3. While savings products are margin accretive, with competition gathering pace in this segment, VNB margin may moderate. “For now, the Street isn’t factoring margin compression, but that is likely if focus on savings plans increases in the coming quarters,” said a senior analyst at a domestic brokerage.
With the dynamics changing in the near term and not entirely justifying valuations, booking profit may be prudent for investors, given the rally in life insurance stocks in the last six months.