'Indian life insurance business to face pressure in FY23'

Chennai, May 10 The life insurance business this fiscal will face some pressure owing to a combination of factors like reversing interest rate cycle, volatility in the stock markets, high inflation and the return of postponed discretionary consumption hitting the middle class savings, said broking company Emkay Global Financial Services.

In a report on the life insurance sector, Emkay Global further said the large private life insurers with a better brand equity and distribution network with innovative approach are better placed for business growth and increasing their market share.

Looking back at the new life insurance business for the fiscal that went by FY22 Emkay Global said even though unit linked insurance policy (ULIP) made a strong comeback during the first nine months logging about 50 per cent growth in retail annual premium equivalent (APE) the category witnessed slowed down materially in the last quarter. The ULIP growth for the year was 33 per cent.

Pension products and non-participating (savings or non-par)) continued to grow strongly, but Annuity and participating (par) savings struggled, reflecting LIC's (the most dominant player in these segments) slow growth.

The materially slow growth in sum assured from individual new business against the premium growth very clearly reflects the slowdown in retail protection volumes due to the demand impact stemming from price hikes and supply-side issues which limited insurers from underwriting retail term policies in the first half of FY22, Emkay Global said.

The strong growth in group term insurance (GTI) premium (+82 per cent year-on-year-YoY) as against the 17 per cent YoY growth in sum assured reflected strong price hikes in the GTI business.

According to Emkay Global, the change in new business product mix in FY22 has been shaped by a combination of external factors, including a sustained low interest rate environment, buoyant equity markets in H1FY22 and Covid-19-led dislocations (additional savings to be deployed by the upper middle class and affluent class, but clipped savings ability of masses).

These external factors, along with changing customer preferences, have driven the changes in new business mix toward ULIP, non-par savings and pension products.

Non-par (savings and protection) continued to grow sustainably despite the slowdown in the non-par protection part, with its share in individual APE increasing to 23 per cent in FY22 from 18 per cent in FY20.

This trend is due to: (a) demand for guaranteed products amid low interest rates offered by banks on fixed deposits (b) increased innovative guaranteed product offerings by many private life insurers (c) availability of wider hedging options (Forward Rate Agreement, Partly paid bonds, long-dated G-Secs, etc.) allowing life insurers to offer a variety of guaranteed products and (d) increased awareness about the opacity of par products among affluent customers.

Pension products continue to grow attractively, likely reflecting the robust demand from customers and increased focus of leading players in this segment.

Taking all non-par products into account (savings, protection, annuity and pensions), their share rose to 32 per cent in FY22 from 24 per cent in FY20.

As regards the participating products, Emkay Global said post Covid-19 world, the mass-saver segment customers have seen their earnings and savings eroded, while the affluent and white-collar workers have seen their savings increase. As a result, the masses' contribution to new business has decreased while the effluent's contribution has increased.

That, in turn, has led to increased ticket sizes of policies and a loss of market share for LIC, which caters more to the masses.

The lower participation from the masses also meant muted growth in participatory savings products.

The recent fund bifurcation at LIC and its gradual shift to 90:10 surplus sharing (between policyholders and shareholders), the attractiveness of LIC's par products will also be reduced and, hence, PAR growth is expected to remain relatively muted.

Muted sum assured growth in individual new business likely a reflection of the slowdown in retail protection sales. This is contrary to the trend seen in recent years when the sum assured has been growing much faster than premium growth, driven by increasing retail protection in the business mix.

The trend this year is a likely reflection of the materially reduced policy volume of retail protection sales amid multiple price hikes taken by leading private players and supply-side issues impacting retail protection sales in the first half of FY22, Emkay Global said.

In the case of group term insurance, while the premium had grown by 82 per cent the sum assured grew by 17 per cent reflecting strong price hikes implemented by life insurers.

In FY23, the pricing should likely to stabilise at the current levels and hence, growth should be driven by an increase in sum assured.

Private sector leaders are well-positioned for strong growth and to gain market share amid a difficult external environment in a rapidly changing environment, changing customer demographics and their product preferences.

The hypothesis of large private life insurers continuing to take market share away from LIC is playing well and will continue to be so in the coming years. Powered by their strong brands and distribution networks (especially the bancassurance reach), private sector leaders are executing their strategy very well by being agile and innovative when it comes to offering insurance products to match customer preferences and needs amid a dynamic external environment, Emkay Global said.