The growth opportunity in India’s life sector lies in catering to the underinsured, says global financial services company Jefferies in a report on life insurance.
Jefferies’ calculation suggests that more than 50% of targetable lives are already under the insurance net, but the average sum assured is only about INR300,000 ($4,440) per policy. The firm’s new business premium growth expectations for the overall industry is at around 15% in the medium term, reports Financial Express citing the report.
While the structural growth opportunity is large and promising (favourable demographics, increasing financialization and a large protection gap) in India’s life sector, near-to-medium term risks exist from regulating product structure, pricing and protecting policyholders’ interests.
These factors could dent profitability —in particular, the disproportionately higher pricing in credit protect, and high surrender penalty for policyholders in non-linked savings, says the report.
Jefferies also said, “We foresee the risk of regulatory clampdown on credit life, where disproportionately higher prices (at least 3-4x of a comparable pure term) lead to a poor value-for-money for the policyholder. It has been the fastest growing segment for private players and is contributing 4-13% of current new business value. Higher margins in the segment are attracting competition and pushing up distribution costs.
“Our checks suggest 15-20% first year opex. ratio (on single premium), whereas commission costs should be lower as IRDAI caps commissions at 5%. Our channel checks suggest 60-80% attachment rates for some of the home finance lenders and thus, chances of mis-selling/forced selling cannot be ruled out.”
The report added, “We believe that a large part of new business profits from par-savings comes from surrender charges. High penalty implies capital loss for policyholders surrendering even at the end of fifth year (versus nil charges for ULIPs after five years). This is a well-recognised concern and even highlighted in IRDA’s product regulation committee.” A