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Commentary

New Business for Insurers Continues Decline in 2012

Insurers seem to be getting lesser new business, as new premiums (single premium policies + new regular premium policies) drop 4.2% in the first half of the year. Last year, new policy premiums had fallen over 20% .

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(Source: IRDA and individual insurer disclosures)

Some of the top insurers (HDFC, ICICI, Bajaj) have picked up from the massive drop last year, but other than Met Life, no one seems to have really gotten back to the highs of 2010. 2010 was, if you recall, when IRDA changed the rules for ULIPs so they would become less sucky for buyers, in terms of lower surrender charges and clearer cost disclosures.

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The ULIP problem has resulted in lower commissions offered to agents, and insurers have shifted, for the most part, to "traditional" policies, which aren’t unit linked. However, while traditional policies have increased in sales, the investment avenues for such policies are more regulated and thus do not provide the great upside that every Indian believes is their birthright: the kosher 15%.

You can also see the sizes of the premiums each of the companies have earned. LIC is out of the graph, having received over 35,000 crore (Rs. 350 billion) in the first six months.

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As you can see, even those that have recovered are still way behind their 2010 highs. LIC has to get to 46,700 cr. just to break even with the number in 2010 (it’s done only 35,000 cr.)

With potential IPOs of these insurers, the slowdown in growth must be disturbing. However, one needs to do a more detailed analysis of the industry to find out if:

a) Renewal premiums are growing fast enough to offset the drop in new premiums. That means the industry gets to not lose too much while things consolidate.

b) Insurer profits are dropping. Profits could still rise because of a higher cut in expenses.

c) The source of insurer margins is largely (or seems to be) surrenders. If so, then surrenders of older-than-2010 policies will have continued to line margins of insurers for at least three years. Remember that prior to 2010, surrenders upto three years would result in customers getting no money at all (they forfeit the entire amount) but post 2010, policies can be surrendered anytime, and they will still get their money – minus costs already charged – in five years. So, in 2013, most of the big profits out of surrenders will have gone and the industry will need to really get lean and mean.

Many of the Insurance companies are unlisted subsidiaries of listed companies (like ICICI Pru, HDFC Life and so on). While some of the arms started to see some profitability in 2011-12, they’ll need to climb a wall to retain that status going forward.