Life insurance biz facing headwinds

Risk Factors

- Reversing interest rate cycle

- Volatility in stock markets

- High inflation

- Weakening consumption demand

- Drop in middleclass savings

Chennai: 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.