Are India’s Private Life Insurers Too Reliant on ULIPs For Growth?
India’s top five insurers earned 42 percent of new business premium from ULIPs in FY17.
Unit-linked insurance plans (ULIPs) are driving growth in new business for India’s private insurers, many of whom are tapping the markets through initial public offerings this year. The skew in the product mix, while partly driven by buoyant capital markets, could prove to be a risk if the sentiment turns.
Data compiled by BloombergQuint shows that ICICI Prudential, which listed in September 2016, has the highest proportion of ULIPs in total new business premium at 79 percent. SBI Life, whose initial public offering closes on Friday, has the second highest proportion of such products in its portfolio at 50 percent. The contribution of ULIPs is higher if one looks at individual new business premium and strips out group policies.
Overall, India’s top five private insurers got 42 percent of their new business premium from ULIPs in the year to March, according to company filings submitted to the Life Insurance Council.
The trend, highlighted by independent financial sector analyst Hemindra Hazari in an interview with BloombergQuint on Wednesday, also suggests that private insurers have had limited success in expanding the market for pure insurance products.
“When most of your business, particularly in the individual segment, comes from ULIPs, you are definitely not into the life insurance business. You are in the mutual fund business,” Hazari told BloombergQuint.
ULIPs are schemes that give higher returns to policyholders as part of the premium money is invested in capital markets. In India, bank-led insurance firms, who already have established mutual fund arms, dominate this segment of the industry.
ULIPS, however, have had a checkered past.
The product was pushed heavily in the early 2000s and led to investor losses when the markets plunged in the aftermath of the global financial crisis. Subsequently, the insurance regulator moved to make the product more secure by increasing the underlying minimum life cover to 10 times from 5 times earlier. Even then, concerns about mis-selling have persisted and surface from time to time.
The inherent design of the product makes it riskier than pure insurance and more dependent on the fortunes of the capital market, Shashwat Sharma, head of insurance at KPMG told BloombergQuint.
The instrument has seen consistent growth in the past two years as a lot of it is linked to the fortunes of the equity markets but the downside is that if the markets crash, ULIPs would suffer.Shashwat Sharma, Head-Insurance, KPMG
Industry representatives take a different view.
“Even though mutual funds appear to be like ULIPs, they lack the element of life insurance,” V Manickam, secretary at the Life Insurance Council told BloombergQuint. He added that the revised guidelines have done enough to keep mis-selling of ULIPs in check. The cap on ULIP charges in India is among the highest, according to the Nomura research report published on August 21.
Manickam defended the high share of ULIPs in new business premium for private life insurers. “It is a game of survival, they cannot just do conventional policies and still be profitable,” said Manickam. State-owned Life Insurance Corporation of India still holds the lion’s share in premiums earned from conventional policies, which forces newer private players to focus more on other types of products, Manickam explained.
According to Arijit Basu, chief executive officer of SBI Life Insurance, ULIPs should not be equated to a pure mutual fund product because it offers a 10 times cover to all customers. While Basu acknowledged that the ULIP portfolio has grown faster than the traditional product portfolio, he said this is because customers are seeking higher returns. To some extent, we must leave it to the customer, said Basu.
What we are seeing is that those who are financially more aware are looking at higher returns via the market linked insurance products. What we also find is that because their ability to take greater risk is higher, the premiums tend to be higher in ULIPs.Arijit Basu, Chief Executive Officer, SBI Life Insurance
For SBI Life, the total ULIP portfolio is at Rs 48,000 crore. Of this, Rs 29,000 crore is in debt while Rs 19,000 crore is in equities.
