Rural India has come to the rescue of insurers in the midst of a sluggish demand. At a time when the economic slowdown has taken a toll on automobile sales in urban areas, insurers have found a lifeline in semi-urban and rural areas.

New India Assurance, the country’s largest general insurer, opened 300 micro-offices in semi-urban and rural areas during FY13 and plans to add another 500 micro-offices this year. Future Generali Insurance is planning to open all its new branches this fiscal in smaller towns.

“The slowdown has resulted in an economic shift from urban areas to smaller towns for general insurers, which presents a huge under-penetrated segment and an opportunity for us,” said Tapan Singhel, Managing Director and Chief Executive Officer at Bajaj Allianz General Insurance. Bajaj Allianz has opened 20 extension counters in tier-III towns and expects them to turn productive soon.

REJIG PORTFOLIOS

The decline in domestic car sales has had a significant impact on the general insurance industry. Motor insurance constitutes at least 40 per cent of the portfolio for most general insurers. According to statistics from insurance regulator IRDA, the general insurance industry’s growth has come down from 20 per cent in April to around 11 per cent in June.

“As automobile sales are down and many projects are stalled, new business premium collection has also dipped. However, we are focusing on more personal lines of businesses, such as retail health, to offset this challenge,” said K.G. Krishnamoorty Rao, Managing Director and CEO, Future Generali Insurance.

Reliance General Insurance also plans to reduce its dependence on motor insurance, which currently accounts for 64 per cent of its overall business, and increase its health insurance portfolio. Interestingly, the tough business environment has forced insurance companies to focus on niche segments such as travel insurance, fidelity insurance, workmen compensation policy, weather insurance and cattle insurance. According to regulatory data, premium collection from this category has increased 16 per cent, from Rs 7,049.37 crore in FY12 to Rs 8,397.19 crore in FY13.

“One of the spin-offs of the slowdown will be that as a part of their cost-cutting measures companies will look to pass on insurance costs to employees,” said Amarnath Ananthanarayanan, MD & CEO, Bharti AXA General Insurance.

IMPACT ON LIFE INSURERS

A series of regulatory changes and the economic slowdown have also hit the growth of the life insurance industry. IRDA’s new regulations in 2011 capped the expense structures of Unit Linked Insurance Plans or ULIPs and improved disclosures. This led to a sharp drop in agent commissions on these products. The controversy over ULIP performance, hitting at a time when equity markets were going through a turbulent phase, curtailed sales of these market-linked plans. Private insurers, who heavily relied on ULIPs when these regulations came up, saw fresh inflows dry up as investors grew wary. It was this trend that saw the life insurance industry record a significant decline of over 15 per cent in weighted new business premium collections in FY13 compared to FY12. Life insurers collected new premiums of Rs 1,07,011 crore in financial year 2013, compared with Rs 1,14,233 crore collected in the previous financial year.

From 90 per cent of premium collections for private life insurance companies in 2010, ULIPs now account for less than 50 per cent for most insurance companies. “Given the short-term fluctuations in the market, few potential policyholders may be worried about the value of their funds. Therefore, there is some impact on the sale of ULIPs, said Sunil Sharma, Chief Actuary at Kotak Life Insurance.

ICICI Prudential, the largest private life insurer, has seen its product portfolio change from ULIPs, which constituted the majority of its portfolio, to a fairly balanced product mix of traditional and unit-linked products. Reliance Life Insurance has also seen its product portfolio undergoing a significant change with 80 per cent of its business now coming from traditional products, said Anup Rau, CEO, Reliance Life Insurance.

Traditional plans

The industry has been quick to shift focus to traditional plans, buy even these are witnessing regulatory intervention. IRDA recently raised the bar on disclosure norms and has laid out commission structures on traditional plans as well. With insurance players working on adapting all their market-linked and traditional plans to bring them in line with new regulations, new product launches from the industry have suffered, hitting first-year premium collections.

EXPANSION PLANS

The drop in new business combined with the squeeze on costs has raised capital requirements for the sector. Nine out of 23 private players in the life insurance sector closed 2012-13 with net losses from this business.

Insurers have responded to these challenges by scaling down branch expansion and closing down non-performing branches. This has resulted in a drop in branches and employees for life insurers. According to statistics released by the Life Insurance Council, the total number of branches of life insurers has decreased from 11,100 to 10,300, and the direct employee headcount had fallen from 247,550 in December 2011 to 245,993 as of December 2012.

Rajendra Ghag, Chief Human Resources Officer, HDFC Life, said: “Bringing cost efficiency has been our focus area over the last two years. We have brought down our operating expense ratio from 29 per cent in 2009 to 11 per cent in 2011.”

“As our main operating expenses constitute people, we have been relooking at headcount. We are very selective in hiring agents,” Ghag said.

Tech back up

In an effort to reduce the costs involved in distribution of products, ICICI Prudential is giving its big distributors a tablet to facilitate the sales process in one visit. The tablet has a POS (point of sale) device, so a consumer can swipe his or her card and make a payment instantly.

“Technology enables us to reach out to areas where having physical infrastructure is not efficient. It helps in bringing significant efficiencies and reduces dependence on physical infrastructure,” said Sandeep Bakshi, MD & CEO, ICICI Prudential Life Insurance.

However, while cost cutting measures may help the industry tide over challenges in the short-term, it is the prospect of new capital infusion from foreign partners, after the easing of foreign direct investment limits, that holds real hope for the industry.

deepa.nair@thehindu.co.in

(With inputs from Aarati Krishnan, BL Research Bureau)

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