Private life insurer Aviva Life saw its profitability dip to Rs 32 crore in fiscal 2012-13 from Rs 72 crore during the previous year. T. R. Ramachandran, Managing Director and Chief Executive Officer, Aviva Life, says the private insurer will continue to focus on its pure protection business even if the products are only profitable in the longer term.
Excerpts from the interview:
You saw profitability dip in FY13. What were the factors that contributed to this?
The decline in profits is a function of many things, including investment income, expenses, and so on. It is also a function of the kind of business you underwrite. In the insurance business, the more business you write, the more loss you make in the first year, because of high charges and expenses; you start making profits in the latter years.
Also, if you write higher protection business (term insurance products), you have to set aside higher reserves. So, what product mix you write will also determine the business strain you have.
Our focus on protection is very high. In FY13, almost 15 per cent of my customers came from protection (term plans), which is probably among the highest in the industry. Though the product is very relevant from the customer’s point of view, what it does is increase my reserve requirement for solvency.
But overall, we have been profitable for the last three years and the need for capital has come down.
You are very aggressive on term plans. Does a lot of your term business come from the online channel?
We have four products in the term space. The offline product, which we sell the most, is a premium plan. It’s a very simple product which accounts for 9 per cent of our business. Also, in our online term business, we have close to 75,000 customers.
The interesting part is that we are getting a very young demographic profile, which is exactly the way it should be sold because younger people need to take term because the premium rate tends to be low even if you continue when you are 45 or 50. So, it benefits buying younger.
We have only one-and-a-half years of persistency experience but what we have seen is that we have a second year persistency of 95 per cent and the combination of that means protection is one of the key things that we will focus on, going forward as well.
The life insurance industry has continued to witness a large number of surrenders, especially in unit-linked products. What are your views on it?
In my view, the Indian customer wants liquidity and many of the issues with unit-linked insurance plans (ULIPs) arise because of the customers reading the fine-print only later and realising that these products actually do not have liquidity.
In the earlier regime, ULIPs had a three-year lock-in. So, once that period is over you are seeing surrenders. In 2014-15, mathematically it is not possible for surrenders to be that high. Products filed after September 2010 have a five-year lock-in, and even if you don’t pay a premium the policy goes into a discontinued fund and you can only withdraw the money after five years, so the number of surrenders ought to come down.
The new business of ULIPs is not as high in the last couple of years and the procedure for surrendering has also changed. So, in my view, this will be the last calendar year when you will see surrenders and that should taper off, going forward as policies get into the discontinued fund.
What are your views on banks becoming brokers and the bancassurance guidelines being discussed by the regulator?
The penetration in any branch, which has insurance-authorised personnel is less than 5 per cent today. So, it is impossible for me to find an argument against open architecture as the consumer gets more choices. And if insurance companies have to get into semi-urban and rural areas, bank branches are the most viable way.
On banks becoming insurance brokers, there needs to be an alignment between the views of the RBI and the IRDA and there will be several rounds of discussions.
However, my view is some progress is better than no progress. It can be a prelude to full open architecture. I am comfortable in any way the regulation comes because it will be a game-changer for insurance distribution in this country. It is the single biggest opportunity for increasing penetration, particularly in non-metros.
Agent attrition is a big issue for the industry. How has the agency channel shaped up for you?
Our agent strength has come down by 15 per cent, but we will be going on a special recruitment drive this fiscal. We hope to add 12,000 agents this fiscal. We will have a selective but highly productive agency force.
What is your outlook for the year?
This year our focus is going to be on retirement planning and child plans.
We find that wherever customers buy with a particular financial goal or a need in mind, stickiness and persistency tend to be higher. Pension and child plans are two areas where we will continue to focus. We have just received approval for a pension product under the new regulatory norms.
Also, there is going to be a lot of chaos in the next two-three months as we have to re-file nearly 17 products.
My outlook for this year is that it will be flat to marginally positive. Not only the regulatory changes, but also the overall business climate is not conducive to savings.
Primarily because of the base effect of the last fiscal, where growth of new business has been low, we may see single-digit growth this year.