Birla Sun Life to wipe out Rs 1,575 cr loss in 4 yrs

Private insurer Birla Sun Life Insurance (BSLI) that for the first time reported profit in 2010-11 is expecting to wipe off its accumulated losses in the next three to four years. BSLI has accumulated losses of Rs 1,575 crore.

Speaking to Financial Chronicle, Mayank Bathwal, chief financial officer at BSLI, said, “We have been reporting profits since the last five quarters including the first quarter of this fiscal. We expect it will take another 3-4 years to wipe out the accumulated losses depending on the rate of growth.”

The insurer reported a gross profit of Rs 144 crore for April-June 2011 as against Rs 9 crore in the corresponding quarter a year ago. “This was primarily driven by the growing size of in-force book, balanced product mix, lower new business strain and better expense management,” the company said in a release.

The Embedded Value of BSLI, which reflects the value of future profits embedded in the in-force policies written by a life insurance company, increased from Rs 3,816 crore as at March 31, 2010 to Rs 4,108 crore on March 31, 2011. Net profit for last financial year was Rs 305 crore against a loss of Rs 435 crore in FY10.

The company is targeting to grow over 18 per cent in this fiscal. “Industry should in a steady state on an average grow at approximately 15-18 per cent. Our goal is to grow faster that the market. In the last three months, our market share among private players has improved from 7 per cent to 8.4 per cent,” said Bathwal.

Since September 2010, when new Ulip guidelines capping the overall charges that could be levied on policyholders were made effective, insurers saw their growth and profitability being impacted.

“Insurers went through a significant transition to create a balanced product portfolio and revamped the business strategy in order to implement new guidelines. Given the fact that in essence the opportunity for life insurance remains very large, and we believe we will see positive momentum in new business sales from Q3 onwards largely aided by base effect,” said Bathwal.

Among private players, BSLI is fifth in terms of new business premium with an improved market share of 8.8 per cent in April-June 2011 up from 8.1 per cent in the first quarter of the previous year.

Assets under management of the insurer scaled up year on year by 19 per cent to 19,984 crore in the first quarter of this year.

Riders get rewarding for life insurers

Life insurance companies and agents are looking at life beyond strict regulatory guidelines. Lending a helping hand are ‘riders’, that is, the add-ons with the base policy.

Since last September, when the Insurance Regulatory and Development Authority (Irda) capped distribution costs of unit-linked insurance plans (Ulips), the number of policies with riders being sold had risen from 5 per cent of the total to 20 per cent, said insurers.

Mayank Bathwal, chief financial officer & head (institutional sales), Birla Sun Life Insurance, said the company saw close to 36 per cent increase in demand for policies with riders in the September-March period as compared to the previous year. The number continues to rise. He said customisation and flexibility had become the focus.

Riders are an alternative source of income. So both insurers and agents are happy pushing these. After Irda capped the commission to agents for selling Ulips, most of them get 5-10 per cent of the first year’s premium instead of the earlier 25-30 per cent. By adding riders, they can raise their income significantly. They earn 22-25 per cent on riders, say industry players.

A number of riders can be purchased. These include surgical care, hospital care, and waiver of premium care, critical illness, accident benefit, permanent disability benefit and guardian benefit. The cost of riders can range from 2-20 per cent of the policy premium. Irda has said the total premium for riders cannot be more than 30 per cent of the base policy premium.

“While riders were always there, they were not being sold aggressively by agents before the Irda guidelines on Ulips came into force,” said Rajeev Kumar, vice-president, product & pricing, Bharti Axa Life Insurance.

Kumar says customer profiling shows that policyholders are more likely to continue a policy that has riders.

For some life insurance companies, the sale of riders has increased significantly. For instance, Kotak Life sold 70,000 riders in 2010-11 vis a vis 21,000 in 2009-10.

Riders offer customers extra benefits with the base plan. Taking a rider can increase benefits at a low cost. A 30-year male buying an endowment plan for 30 years, for a sum assured of Rs 5 lakh, can buy a term benefit or a life guardian benefit rider for 18 per cent and 6 per cent policy premium, respectively.

This gives an additional Rs 5 lakh cover in case of disability due to accident. In case of death, the premium will be waived.

Last September, Irda capped commissions and increased the lock-in period of Ulips from three to five years. It capped the sum assured at 10 times the premium for pension products. This resulted in a sharp drop in sales of Ulips, which accounted for more than 80 per cent sales of life insurance companies.

Birla Sun Life expecting revenue for the first time

Birla Sun Life Insurance, which is in its tenth year of operation, is expected to report profit for the first time for the year 2010-11. Changes in regulatory requirements regarding unit-linked insurance plans (Ulips), effective from September 1, 2010, have not had much impact on the company’s margins.

Life insurance business has a high gestation period and the companies do not report profit in the first few years of operation.

“The company reported profits in the first nine month period ending December 2010. Despite changes in regulations, we have done well. We do not foresee any contraction in margins in our business. We will have three to four per cent edge in margins over the industry. I can not share exact details. The company will come out with results in a few days,” said Mayank Bathwal, CFO, Birla Sun Life Insurance.

“We feel the business opportunity in life insurance is still very high. Now the product is much more attractive for customers. One just needs to find a profitable formula to adequately compensate distributors,” he added. Average commission paid to agents has fallen to 6-7 per cent of the premium post September 1, 2010 compared to 15 per cent earlier.

However, the product mix of the company has drastically changed in favour of traditional plans. Composition of Ulip in new sales has fallen to 55 per cent in 2010-11, from over 95 per cent in the previous year.

“There was a big change in regulations, but now the momentum is coming back. We see a good positive trend month after month. We are moving fairly quickly where we can start showing growth,” said Bathwal.

The company is also looking into its distribution model. At present, 70 per cent of new business is generated from its agents, 15 per cent from bancassurance (its partner banks which sells Birla Sun Life Insurance products) and the rest from brokers. “We want to increase sales from non-agency channel. It is our focus to have a much better distribution mix,” said Bathwal.

Term plans score in excess of Ulips again

Term insurance products are back in favour with insurers. The cost of term plans has come down by 40-50 per cent over the past year.
A year before, a term plan insurance for a cover of Rs 50 lakh for a person aged 25-30 years attracted a premuim of Rs 12,000. The average cost of such a plan is now Rs 6,500-7,000.
A term insurance policy provides a confirmed benefit only upon the holder’s death, provided the death occurs within the policy period. There will be no stated benefits if the policy holder outlives the policy period.
With the Insurance Regulatory and Development Authority cracking a beat on the sale of unit-linked insurance plans, almost all major life insurers have launched a number of new term plans in recent months, to increase their sales and diversify the product portfolio. Examples are Aviva Life Shield Platinum, ICICI Prudential iProtect, Kotak e-Term, and Kotak e-Preferred Term plan, Met Suraksha Plus, SBI Life Smart Shield and HDFC Term Insurance.
Cost enticement
Other companies are in the process of doing so, citing reduced cost. For instance, Birla Sun Life Insurance will be revising its term plan, claiming the new one would cost 30(%) per cent less. “Most of our term plans were launched 10 years ago, so they have to repriced. Premiums are projected to come down by at least 30 per cent. It will be applicable for the existing customers as well,” said Fabien Jeudy, chief actuarial officer.
T R Ramachandran, MD & CEO, Aviva Life Insurance said also, “term plans are increasingly being launched in the online platform, where insurers save on overhead costs. Insurers are passing this savings on to the customers. Term plans are right for the online platform, as it is simple to understand,”. “Costs are particularly lower for those who start early. We are seeing an increased interest towards term plans in the 25-30 years population.”
Aviva recently introduced three term plans. Term plans constitute 16(%) per cent of its overall portfolio and 40(%) per cent of the traditional portfolio, he said.
Another reason for the lower cost is improvement in mortality rates, enabling insurers to issue term policies with longer tenures. “Mortality rates have improved by 10-15(%) per cent over the past few years. This is helping insurers to underwrite policies with higher tenure. Second, due to the same reason, reinsurance rates have also dropped by 20-25(%) per cent over the past one year, which is pushing the cost down,” said G N Agarwal, Chief Actuary, Future Genereli Life Insurance Co.
However, some industry experts believe an overdose of term plans is not ideal, as these address only a part of the risk. “According to statistics, only four of 1,000 policy holders dies during the policy period. There are other risks, apart from the life risks, which a term plan fails to cover. One needs a systemic savings plan and, ideally, term plans should be bundled with other hybrid products,” said P Nandagopal, MD & CEO, IndiaFirst Life Insurance.

Insurance IPOs doubtful till hike in FDI limit

Listing plans of life insurance companies may take longer, with the delay in raising the foreign direct investment (FDI) cap to 49 per cent from the present 26 per cent.
According to a study by HSBC, insurance companies may not go for an initial public offer (IPO) till the FDI limit was raised
“Political winds have changed in recent weeks and the FDI limit increase was not tabled in the monsoon session of Parliament as expected. Indian insurance IPOs are unlikely until the FDI limit is raised, as the foreign partner understandably prefers to raise their stake ‘off market’ first,” the report said.
At present, insurance companies may list only after completing 10 years of operation. HDFC Standard Life will be the first since the sector was opened to complete 10 years, this October, while ICICI Prudential will do so in November. Birla Sun Life will be eligible to tap the public market in January and SBI Life, promoted by the country’s largest bank, can do so by March.
“We do not see the current grey requirement of a 10-year track record as an immovable object… The vast majority of insurers we met seemed keen to do an IPO once regulations permit, owing to a desire to raise capital and/or establish a price discovery mechanism,” the report said.
Foreign partners are interested in increasing their stake from 26 per cent to 49 per cent once the FDI limit is raised. “Then, both the local promoter and the foreign partner would sell down equally in any IPO to meet Sebi’s (the regulator) recently introduced 25 per cent minimum free float,” the report said.
While most insurance companies have agreed to a fair market price at which foreign partners can increase their stake, Allianz has set a price with Bajaj to raise its stake.
Valuations, however, will be subject to negotiation, with each partner appointing an investment bank to hammer out the deal. Most Indian insurers have not disclosed their embedded value (EV) or the valuation of a company in the absence of a standard industry norm. Three insurers — HDFC Standard Life, Max New York Life and Birla Sun Life — have disclosed their EV.

Return-of-premium alternative may be positive for some

Despite financial planners untiringly extolling the virtues of pure risk covers — term insurance plans offered by life insurance companies — a vast majority of future policyholders remain unconvinced about having to split out a premium without being assured of any financial benefit in return, should they outlive the policy tenure.

This perception has contributed to the status of unit-linked insurance plans (ULIP) and endowment plans, which offer an investment module, but come at a significantly higher cost. Few policyholders realise that in the bargain, they may have settle for an insufficient life cover.

For those seeking the middle ground between the two options, some life insurers offer return-of-premium plans, with HDFC Standard Life’s Premium Guarantee plan being the latest among them. Others with similar product offerings include ICICI Prudential Life, Bajaj Allianz Life and Birla Sun Life.

Under HDFC SL’s Premium Guarantee plan, winning maturity, the policyholder is entitled to receive an amount equivalent to all the premiums — excluding any extra premium charged due to underwriting, revival or alteration charges, if any — paid through the policy’s tenure. In the event of the insured’s death during the policy term, the sum assured will be provided to his/her dependants.

As for the policy, a 30-year-old female opting for a term of 25 years will have to pay a premium of Rs 7,330 per annum for a sum assured of Rs 10 lakh. On maturity, the policyholder stands to collect a sum of around Rs 1, 83,250.

Compared to ULIPs, which provide life cover that is not equal with the premium outgo, the plan is surely cheaper, and seems like a compelling buy for an individual whose primary aim is to maintain her family’s interests in the event of her death, but all the same, wishes to get the premium back if she survives the term.

While it does address one of the key concerns of many policyholders, one needs to bear in mind that the comfort and peace of mind it offers comes with a cost attached. A comparison between the premiums charged by HDFC SL’s Term Assurance Plan (pure protection cover) and Premium Guarantee Plan (return-of-premium policy) shows that the former is more cost-effective.

Assuming the aforementioned parameters to be the same, the Term Assurance Plan will entail an annual premium of just Rs 2,541. The difference between the premium payable in the case of the two plans — that is, Rs 4,789 per annum — if invested for the same period in other instruments like equities or even debt, can get much higher maturity proceeds than the amount one can expect if one survives the tenure of the Premium Guarantee plan.