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Saturday, January 15, 2011

Low Health Insurance renewal ratios of Reliance Insurance

Low Health Insurance renewal ratios of Reliance Insurance

Health Insurance Policyholders of Reliance Insurance are an unhappy lot. That is because of the steep increase in health insurance premium that Reliance has announced. Till as  recently as last year, the rates quoted by Reliance for health insurance were amongst the lowest in the industry if not the lowest. This was part of a strategy to acquire as many customers as possible. While the acquisition strategy worked, the problems came in later as Reliance started incurring heavy losses on their health portfolio. This forced Reliance Insurance to increase their premiums by as much as 400-500% across certain categories. Such an increase in premium rates was unheard of in the Indian Insurance industry.

But this created another problem. Customers were not prepared to accept this steep increase in their health insurance premium and stopped renewing their policies. If certain rumours are to be believed , the renewal rate on their health insurance policies fell to as low as 10%-25%. The market rate is typically around 75% to 90%. One has to understand here that in the case of health insurance, the policyholder mostly wants to renew as he is deeply inconvenienced by shifting to another insurance company as his pre-existing diseases would not be covered. This is because currently there is no health insurance portability in India. Thus, it is significant to note that even when there is such a discentive to not renew, existing policyholders of Reliance General are still not renewing. The bait and switch model which Reliance thought they will use on their customers did  not work well.

Given the dismal renewal rates due to the insurance premiums having been jacked up, Reliance Insurance is understood to have requested IRDA ( the regulator) to allow them to revise their pricing downwards. Unconfirmed reports suggest that IRDA  has disallowed the request. Be that as it may, this teaser rate strategy of Reliance Insurance is not at all confidence inspiring, especially for an organization whose Life Insurance arm cannot seem to wait to tap the equity markets through an IPO. In some ways, the market has already given a thumbs down to Reliance Insurance with its market share down by as much as 40% in the six months ending September 2010 over the corresponding period in 2009.

Friday, January 14, 2011

IPOs of Life Insurance Companies in FY11-12!

IPOs of Life Insurance Companies in FY11-12!

Come the next Financial year, and many of the private life insurance companies of India will be able to tap the Indian Capital Markets through an IPO. IRDA is in the process of finalizing the IPO guidelines, and would be completing it before the end of this fiscal year. Thus, many of the Life Insurance Companies which were amongst the first to start when privatization of Insurance Companies was allowed at the turn of the century will be able to tap the markets to raise much needed funds. It will also be interesting to note the valuations that the market gives to these private life insurance companies. For the non life insurance companies, the wait will be a little longer as IRDA will take some more time to finalise the norms.

As far as the Life Insurance IPO norms are concerned, these are some of the basic terms that are under consideration:

  1. The Life Insurance companies should be in operation for 10 years. However, some minor relaxations might be allowed in this case. Companies such as ICICI Prudential, HDFC Life etc would be eligible while Reliance Life might need to wait for a year or so
  2. It is generally considered that a Life Insurance company needs around seven years to achieve operational breakeven. There might be a clause which states that the Life Insurance Company should have been profitable for the last three years prior to the IPO
  3. The Insurers will need to come up with disclosure of risk factors specific to the companies

We will also track closely if the 800 pound gorilla , LIC, also shows some interest in being listed. In a separate blog, we had discussed that if it were to be listed, LIC might well be India’s largest company by market capitalization.

One factor which might depress the valuations for the life insurance companies are the IRDA rules effective Sep 2010, wherein strict levels have been determined for the commission levels, surrender charges and policy administration charges. This might have a significant negative impact on the volumes and profitability of unit linked life insurance products.

Thursday, January 13, 2011

Edelweiss Tokio Life Insurance gets IRDA approval for R1

India will be having its 24th life insurance company  in a matter of a few months. IRDA has granted the RI licence, the first in a 3 step process, to Edelweiss Tokia Life Insurance Company. This is a joint venture between Edelweiss, a listed financial services firm and and TokiO Marine Insurance. Tokia Insurance is already present in India in the non-life insurance space through a  JV with IFFCO.

Edelweiss Tokio Life Insurance is led by Deepak Mittal, a finance professional with astounding capabilities. The author had the good fortune of studying with Mr Mittal for two years, and has rarely met anyone with the quantitative skills and financial expertise that Mr Mittal possesses. He was previously the CFO of Edelweiss, where one understands he established and scaled up their derivatives trading division.

However, the life insurance industry has faced some significant  head winds of late,with IRDA coming down heavily on the mis-selling that was occurring in ULIPs, and setting tight caps on charges. It is not going to be easy for a new company to establish itself, and we will be watching the developments closely