Attrition amongst agents in the insurance industry.

The changed guidelines on ULIPs has resulted not only in the decrease in premium but also has led to a high attrition of the agents. ULIPs are market linked insurance products where the cash value varies according to changes in the market. The worst hits are those companies who don’t fall in the bancassurance sector. Since the strong agents channel is critical for these companies they are looking into all sorts of ways to contain it. According to the IRDA at least 10.45 lakh agents have left the business compared to 7 lakh who joined resulting in a net 35 percent dip.

This attrition can be a direct result of the changed ULIP guidelines. These days ULIPs are not as attractive and lucrative as it used to be. This change had also resulted in a huge drop of premium collected. Subsequently the commissions earned also decrease something which is prompting agents to leave the business. The commission for selling ULIPs has been slashed from 15% to 5% now. Apart from this fall in commission, the performance of ULIPs has also instigated agents to take a break from it. Earlier some huge proportion of mis selling had happened where agents asked naïve customers to pay premium for three years and get a double return on the fourth year. Now with the poor performance of the market, these agents are seeking refuge and trying to stay away.

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Quoted in Financial Express

http://www.financialexpress.com/news/irdas-trump-card-in-mf-battle-backfires/807475/0
We were quoted in the Financial Express cover page article today  

LIC plans to invest Rs 60,000 cr into equities

LIC plans to invest upto Rs 60000 crores in the equity markets in India. Out of a total deployment of funds of Rs 2 lakh crores across different asset classes, about 30% i.e Rs 60,000 crores would be invested into equities. The amount that LIC invests in equities has come under pressure due to the reduced sale of ULIPS, 90% of which would be invested in the equities market. Typically a long term investor, LIC is a much needed source of stability for the Indian equity markets.

HDFC Life to defer IPO plans

IRDA would be coming out with the IPO norms for insurance companies in the next few days. Insurance companies which have completed 10 years of operation would be able to tap the equity markets for fund raising. HDFC Life , one of the earliest private entrants, would be eligible to tap the equity markets. 

In an obvious and expected move, the company has mentioned that it will defer the IPO plans till at least next year as the current valuations are not attractive at all. Profitability is under pressure and the life industry is set to record a degrowth this year. In the light of the new regulations on ULIPs with lower charges and lower commissions, the life insurance industry has been recording lower sales and the margins have come under intense pressure.

However, we feel that the current changes brought about will strengthen the life insurance industry in the long run, and it very well addresses the systemic flaws in the system. The industry will emerge the healthier for it in the long run, and ultimately will lead to higher valuations for the life insurance industry. The same cannot be said about the general insurance industry where the public insurance companies are operating at a combined ratio of 135! There are systemic problems there among the non life public sector companies which needs to be urgently addressed.

Distance Marketing Guidelines for Insurance

IRDA has come out with a set of guidelines to regulate the process of distance marketing of insurance policies through telephone or over the internet. The key points of this set of guidelines is as follows:

1. Telecallers engaged in selling insurance over the phone need to have mandatory training of 25 hours

2. Insurers and brokers have to get their telecalling sales scripts approved through IRDA before use

3. In the case of telecalling, the telecaller has to provide all the details regarding the product features and benefits and mention the risks and exclusions

4.Insurers and brokers have to listen to at least 5% of the calls live and 10% of the calls that lead to a sale, to ensure that the guidelines are being met

5.Single premium ULIPs can be sold only upto a premium of Rs 1 lakh. Regular premium ULIPs sold cannot exceed Rs 50000 of premium per year. 

6. Universal Life products cannot be sold through the distance marketing mode

These guidelines come into effect from 1st Oct, 2011.

ULIP sales take a beating

Sales of Unit Linked Insurance Plans (ULIPs) have substantially declined in 2010-11 over the previous year. This was mentioned by the IRDA Chairman during a FICCI organised event in Delhi where he mentioned that ULIP sales have gone down by as much as 15% over the previous year. A public row between SEBI and IRDA brought in new regulations for ULIPs from September 1 wherein charges and commissions were dramatically reduced. We feel that this had made a very attractive product category for the end consumer, but the tragedy has been that the life insurance distribution force has been reluctant to sell it due to lower payouts. 

It would be interesting to see whether this 15% decline is for the full year, or whether it is from September 1 when the new regulations came into effect. In case the decline is at an annual level, the real decline would be much more as the new regulations were in force for only 6 months.

In the long term, however, we feel that the market will tide over this and the new regulations will be healthy for the market. The level of misselling leading to record lapse rates would come down through these new regulations. In the short term, we expect to see higher level of sales of traditional life insurance policies.

Indian Insurance market to be USD 400 BN by 2020!

A recent report by FICCI and BCG has suggested that the Indian Insurance market will grow to USD 350-400 BN by 2020, and will be the among the top three insurance markets in the heart. This sensational headline has warmed the hearts of many, and made everyone excited about the potential of the industry. It is worthwhile to bear in mind that the current market size is around Rs 3 lakh crores, which is USD 70 bn. So we are talking about a 5 times increase in the next 10 years. We feel this is too aggressive and is more a headline grabbing, stand out from the clutter, screaming for attention news item.

We would actually pay far more attention to some of the other items that the report mentions: 

1. Profitability is a huge issue for the Insurance industry in India, with the non life insurance industry having accumulated underwriting losses of Rs 30,000 crores and the life insurance industry have cumulative losses of Rs 16,000 crores

2. The agency model, the main distribution channel, is still proving to be unprofitable for the life and non life insurance sector

3.Insurance companies' obsession for topline growth has contributed to a inefficient, non sustainable operating model

4.Auto claims fraud, third party liability for motor and high level of claims for health insurance is crippling the general insurance industry in India

5. The recent tightening of charges for ULIPs has taken the wind out of the sails of the life insurance companies in India

IPO norms by end of April 2011

The IRDA Chairman has announced that the IPO norms for insurance companies in India would be announced by the end of April 2011. Speaking at a conference in Delhi, the Chairman mentioned that a couple of private insurance companies would be completing 10 years of operation (HDFC Life and ICICI Prudential Life) by the end of April 2011, and the initial condition has been that private companies need to be in existence for 10 years before going public, thus norms need to be ready by then. 

It would be interesting to note which life insurance companies decide to tap the equity markets. While the markets have been on a roll, the regulations effective Sep 1 2010 for Unit Linked products (ULIPs) might depress valuations of the life insurance companies. While Bajaj, Max ,ICICI etc have their holding companies listed and the market has assigned an indirect value to the insurance companies, it would be nice to see how the market values a directly listed life or general insurance company. Insurance penetration which is at 5% of GDP and has a total market size of Rs 3 lakh crores still has a lot of potential to expand further in India, and that should keep the capital markets interested.

Life Insurance : ULIPs vs Traditional Products

Until end of August this year, the bulk of the life insurance products sold by insurance companies was ULIPs (Unit Linked Insurance Plans). Almost 70% of the new business premium earned by the life insurance companies was through ULIPs. The entire life insurance distribution machinery touted ULIPs as the ideal investment cum insurance product. While ULIPs were the flavour of the reason, there was a slightly unfortunate reason for them being pushed so much by the distributors- and that was because ULIPs had very high commissions for the person who was selling it, sometimes as high as 70% of the first year premium. Policy administration charges were high, surrender penalty was exorbitant and mis-selling was rampant. And finally, the cookie crumbled- first SEBI came down heavily saying it had a right to regulate ULIPs because they were essentially mutual funds masquerading as Insurance, and then IRDA cracked the whip laying down stringent criteria for the ULIPs. Commission were reduced,  charges were minimized, and overall transparency was improved. In an ideal world, ULIPs became a great product for the consumer. But we do not live in an ideal world.  While the ULIPs of today are far more aligned to customer interests, we find that there is no zeal and fervour to sell them on the part of the distributors. The very agents who were pushing ULIPs down the throat of unsuspecting customers do not consider ULIPS as the flavour of the season anymore. They have now fallen back upon the traditional products where IRDA has not laid down any guidelines for commission level.

Thus we find that traditional products sales have suddenly taken off. This is primarily because these products now allow the insurance agents and distributors to earn their fat commissions, and not because suddenly traditional products are better for customers than ULIPs. On the contrary, today, a ULIP is a great savings and insurance product.

If we look at the data coming out, we see that 50% of Reliance Life’s product sales are now traditional products, whereas a year ago, only 15% was through traditional products. Birla SunLife now generates 30% of their premium through ULIPS as compared to only 8% through ULIPs a year earlier. In the case of ING Vysya Life insurance, only 10% of their sale is through ULIPs now. All the insurers narrate the same story about how they are trying to reduce their reliance on ULIPs . But the real reason for the decreased importance of ULIPs is because the insurer can not pay enough commissions on ULIPs to keep the distributors happy due to the IRDA guidelines. And thus, they are resorting to selling traditional products. So next time, your friendly neighborhood agent espouses the virtues of a traditional life insurance product, do know that the real reason for the promotion is something completely different!