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.

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.

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

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!

Claims payment record of the Private Insurance Companies

As we know, there are 20 odd private life insurance companies in India, and there is LIC which is a public sector company. LIC is the 800 pound gorilla, managing to hold on to about 75% market share even 10 years after private companies have been allowed into the life insurance space. The private life insurance companies position themselves on being more customer friendly, wider array of products etc while LIC holds on to its positioning of trust, experience and government backing. One of the key parameters on which to judge a life insurance company is their claims payment record. At the same time, we must note that given that life insurance has become more of  a savings and investment product, the returns that they provide are perhaps more important than claims payout ratios. Nevertheless, claims record is definitely not a variable to be ignored.

 
A table illustrating the claims rejection percentages of the top life insurance companies in 2009-10 is presented below:

Life Insurance Company	Claims rejection ratio (%)
LIC	1.21%
Aviva	9.75%
Bajaj Allianz	5.2%
Birla SunLife	10.62%
HDFC Life	4.67%
ICICI Prudential	3.27%
ING Vysya	4.26%
Kotak Mahindra	4.29%
Max New York Life	12.31%
MetLife	5.94%
Reliance Life	7.05%
SBI Life	14.75%
Tata AIG	12.3%

An important observation from the above table is that the claims rejection ratio of LIC is the lowest, thus implying that their record is the best as far as claims payment is concerned. At the same time, the very high percentage of claims rejection of SBI Life and Max  New York Life surely comes in as a surprise.

It must however be noted once again that in Unit Linked products that life insurance companies promote aggressively (or at least was promoting till Sep 2010) , the returns earned on the fund is perhaps a more important variable than the claims payment (or rejection) ratio. However, for non life insurance companies, which offer pure protection/insurance products with no savings or investment component, claims payment is the crucial variable along with the speed of processing of claims.

Let us now look at the incurred claims ratios of the non life insurance companies:

Non Life Insurance Company	Incurred claims ratio
New India Assurance	89%
Oriental Insurance	99.69%
United India Insurance	78.62%
National Insurance	99.16%
Royal Sundaram	68.95%
Reliance  General Insurance	77.3%
Iffco Tokio Insurance	83.44%
Tata AIG	60.54%
ICICI Lombard	85.35%
Bajaj Allianz	71.9%
HDFC Ergo	80.73%
Bharti Axa	104%%

One data point that stands out from above is that Tata AIG General Insurance seems to be sourcing the best quality business from the underwriting point of view, whereas the claims payment ratio of Bharti Axa seems to be quite high. Alo,the claims payment ratio of the public insurers, at an overall level, is higher than that of the private non life insurers.