Working with a clear mandate to position ULIPs (unit linked insurance products) as long-term protection contracts, doing away with excesses in the system, IRDA has effected changes such as: (1) capping the difference between gross and net yield; (2) reducing surrender penalty; and (3) mandating higher risk cover. This will change the entire business landscape (including distribution) of the industry, resulting in: (1) realisable ULIP NBAP margin falling to 10-11% from the current reported level of 16-21%; (2) capital requirements rising as new business strain could rise by ~40% and solvency requirement by ~25%; (3) monitoring of sensitivity drivers (persistency, expenses) turning more critical than ever; and (4) volumes declining by 5-10% over FY11-12. On the flip-side, improving product viability, coupled with enhanced transparency and presence of structural drivers, will drive volume growth in line with nominal GDP.
Working with a clear mandate to position ULIPs (unit linked insurance products) as long-term protection contracts, doing away with excesses in the system, IRDA has effected changes such as: (1) capping the difference between gross and net yield; (2) reducing surrender penalty; and (3) mandating higher risk cover. This will change the entire business landscape (including distribution) of the industry, resulting in: (1) realisable ULIP NBAP margin falling to 10-11% from the current reported level of 16-21%; (2) capital requirements rising as new business strain could rise by ~40% and solvency requirement by ~25%; (3) monitoring of sensitivity drivers (persistency, expenses) turning more critical than ever; and (4) volumes declining by 5-10% over FY11-12. On the flip-side, improving product viability, coupled with enhanced transparency and presence of structural drivers, will drive volume growth in line with nominal GDP.
With cap on charges, efficient cost-management is the only lever and differentiator available to insurers to manage profitability. However, given expense overruns across the sector, we believe achieving optimal scale will be a tall order. As per our analysis, to report NBAP margins closer to 10-11%, opex ratios for insurers should sustain at ~10% against ~20% currently.
Given the nature of products (simple ULIPs with limited opportunity for product differentiation) and emerging regulatory environment (restricting freedom to price), the existing distribution strategy (high acquisition costs to be recovered from policyholders) stands challenged. Against this backdrop, bank-backed insurers with inherent advantage of: (1) strong brand; (2) variable cost structure; and (3) access to network sharing – are relatively better placed to ride the regulatory changes.
