Thanks
to the trust the name it evokes, LIC's dominance continues. But it
needs to improve returns, invest in technology, and be innovative to
remain the go-to insurer.
About a century after Fredrik Idestam began Nokia’s
journey as a wood pulp mill, the Finnish company became a wireless
telephony pioneer, and was a virtual monopoly for 25 years in the
handset industry where technology becomes obsolete by the month. By contrast, the Life Insurance Corp of India (LIC)
had a far longer run as a monopoly in the world’s second-most populous
country, securing business in an industry that was shackled for the
greater part of four decades.
But is LIC likely to meet the same fate
as that of Nokia, or various other oil and telecom services monopolies
of the past? Unlikely.
The state-run behemoth was itself born out of
an internecine and unsustainable rivalry. Back in 1956, the government
had brought together 256 insurers to lend scale, sustainability, and
surety to what is essentially an unappetising business – protection
against death. For success in insurance, therefore, the most important
currency is trust.
And this is one element that the LIC appears
to have in large measure even 18 years after deregulation, which
unshackled the industry and allowed a raft of private insurers to hawk
policy covers to an under-insured population. In 2017-18, LIC reported a
growth of 8% in total new business to Rs 1.35 lakh crore. It still
holds a 69% share in the total business, although private insurers are
catching up in the individual segment.
BETTER MANAGED THAN OTHER PUBLIC SECTOR UNDETAKINGS “LIC has been able to hold on to the majority of its market share
unlike other public sector companies like UTI, which faded away,” said
Joydeep Roy, a partner at PwC. “The reason public sector dwindles is
lack of transparency, which leads to low efficiency and high costs. It
is shielded from analysts’ criticism. There is no fiscal issue like
claims management or solvency. LIC is more efficient compared to where
it was in 2001.”
To be sure, the fragmented pie has meant that
the erstwhile monopoly has yielded ground. In regular policies, LIC’s
market share has fallen to 44% since deregulation opened the industry up
to competition. However, the focus over the last five years has moved
towards achieving the total premium income target, a strategy that has
its share of critics. Its sales strategy has four priorities – the first
is annuity; second, single premium endowment products; third, pension
& group business and fourth, non-single endowment products.
“LIC is committing suicide by writing mostly
single-premium policies,” said a former LIC executive. “Every year,
people pay premium under regular income. So, the renewal premium will
come down. The insurance structure is around renewal.”
LIC did not respond to repeated requests for
meetings with its executives for the story and did not respond to
e-mails seeking comment on the issues that came up in the story.
The strategy appears to be an outcome of the
revenue targets LIC must meet. “Now, the budget prepared with the
corporation talks about achieving total premium and LIC is doing it by
selling single premium largely,” said a former LIC chairman. “Single
premium was never the focus for the corporation earlier.”
HUGE ANNUITY BOOK Rising life expectancy and growing annuity payouts
can be a risk for LIC in the future. An annuity is an insurance product
that provides annual payment to the buyer at regular intervals, usually
fixed returns, after retirement. LIC dominates the annuity business with
a 95% market share. About 20-25% of LIC’s total new business is
annuity.
Any loss in annuity products will hit
returns offered to all policyholders as all receipts are pooled, and
return is generated on a participating basis. LIC re-prices annuity
products intermittently, especially when the rates move.
J Hari Narayan, former chairman of Irda, had
tried to de-risk LIC from its concentration of annuity business. In
2010, LIC had reported a notional loss of Rs 14,000 crore under three
products written in earlier times, offering 13-14% returns. Now, it
offers more than 6.5% returns on annuity products, more than what is
offered by any other insurer.
“They are able to pick longer-end G-Sec and
generate value from their investments in equities of state-run companies
in the longer run,” said Sanjeev Pujari President Actuarial & Risk
Management at SBI Life Insurance.
THE TRUST FACTOR LIC has the largest agency force in the insurance sector. During
2008-10, when private players slowed down business, cut down on
expenses, and reduced the number of branches owing to irrational
competition, LIC was the only one adding agents. It has 11.31 lakh
agents compared with 9.5 lakh in the private sector.
Moreover, LIC repudiates 1 in every 100 claims
filed, while the private sector rejects 8 out of every 100 claims.
“LIC’s lower claims repudiation helps it garner more business,” said SB
Mathur, former chairman, LIC. “LIC’s back-office support is spread
across country, which helps in servicing claims.”
LOWER RETURNS COULD AFFECT MARKET SHARE LIC puts surplus from each scheme into a common pool. According to the LIC Act, all policies have sovereign guarantee.
“LIC’s cost structure is such that if it makes
8% return on an investment, 4% goes toward managing expenses and the
return to policyholders falls to just 3.5-4%,” said the executive quoted
above.
LIC’s cost ratio is high at around 3-5%. If it
focuses on non-single premium, it may come down by 1%, say experts.
“Some high guarantee portfolios, annuity and group fund management
businesses would be their weaknesses,” said Sanket Kawatkar, actuary of
Milliman. “Returns or profitability of these would drag the overall
embedded value down.”
LIC has huge investments in government bonds. It has been increasing exposure to shares of state-owned enterprises.
Investments in public sector banks and
state-run general insurance companies have been a matter of worry. Last
year, LIC bought over 8% stake in New India Assurance and General
Insurance Corporation, and both are trading 10-20% below the issue
price.
It has been buying large stakes in
disinvestment schemes and had earlier used policyholders’ money to buy
shares to bail out state-run banks. The government, almost invariably,
seeks LIC’s help whenever a divestment programme is in trouble.
“As long as people do not fiddle with investment regulations, LIC should be alright,” said Hari Narayan.
THE ROAD AHEAD Of course, LIC faces challenges. Loss in equity investments,
concentration in governmentowned entities, operational and actuarial
risks, and asset liability mismatches are among those the insurer must
negotiate.
“LIC has prepared for competition well in
advance,” said Mathur. “It was ahead so far as technology is concerned.
It had its own repository to maintain 12 crore policies and the
back-office job was computerised long back. Competition will start when
private sector companies will start going rural.”
Eighteen years after the monopoly of LIC
ended, it still holds 69% market share in the total new business
premium. LIC’s large participating funds, and low expense ratios, are
also its biggest strengths.
“People will move to LIC to buy term and
annuity,” said Hari Narayan. “Being in the annuity market, you require a
huge corpus. LIC will be able to cash in on it. It is far nimbler in
its market and financial management.”
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