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Analysts are downgrading valuations of insurance companies which are facing lower margins in the new regulatory system.
Analysts opine it is difficult to predict persistency in new Ulips (unit-linked insurance plans) as the reduced commissions have failed to enthuse the distributors.
Also, factors such as the unclear product approach and reduction in branches and employees could impact the long-term franchises, analysts say.
All these factors have put the margins of life insurance companies under significant pressure, they say.
The margins of life insurance companies have definitely gone down due to reduced commissions on Ulips. All charges have also considerably reduced. Since October 2010, the new business premium of private insurance players has slowed down considerably. The companies have also brought down their branches and number of employees considerably. says SB Mathur, secretary general, Life Insurance Council.
There has been a slew of regulatory changes that have impacted the industry. Regulations have impacted both the product structures and feasibility as well as distribution models. While the margins on Ulips, which were 75% or so of industry volumes, have come down substantially, pensions that contributed to around 30% have become unviable, says TR Ramachandran, MD & CEO, Aviva India.
We find major challenges in the new operating environment pressure to drastically cut costs and commissions (25-30% expense reduction as highlighted by key players) and simultaneously increase business volumes to leverage fixed costs. Regulatory restrictions have reduced the leeway of insurance companies to offer much variety in the product portfolios, said Nischint Chawathe and Manish Karwa of Kotak Institutional Equities in a report released on Tuesday.
They have also identified the key challenges faced by this sector. According to them, volumes may be imperative to leverage overhead costs, but product strategy is still unclear.
Popular products like pensions are not attractive anymore. The traditional policies seem to be a focus area, but most companies do not have the franchisees to scale up this segment.
It is felt that reduction in branches and employees will result in saving operating expenses, but the strategy can affect long-term franchise.
Our margins are affected, but lesser than other players. Earlier, pension products contributed 25% to the total sales, but since pension products have become less attractive it has affected the overall sales, says G V Nageswara Rao, MD & CEO, IDBI Federal Life Insurance Co Ltd.
The other challenges identified by Chawathe and Karwa are, predicting the persistency of new Ulips (in the light of longer minimum tenure) and the new commission structure, which they feel may not motivate distributors though a reaction is yet to be seen.
They have reduced the first-year commission and are giving higher focus on renewals. It is also felt by them that new business trends for the past two months appear weak.
But analysts think insurance companies, which are a part of a banking group, have slight advantage over their pure standalone private-sector peers. They find it convenient to sell their insurance products through their banking channel.
Insurance companies, which are a part of a banking group, will have a lesser impact on valuations compared with pure standalone private sector insurance players because these players at least have their own branch network due to which they will continue selling their products. Due to this advantage such players have also garnered a better market share in the last one year, said Vaibhav Agrawal, vice-president- research at Angel Broking.
Source: [dnaindia.com]
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