While buying insurance as an instrument of safety, against future contingencies, comes as a natural choice to consumers, evaluating the same business from the perspective of an investor is a completely different ballgame. Insurance as a business is characterised by high, uncertain risks. Profitability, surprisingly, plays a smaller role than client stickiness in determining the long-term sustainability of the business. Thus, it becomes crucial to adopt a different framework to evaluate the business.
The life insurance industry in India has witnessed two key turning points: one in FY08 and the other in FY15. The period till FY08 was the growth phase of the industry dominated by unit linked insurance products (ULIP). But the 2008 recession and the changes in laws governing ULIPs, followed by changes in regulations for traditional products, unleashed a tumultuous phase that lasted till FY15. Major regulatory changes for traditional products came in 2013, that included a complete ban on NAV-guaranteed products, aligning cost structures, increase in sum assured, cap on commissions, reduction/removal of surrender charges and minimum surrender value. A change in the ULIP guidelines had resulted in a degrowth of individual retail business by 40% for the industry.
During the downturn, players realigned their strategy towards a more balanced product-mix, improved their persistency ratios (indicator of client retention) and increased the use of the banking channel (bancassurance) for distribution. An improved regulatory regime around the mis-selling of products also led to increased customer confidence. The icing on the cake was the upward revision in foreign direct investment from 26% to 49% in 2016.
Against such a backdrop and aided by a buoyant market, it’s not surprising that five insurance players went public in CY17. In fact, the insurance sector accounted for 62% of the entire funds raised through IPOs. Currently, there are three listed private life insurers: ICICI Prudential Life Insurance, SBI Life Insur