For the past few years the life insurance companies, especially the private sector ones have been growing fast on the back of single product – Unit Linked Insurance Plan (ULIP).
However, since ULIP work well with the rising stock markets, it failed to sustain its attraction last year, when the stock markets fell.
According to recent report by ShareKhan, the private life insurance providers are witnessing negative growth since November last year as their annualised premium earnings (APE) has fallen by 30%.
On the other hand, state-run Life Insurance Corp of India (LIC) continued its strong performance, taking the APE growth in July to 6.1%, thus breaking the trend of negative growth in the past two months, the report added.
Following liberalisation of the insurance sector in 2000, many private companies have come out with newer products. Among these are ULIPs, which offer both life cover as well as scope for savings or investment options as the customer desires.
"The insurance industry sells ULIP to a very high extent and consumers were reluctant to invest as the risk appetite reduced due to global slowdown," said Puneet Nanda, executive vice president, ICICI Prudential Life.
Also, since ULIPs contribute to almost 80% to 90% of the business of the insurance companies, they focus more on it instead of selling traditional life insurance planes.
"ULIPs comprise most of the portfolios of private players and due to the global meltdown people stopped investing," said Akshay Mehrotra, head, marketing and corporate communications, Bajaj Allianz.
During July, LIC continued the increasing trend in its APE by posting a healthy 28.9% year-on-year increase, driven partially by higher sales during the month and partially due to low base effect of the previous year.
Almost other private insurance companies like Bajaj Allianz, ICICI Prudential and Kotak Mahindra OM continued to record negative growth during the month. Bajaj Allianz registered a 30.5% decline in its APE marking a year full of negative growth, the company registered growth last in July 2008 while ICICI Prudential too recorded a decline of 33.2% in APE, straight for the tenth consecutive month.
The new product strategy has worked for LIC, which came out with high guaranteed return plans at a time when consumers were reluctant to invest in the market. "LIC came up with Jeevan Aastha in December which attracted a lot of people to invest as they were convinced that it will give them high returns," said Nanda. Even the wider reach of the state-run insurer helped it to sublime in the market.
After a lacklustre first quarter, business volumes seem to have picked up in July 2009. This could be partly due to the recent ban on the entry load on mutual funds, which makes ULIPs more attractive from distributor’s perspective.
The decision of the Insurance Regulatory Authority of India (IRDA) to cap fund management charges at 135 basis points irrespective of policy tenure, in order to lower product cost for the investor, is a move in the right direction from the longer-term perspective. However this would adversely affect business volumes and margins in the near term, as the insurance companies will have to re-design their products and re-work their distribution strategies to maintain the business growth momentum while protecting their margins, said Sharekhan. - Pallabika Ganguly[email protected]