New Ulip norms hit insurer IPOs

The new guidelines on unit-linked insurance plans (Ulips) will squeeze the margins and profitability of insurance companies, and therefore valuations, which could hamper their initial public offerings, said experts.

The loss of their previously lucrative business model will further defer already delayed IPOs, said industry experts.

“Reality will dawn over a period of time. But insurance valuations will be badly dented. Those planning IPOs will not have the stomach to go ahead till they settle down under the new regime and show sustainablity,” said an insurance company official, not withing to be named.

The Insurance Regulatory and Development Authority (Irda), the industry regulator, late on Monday asked insurers to cap the differential between actual yield and returns post deduction of charges at 4% from the 5th year of policy.

Commissions, which were as high as 40% in the first policy year, are now to be evened out over the first five years for which the money is invested and locked in, starting September 1, 2010, Irda said.

This is expected to put pressure on Ulip sales and reduce the revenues of insurers.

Paresh Parasnis, executive director and chief operating officer at HDFC Standard Life Insurance, admits as much. “Looks like margins will be under pressure,” he said. “Valuations are far away, not on the mind now,” he said.

“We will still see how the guidelines are formulated -foreign direct investment of 49%, the 25% public float, the IPO guidelines itself by Irda and Sebi (Securities and Exchange Board of India). We have to see all these. We have really not taken a decision on this,” Parasnis said.

Nalin Kapadia, a consulting actuary, said the new guidelines will actually prevent insurers from making profits.

“Also, the sales of Ulips will go down because of the lock-in period being increased to 5 years. The profits were coming in because the initial amount was being deducted from the 1st year premium in terms of allocation charges, policy charges etc. There were cases where even after five years of investments the policyholder was not able to recoup the investments made,” Kapadia said.

Not just the profits that came by way of the charges deducted from policyholder’s premiums, but also the ones made through policy lapsations - where investors pay premiums half-way through the minimum investment period and discontinue - too will go.

“Policy lapses too were contributing to the profits of insurance companies. This will be impacted now,” Kapadia said.

Vivek Verma, Nilesh Parikh and Kunal Shah, analysts with Edelweiss Capital, said in line with expectations, the capping of charges will impact margins adversely.

“However, capping of surrender charges is a bigger blow compared with capping the difference between gross and net yield, as it would not only restrict the ability to generate revenue, but also raise the persistency risk borne by the insurers,” they said in a note on Tuesday.

The industry is wondering how cost of operations can be brought down, which now will be quintessential to sustainability.
Gaurang Shah, director at Kotak Mahindra Old Mutual Life Insurance, said “as per the current product mix, costs will have to come down by 35-45%, unless you change the product mix or losses will mount. But 55-60% costs are employee costs alone.”

“The industry will see pain in the next 18-24 months unless one potentially adjusts to the situation,” Shah said.

That could also mean there could be job cuts in the industry, said a source who did not wish to be named.

But if insurance that is currently sold — rather than bought — still needs to be pushed, how will the cost of customer acquisition come down?

“It remains to be seen whether the new products require less sales efforts - say, instead of 5 calls per customer, 2.5 calls, or if it still needs to be pushed. This can be known only over the next 24 months. One thing is for sure: only the efficient players will survive,” said Shah.

Others say that the industry may focus on getting short-term money as the new guidelines slap only  a small penalty for those looking to surrender in the first five years.

“It may become a 5-year product, which is not great. The zero surrender charges will bring in investors who have lesser commitment as they will say Rs 6,000 on a Rs 5 lakh cover is not too much,” said the head of a life insurance company not willing to be named.

But product distributors are confident of being better off in the long-run.

Anil Chopra, group chief executive officer at Bajaj Capital, said there may be a dip in income from a short-term perspective of say 2-3 months.

“But the we will be okay in the January-March peak season. But there will be higher acceptability of the new product and higher volumes will cover up the shortage on the brokerage front,” Chopra said.

Experts said investors too will be in a better position. Anil Rego, chief executive officer of Right Horizons, an investment consultancy, said for customers who have a 10-year or more horizon, nothing changes.

“Those who are entering with a investment horizon of 5-10 years will end up saving the costs under the new structure. We have seen that after 7 years, the break-even is better under the current charge structure. I don’t see any great change happening,” Rego said.