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6 reasons to track the life insurance sector
It is no secret that the financial services sector is the fastest growing part of the Indian economy. Stock markets barely covered the insurance sector as no large company was listed. However, with the listing of insurance subsidiaries of large banks, there is a lot of interesting data released regularly on the sector.
Here are six reasons for you to track the sector:
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Vast potential:
The country’s life insurance penetration rate was 2.26% in FY2003. It hardly increased in the the next ten years or so, with the penetration rate increasing to 2.6% in 2017. This is well below the global standards. While the average rate among Asian countries is 3.7%, the world average of 3.5%. Therefore, the growth potential for life insurers is unlimited.
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ULIPs drive growth:
The compounded annual growth rate (CAGR) measures compounding growth over a period exceeding a year. Private players reported a CAGR of 8-27% between FY2014 and FY2017. This growth was driven by unit-linked insurance plans (ULIPs), which are a combination of insurance and investment plan.
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Agent network efficiency:
Insurance companies are streamlining their agency network. Agents with a poor track record are being dropped across the board. To give perspective, the number of agents working for private players declined to 9.57 lakh in FY2017 from 15 lakh in 2009. However, the productivity of the retained agents have picked up. The business done by them has increased at a CAGR of 15-24% between FY2014 and FY2017.
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Rising bancassurance model:
The bancassurance model enables an insurer to sell products offline by using a bank as a distributor. The bank earns commission for policies sold through them. This model has witnessed a steady growth, with its share increasing from 9.7% in 2009 to 23.8% in 2016.
The share of bancassurance is likely to grow further as smaller banks and insurance companies replicate this business model, according to Kotak Securities.
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Business risk:
As mentioned earlier, ULIP products are driving business growth in the insurance sector. Though they have been the engine of this sector of late, its performance needs to be tracked closely because a downturn in the capital market can affect premium collection in the future.
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Hike in tax rate:
Currently, the Indian government levies a tax rate of 14.3% on insurance companies. A task force constituted by the finance ministry will submit its report on tax changes in the next five to six months. The word is that tax rate on insurers can be raised to 25%. However, that all depends on the suggestions made by the task force. But if this does happen, it will undercut the profits made by insurance companies. This would result in a devaluation of insurance companies, according to a report compiled by Kotak Securities.
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89
Life Insurance Corporation of India, SBI LIFE, ICICI Prudential, HDFC Life, and Bajaj Allianz are top life insurance companies in India in terms of annual premium collected. The top five insurers contribute about 89% to the total premium collected by the industry.
