ULIPs and Tax Sops to Boost Life Insurance Revenues

MD & CEO of Bajaj Allianz Life Insurance, Mr. Anuj Agarwal, stated in Financial Chronicle, “Stimulation of stock market boosted the sales of ULIP policies as a product of investment.” Adding to that is the last budget (Section 80 C) announcement hiking I-T’s limit of deduction which may boost its sales.”

“Most of the purchasing of ULIPs occurs in the favorable quarter of January-March for insurers. Awareness for insurance has also been increased with the help of proper measures taken by IRDA. All of these measures are altogether going to result in the cessation of the trend of decline seen in insurance penetration in 2014-15.”

ULIP sales have been driven strongly with the hike of above 20% in Sensex returns (May 2014 onwards) with insurance businesses of private sector affiliated to banks (as distributors) witnessing a strong boost in their business (with 10% adjustment for each premium). In its term of 9 months, ICICI Prudential Life Insurance has bagged a whopping 37% growth with Rs 3,153 crores, while SBI Life showed a growth of Rs 2,603 crores, HDFC Life Insurance with 34% growth to Rs 2,066 crores and Axis Max Life Insurance logged 15% with its Rs 1,552 crores of growth.

A growth of 11% depicted by private life insurance companies whose individual 1^st annual premium growth was recorded to Rs 12,571 crores was recorded. The growth in the individual 1^st annual premium had an adjustment of 10% for single premium during the period of April-December 2014 with the industry (life insurance) growth recorded at -20% to Rs 26,362 crores.

Figuratively, the fall of LIC’s growth by 36% accounted to Rs 13,791 crores observed between April to December 2014. During the same tenure, the total of the premium including single and large players in the private insurance business witnessed a growth of 17% to Rs 22,110 crores. The growth of LIC fell by 21% to Rs 51,667 crores while the entire industry saw a decline in growth by 13% to Rs 73,777 crores in these 9 months till 31^st December 2014.

The average of each premium for every policy, also known as the ticket size also saw good growth. Regular premium policies have grown by 79% with respect to ticket size to Rs 17,320 for the entire industry (life insurance) in April-December 2014.

Finance minister, Arun Jaitley in his 2014-15 budget announced an increase of Rs. 50,000 tax deduction on investments made under Section 80 C.

Under Section 80C a lot of people benefit from purchase of insurance to get tax deductions, thus making it popular. Life cover has also increased to double fold under the revised regulations (2013) of insurance instruments. Therefore, for population within 45 years of age to be able to qualify for tax deduction limit, their annual premium’s worth must be at least 1/10^th of their cover and after 45 years of age, it should be 1/7^th of their cover for them to qualify.

“If the government maintains a separate tax limit for insurance buyers and executes the same on annuities, this would encourage a wider and deeper penetration of the Insurance sector.” added Agarwal.

Insurance’s liberalization witnessed in its 1^st sector a hike of 2.45% in its penetration (2001-2009). However, its decline has been reported to reach 3.1%, which was noted in 2013.

Insurance density also witnessed a parallel drift, with $52.9 raise in 2001-10 tenure. In 2013 (appraisal year), the density of insurance was $52.0. The entire business of life insurance peaked in 2010 with $55.7 (from $9.1 in 2001) in its density. However, in 2013, the density was recorded at just $41.

It has been over a decade that the non-life insurance sector’s penetration stagnated in its growth range of 0.5-0.8% while its density showed a hike by $8.6 (2001-13).

The level of development of insurance in a country is reflected by its density and penetration levels in the insurance measures. The insurance penetration is the measure of percentage of premium with respect to GDP and density is the per capita premium (population ratio against premium).

The end of FY14 witnessed 53 insurance businesses in India, which operated under life insurance (24 companies), and non-life insurance sector (28 businesses).

Premium income in life insurance as an industry was recorded at Rs 3,14,293 crores (2013-14) against previous year’s Rs 2,87,202 crores which accounted for a growth of 9.43% with only 0.05% growth in previous year. LIC accounted for a growth of 13.48% growth in its premium income (with only 2.92% growth in 2012-13) while the private insurance players accounted for a fall of 1.35% while previous year’s records being 6.87% decline.

Absence of awareness about insurance, low levels of financial literacy and less number of district level private insurers is what IRDA accounts the low numbers of non-life insurance penetration to. MD & CEO of Reliance General Insurance, Rakesh Jain stated, “The penetration and reach to customers is low as distributors are less. There is a need for creation of awareness as well as different options that customers can avail to increase the penetration of non-life insurance.”

The IRDA Report quoted, “District level reach of non-life insurers is lesser in comparison to life insurance. Non-life insurers cover 601 districts under public sector (94% - out of 640 in India) and only 45% are covered by private players under which 286 district offices come.”

Around 39 districts (6%) in India have not been covered by private or public non-life insurers, while 354 districts have no private insurers covering them. Out of 35 states/UTs in India, only 19 are covered by non-life insurers’ offices in all the districts of these states/UTs. IRDA rued by stating in its yearly report (2013-14), “the low penetration of non-life insurers in India is due to the low intensity of coverage at district level in comparison to life insurance’s penetration.”

The MD & CEO of HDFC Ergo General Insurance, Ritesh Kumar quoted, “Higher health penetration would have been possible by de-tariffing. Subsidy for 3^rd party vehicular insurance is being given. Besides having product reforms, distribution reforms are in great need with rural penetration accounting for only 0.2% of GDP.”

IRDA has started several initiatives, which can cause the boost of this penetration of insurance. For example, ‘Licensing of Insurance Marketing Firm Regulations 2014’ is to be launched in few months to buoy new players and existing insurer giants to initiate with better distribution of insurance. IRDA is also strategizing and executing the publicity, awareness, and customer education besetting both in house as well as sponsored programmes to incorporate the promotion of awareness of insurance. In the financial year of 2013-14, IRDA’s Bima Bemisaal also undertook a plethora of education initiatives for consumers under itself.

The Life Insurance Council rolled out IRDA’s SPV Model of CSC (Common Service Centre); encouragement was given to rural entrepreneurs who account for over ten thousand across India, to sell insurance products across the nation of any insurance company. This would aid the insurance penetration in villages in a large way.

Our entire economy, in India has accounted for a moderate growth of 4.7% in 2013-14 in continuum. RBI’s Annual Report of 2013-14 accounted the household savings of finance to be low at 7.2% of GDP in comparison to 2012-13 when it was 7.1% of GDP and 7.0% of GDP in 2011-12. A decline of 30.1% in 2012-13 in gross domestic saving rate was reported by CSO’s (Central Statistics Office’s) estimates in comparison to 31.3% in 2011-12, which was primarily on the account of the fall observed in the household physical savings rate. Accentuation of imbalances at macroeconomic level has been accounted to this lowest dip of rate in the last 9 years.

The rate of household savings has drifted in general to about 23% since 2003-04. Apart from an instance of hike of 25.2% in 2009-10, it reached 21.9 percent in its decline rate in 2012-13.

According to the Swiss Re-Global Insurance Report, the forecasted growth in the life insurance premium in amongst larger market segments will resume expectedly and project improvement in the newer ones. Strong economic nations of North America and Europe (Western part) will offer its support to help in the growth of life and non-life insurance; while this growth should be reflected in the newer markets as well. A notably strong growth is observed in life insurance sectors of India and China, predominantly.

(Source: This article has been adapted from the article "Ulips, tax sops may arrest fall in life insurance biz" that appeared on Feb 15, 2015 in mydigitalfc.com)