AT THE peak of India’s strange insurance hysteria a few years ago there were almost 3m people flogging life-insurance policies. Many of them did so while juggling other jobs, from driving taxis to running TV repair shops. Even by the standards of the subcontinent it was a colossal operation: Indian Railways employs a mere 1.5m people. Many agents were hired in a frenzy of optimism by the world’s most famous insurance firms, which piled into the country, taking minority stakes in joint ventures with local partners (often India’s big industrial conglomerates), as the rules require.
These firms’ strategy was premised on one, beguiling fact. Five years ago 2-3% of India’s 1.2 billion people had a life policy (today about 5% do). In many rich places, including South Korea, Taiwan and Hong Kong, a tenth or more of the population does. India promised to become one of the world’s largest insurance markets. Its regulators were also keen. Until 2000 the industry consisted of a state monopolist, Life Insurance Corporation of India (LIC), which still has a market share of about 70%. Letting in new players, the authorities judged, would bring the joys of life insurance to the masses and help direct their savings into India’s needy capital markets.
By 2004-05 things had begun to get out of control. Without an infrastructure on the ground, the new firms hired armies of agents, giving them a healthy commission of, say, 25% of the payment (or premium) the customer coughed up in the first year. The agents sold the raciest products they could—unit-linked policies, which are invested mainly in equities and which thanks to India’s bull market were producing stonking returns. These were not protection against old age or death, but instead a fairly speculative kind of investing. At about the same time regulators cracked down on mutual funds, leaving unit-linked policies as the next best way to have a punt on the markets.
Customers were often clueless. Instead of renewing policies and avoiding a succession of upfront charges, they were encouraged by the agents to churn. The agents churned, too: a third of them quit each year. At the start of the 2000s perhaps 80% of policies were renewed after the first year; by the end of the decade only 40% were. For good measure the insurance firms whacked customers with early-cancellation fees, which helped them pay for the agents’ high commissions.
And then reality struck
In short, an industry had been born in which insurance firms paid inappropriate agents to sell inappropriate policies to inappropriate customers, and then penalised those customers in order to pay the agents. Rising equity markets blinded customers to their role as patsy. Exuberant analysts and bankers placed peak valuations on many life-insurance firms of ten times or more the equity invested in them, in turn encouraging their managers and owners to pursue the land-grab further.
Three things brought the show to a halt. First, the financial crash meant some troubled Western joint-venture partners, and some local partners that had overextended themselves with acquisitions, began to tire of the capital injections required to sustain growth. Excluding LIC the industry made a cumulative pre-tax loss of $4 billion up until March 2010 (see chart; under Indian accounting, losses are a rough proxy for the cash outflows borne by shareholders).
Second, India’s stockmarkets stopped going up and then fell, so even naive customers lost enthusiasm. Finally, in the past two years “the regulator rightly stepped in,” says Sandeep Bakhshi, the boss of ICICI Prudential, one of the big players. Among other things, firms were arm-twisted not to pay high commissions. The amount an agent gets for a new policy has fallen by up to three-quarters. Many have lost enthusiasm and are diverting more of their day back to taxis and TVs. So far this fiscal year sales of new policies are down by a fifth or so on the previous year.
In response the insurance firms have done all of the obvious stuff. The number of agents has been cut (although only to 2.6m so far), as have other overheads. Most firms are now keen on arrangements to sell policies through alliances with banks, not just through door-knockers, says P. Nandagopal, the managing director of IndiaFirst, a relative newcomer which has a tie-up with Bank of Baroda, a biggish lender.
Existing customers are being encouraged to renew policies. For new clients there has been a sharp shift away from unit-linked policies towards traditional ones, of the kind LIC mainly does, which pool customers’ savings, invest them largely in bonds (usually government ones) and smooth the returns customers get. The hope is that overall premiums, both from new policies written in a year and from old ones customers renew, will not fall.
In the long term India does look like a country where life insurance will be a vital vehicle for savings. This week the authorities further deregulated interest rates on longer-term deposits at banks, which should encourage people to save more. But with only a tiny fraction of people employed in the formal economy, the approach used by other places of encouraging or forcing people to divert money straight from their pay cheques into pensions and the like isn’t really an option. Those who needed a shot of confidence got it earlier this month, when Nippon Life Insurance, a Japanese firm, completed a deal to buy a 26% stake in Reliance Life, part of a conglomerate run by Anil Ambani, for a fairly perky $680m.
Yet for now India’s insurance industry looks mighty odd. There are 22 firms, excluding LIC, most of them with foreign partners which are prohibited from taking control. Assuming LIC does not cede much market share, these firms will have to compete over about a third of the overall pot.
India may eventually become so big that there is still enough for all. But some of the local JV partners, many of them without experience in life insurance, seem to have been more interested in making a fast buck. The obvious solution is consolidation, with the big players buying the smaller ones, particularly those that rely on agents and have no solid banking partner. But that may be tricky. Sanket Kawatkar of Milliman, an actuarial consultancy, says, “deals are made harder by the 1938 Insurance Act, which is out of date, the added complexity joint ventures create, and by the rules, which at the moment prevent foreigners from increasing their stakes.” For those who’ve had enough of the industry the hope must be that the rules are made more flexible. That may take time. Then again, insurance—properly done, at least—is all about patience.
These firms’ strategy was premised on one, beguiling fact. Five years ago 2-3% of India’s 1.2 billion people had a life policy (today about 5% do). In many rich places, including South Korea, Taiwan and Hong Kong, a tenth or more of the population does. India promised to become one of the world’s largest insurance markets. Its regulators were also keen. Until 2000 the industry consisted of a state monopolist, Life Insurance Corporation of India (LIC), which still has a market share of about 70%. Letting in new players, the authorities judged, would bring the joys of life insurance to the masses and help direct their savings into India’s needy capital markets.
By 2004-05 things had begun to get out of control. Without an infrastructure on the ground, the new firms hired armies of agents, giving them a healthy commission of, say, 25% of the payment (or premium) the customer coughed up in the first year. The agents sold the raciest products they could—unit-linked policies, which are invested mainly in equities and which thanks to India’s bull market were producing stonking returns. These were not protection against old age or death, but instead a fairly speculative kind of investing. At about the same time regulators cracked down on mutual funds, leaving unit-linked policies as the next best way to have a punt on the markets.
Customers were often clueless. Instead of renewing policies and avoiding a succession of upfront charges, they were encouraged by the agents to churn. The agents churned, too: a third of them quit each year. At the start of the 2000s perhaps 80% of policies were renewed after the first year; by the end of the decade only 40% were. For good measure the insurance firms whacked customers with early-cancellation fees, which helped them pay for the agents’ high commissions.
And then reality struck
In short, an industry had been born in which insurance firms paid inappropriate agents to sell inappropriate policies to inappropriate customers, and then penalised those customers in order to pay the agents. Rising equity markets blinded customers to their role as patsy. Exuberant analysts and bankers placed peak valuations on many life-insurance firms of ten times or more the equity invested in them, in turn encouraging their managers and owners to pursue the land-grab further.
Three things brought the show to a halt. First, the financial crash meant some troubled Western joint-venture partners, and some local partners that had overextended themselves with acquisitions, began to tire of the capital injections required to sustain growth. Excluding LIC the industry made a cumulative pre-tax loss of $4 billion up until March 2010 (see chart; under Indian accounting, losses are a rough proxy for the cash outflows borne by shareholders).
Second, India’s stockmarkets stopped going up and then fell, so even naive customers lost enthusiasm. Finally, in the past two years “the regulator rightly stepped in,” says Sandeep Bakhshi, the boss of ICICI Prudential, one of the big players. Among other things, firms were arm-twisted not to pay high commissions. The amount an agent gets for a new policy has fallen by up to three-quarters. Many have lost enthusiasm and are diverting more of their day back to taxis and TVs. So far this fiscal year sales of new policies are down by a fifth or so on the previous year.
In response the insurance firms have done all of the obvious stuff. The number of agents has been cut (although only to 2.6m so far), as have other overheads. Most firms are now keen on arrangements to sell policies through alliances with banks, not just through door-knockers, says P. Nandagopal, the managing director of IndiaFirst, a relative newcomer which has a tie-up with Bank of Baroda, a biggish lender.
Existing customers are being encouraged to renew policies. For new clients there has been a sharp shift away from unit-linked policies towards traditional ones, of the kind LIC mainly does, which pool customers’ savings, invest them largely in bonds (usually government ones) and smooth the returns customers get. The hope is that overall premiums, both from new policies written in a year and from old ones customers renew, will not fall.
In the long term India does look like a country where life insurance will be a vital vehicle for savings. This week the authorities further deregulated interest rates on longer-term deposits at banks, which should encourage people to save more. But with only a tiny fraction of people employed in the formal economy, the approach used by other places of encouraging or forcing people to divert money straight from their pay cheques into pensions and the like isn’t really an option. Those who needed a shot of confidence got it earlier this month, when Nippon Life Insurance, a Japanese firm, completed a deal to buy a 26% stake in Reliance Life, part of a conglomerate run by Anil Ambani, for a fairly perky $680m.
Yet for now India’s insurance industry looks mighty odd. There are 22 firms, excluding LIC, most of them with foreign partners which are prohibited from taking control. Assuming LIC does not cede much market share, these firms will have to compete over about a third of the overall pot.
India may eventually become so big that there is still enough for all. But some of the local JV partners, many of them without experience in life insurance, seem to have been more interested in making a fast buck. The obvious solution is consolidation, with the big players buying the smaller ones, particularly those that rely on agents and have no solid banking partner. But that may be tricky. Sanket Kawatkar of Milliman, an actuarial consultancy, says, “deals are made harder by the 1938 Insurance Act, which is out of date, the added complexity joint ventures create, and by the rules, which at the moment prevent foreigners from increasing their stakes.” For those who’ve had enough of the industry the hope must be that the rules are made more flexible. That may take time. Then again, insurance—properly done, at least—is all about patience.
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