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As we move towards the close of year 2017, it would be worthwhile to pause and take a look back at the year gone by to assess the key developments that took place in the life insurance industry in India.
Business performance and IPOs
The demonetization announced in November 2016 helped the life insurance industry as people preferred to channelize their cash into financial savings and insurance policies. The life insurance industry’s new business annualised premium equivalent (APE) grew by around 19% in FY2016-17 with APE from individual business growing by 21% for the same period. This growth momentum continues during FY2017-18, wherein the financial year-to-date APE from individual business grew by around 26% up to the end of November 2017 over the same period last year.
Thanks to the growth momentum and rising stock markets, this year also saw two life insurance companies—SBI Life and HDFC Life—tapping the equity market through initial public offering (IPO) for a proportion of their shares. Following this, we now have three life insurance companies directly listed on the Indian stock markets. Each of these listings was over-subscribed, indicating the perceived long-term prospects for the industry in general, and these companies in particular.
Regulatory developments
The Insurance Regulatory and Development Authority of India (Irdai) issued a number of regulations and guidelines during the year to enhance its regulatory and developmental role in the sector.
First and foremost, Irdai issued its regulations on commission to distributors. Issued in December 2016, these regulations are aimed at streamlining the commission payable to the distributors of insurance policies. Recognising the need to promote the sale of ‘protection’ business, these regulations allow an increased level of commission payable on such policies. While the increased commission limits are aimed at promoting the sale of protection products, we need to wait and see if the distributors find it attractive to sell the low ticket-size protection products, albeit at a higher commission rate instead of continuing the focus on the sale of high ticket-size investment oriented products with lower level of commission rates. The regulations also recognise the need for additional compensation to non-agent intermediaries for the sales support provided by them and allow payment for the same on top of the base commission, subject to a certain limit. The Irdai also issued regulations on insurance web aggregators. As online distribution of life insurance policies continues to develop, it is important to regulate the activities of web aggregators. These new regulations help to regulate key aspects, including registration, corporate governance issues, functions performed, remuneration received, and others.
To enable private equity (PE) firms to promote or invest in insurance companies, the Irdai has issued guidelines on investment by PE firms into the insurance companies. These guidelines specify the ‘fit and proper’ criteria and the limits that may apply on such investments. These guidelines may help attract further PE capital to the insurance industry. The regulator also issued revised regulations that would enhance the framework to protect policyholders’ interest. It needs insurers to have a Board-approved policy on policyholder protection and mandates certain minimum information to be provided in a point of sale prospectus and in a life insurance policy. It also details claims procedures and policyholder grievance redressal procedures that insurers have to follow. In order to provide a further avenue for dispute resolution, Irdai issued separate rules governing the insurance ombudsman. The year also saw the regulator taking over the administration of Sahara Life, the first private sector company to be taken over this way. However, the proposed sale of Sahara Life to ICICI Prudential has been challenged by the promoter of Sahara Life and the matter is currently subjudice. During 2017, several global reinsurance companies were licensed to open branches in India. This is likely to streamline their operations in India, as well as allow the regulator to exercise its supervisory role on their activities.
The Goods and Services Tax (GST) was implemented, which increased the earlier service tax rate of 15% to a new GST rate of 18% for life insurers. So policyholders have to now pay more as premium on several policies, especially ‘protection’ policies.
The discussions around the new direct tax code (DTC) initiatives resurfaced this year. But we will have to wait and see what the final proposals on DTC are before analysing its potential impact on life insurance.
Likely future developments
The regulator has already set up a committee to look at drawing up a framework for the implementation of risk based capital (RBC) regime. In the coming year, we may see further progress in this area. As some promoters of the more marginal companies reconsider their options, we may continue to see mergers and acquisitions activity in 2018. And if the stock markets continue to be buoyant, we may also see some other insurers consider IPOs. However, it is yet to be seen whether the growth momentum generated following demonetization is sustained in the year to come. But one thing is certain: there won't be a dull moment in the life insurance industry in 2018.
Sanket Kawatkar, principal and consulting actuary, Milliman India.