The strategy of Life Insurance Corporation of India to focus on non-par policies could pose risk for private players, as they generate 50%-75% of profitability from so-called ‘non-participating’ policies, according to Credit Suisse.
A participating policy enables policyholders to share profits of the insurance company. These profits are shared in the form of bonuses or dividends. In non-participating policies, profits are not shared and no dividends are paid to policyholders.
According to Credit Suisse, LIC can increase sales of policies that don’t pay dividend to holders at lower prices than privately-owned competitors that count on such products for a large share of profitability, “Contrary to perception, LIC’s persistency experience in non-par is superior. This provides LIC with headroom to offer competitive pricing in these products,” the foreign brokerage said in a note.
Moreover, with better profit retention, value of new business (VNB) margins have moved up from 2.8% to 9.9% and will reach 12.3% once surplus distribution fully equates to private players. VNB for FY21 jumped 3.5x to Rs 4,170 crore, according to new assumptions.
LIC enjoys a 66% market share in new business premiums owing to its strong agency network. The insurer’s agency channel is seven times larger than the private sector and much more productive compared to its competitors.
Additionally, LIC’s non-par margins are superior to its own par business as well as private non-par margins. Its non-par margins (gross) are 83% against 11% for par products, and despite contributing only 4% of annual premium equivalent (APE), non-par accounts for a third of VNB. Thus, LIC believes a shift in focus to non-par can significantly raise its profitability — a 10% shift in APE mix from par to non-par can push VNB margins up to 20%.
