Analysts are constructive on the long-term prospects of the life insurance industry.
Private life insurance companies are expected to continue their strong growth momentum this fiscal, though margins may remain under pressure as the focus shifts to higher distributor payouts and investments in stepping up new channels, analysts say. Life insurers posted healthy growth in annualised premium equivalent (APE) in the fourth quarter of FY23, aided by customers rushing to buy high-ticket, non-unit-linked savings products ahead of withdrawal of tax exemptions from April 1.
APE is a common measure of ascertaining the business sales in the life insurance industry.
The Union Budget 2023-24 withdrew tax exemptions on maturity proceeds of non-unit linked insurance policies (non-ULIPs) with an annual premium exceeding Rs 5 lakh.
“While the Street remains skeptical, we expect private life insurance companies under coverage to deliver 13-18 percent APE growth on normalised basis. The one-off business in March 2023 will likely weigh on March 2024, leading to 2-18 percent APE growth for the year,” Kotak Institutional Equities said in a report.
Life insurance companies will likely lose business in non-participating policies (where the profits are not shared and no dividends are paid to policyholders) above annual premium of Rs 5 lakh, though policies below this threshold may become relatively more attractive as income from these policies remains tax-free, while income from debt funds has been made taxable at the marginal tax rate.
Margin Pressures
Challenges on the margins front may impact life insurers in the near term, feel analysts.
“Investments in new partnerships and income in agency business will likely put pressure on margin expansion. Levers include pick-up in term business and the high share of non-part (policies). We consequently model flat-to-marginal compression in margins in FY 2024E for listed private insurance companies; this is compared with the 145 bps to 981 bps expansion reported in FY2021-23,” Kotak added.
As per new rules by IRDAI effective April 1, life and general insurance companies will not have to adhere to any specific ceiling on commissions paid to agents, distributor banks, and other intermediaries.
However, the payouts cannot exceed the overall expenses of management (EoM) limits specified by the Insurance Regulatory and Development Authority of India (IRDAI).
The industry has largely welcomed the regulator’s directives, though some smaller players said they could find the going tough in the days to come.
Some analysts also believe that the larger listed players will be under pressure to deliver as unlisted insurers now have the flexibility to be more aggressive.
“This removal of explicit commission cap will bring in transparency and payouts to distributors will get reported under commissions. For listed larger players, despite commission limits being freed up, the struggle to deliver profitability to the shareholders while balancing policyholders and distributors' interests would mean the limited ability to materially tinker the payouts to their distributors,” broking firm Emkay Global said in a recent report.
Road Ahead
Despite these headwinds, Kotak has retained its positive stance on the life insurance sector.
“We expect APE growth (ex-one offs in March) to remain strong in FY2024E, with flat margins, but investments provide visibility for better medium-term growth. Non-par savings and protection will be value drivers. We remain bullish across life insurers,” it noted.
However, there are also some voices of concern.
HDFC Securities said conversations with industry experts suggest that the top four private life insurers are likely to witness 20-27 percent adverse impact on FY24E APE, predominantly on account of the impending transition to the new tax regime.
The optional new tax regime has removed most deductions, including on life insurance premiums.
Policies with a ticket size of less than Rs 1 lakh are believed to be sensitive to tax deductions under Section 80C of the Income Tax Act, analysts at HDFC Securities noted.
“We expect an 18/11/16 percent impact on retail APE of SBI Life/ICICI Prudential/Max Life solely on the back of lower new business growth as customers move to a new tax regime (assuming resistance from 40 percent of the 80C sensitive customer pool),” they said.
While HDFC Securities is constructive on the long-term prospects of the life insurance industry and the regulatory vision to improve penetration, it said the sector will face growth challenges in the near- to medium-term from revised EoM guidelines, the gradual elimination of tax-induced sales, increasing competition within channels, and forced pivot towards lower ticket-sized policies.
It’s advice to players in the segment?
“We believe India is structurally moving towards a regime where ‘tax planning’ as a motivation for insurance will become completely redundant. Hence, companies that pivot sooner from ‘tax planning’ to the ‘financial planning’ plank will have a competitive advantage over peers,” it added.
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