Insurance Sector A ‘Healthier Reboot
Given the significant increase in sales of health insurance policies post the outbreak of the virus pandemic, it is high time the insurance sector was re-rated to find out where it is headed towards. Join Anthony Fernandes as he looks at the potential impacts of COVID-19 on the Insurance Industry.
The Indian insurance industry is at an inflection point with the outbreak of the corona virus, with the average Indian realising now that insurance is almost as essential as bread and butter. The demand for life and health insurance has certainly magnified since March 2020 in tandem with the increase in the number of corona virus positive patients. According to online distribution portal policybazaar.com, health insurance has seen a jump of 35-40 per cent on its platform during this period, while life insurance registered a 20 per cent growth.
Even though the insurance industry invariably records strong growth in March with people rushing to buy policies before the end of the financial year, this year, in particular, has seen stronger growth as compared to the average 10 per cent growth logged in the previous years in both categories, the online portal states. Similarly, digital insurance player, Digit Insurance saw a 50 per cent increase in average policies sold a day in March over January for its comprehensive health insurance policies.
The company received a robust response for its corona virus-specific insurance product as well which was launched in the first week of March.
Since the product was launched under Sandbox regulations, the company has rolled it back after they hit the IRDAspecified upper limit. “In less than a month we clocked a total premium of over Rs 39 lakhs which was nearing the limit of Rs 50 lakhs that the regulator had fixed; hence we had to stop the product,” says Vivek Chaturvedi, Head of Marketing and Direct (Online) Sales at Digit Insurance. A quick analysis of previous epidemics tells us that there has always been a notable rise in demand for term and health insurance policies during such events.
Global Precedents
☛ SARS (Severe Acute Respiratory Syndrome): A viral respiratory disease, it spread in China and Singapore from November 2002 to July 2003. During these years, China Life Insurance Company (CLIC) saw 40 per cent CAGR in short-term health insurance and 34 per cent CAGR in long-term health, whole and term life insurance. This was higher than 3 per cent CAGR and 10 per cent CAGR over FY 2004-11 observed for these products.
☛ MERS (Middle East Respiratory Syndrome): It spread rapidly in Saudi Arabia during 2QCY13 to 3QCY14. Bupa Arabia, one of the largest health insurers, reported 44 per cent and 81 per cent YoY growth in premiums during 2013 and 2014. The overall industry health insurance premiums increased 22 per cent YoY in 2014 compared to 14 per cent CAGR over 2010-13 and 2 per cent CAGR during 2015-19. Overall life insurance premiums increased 7 per cent and 15 per cent YoY in 2014 and 2015 respectively as compared to 2 per cent to 7 per cent YoY decline over CY 2010-13,
Although it is still early to quantify the rise in premium volumes due to the pandemic as the intensity of the spread still remains unclear, the one thing that is clear is that life and health insurance companies will be key beneficiaries from a rise in volumes. After having shown a considerable improvement in almost all areas over the last few years, the spotlight is now on this industry which is all set to play a major role in bridging the vast ‘protection gap’ that exists in the country today. This makes it all the more important to look into the impact the current market conditions will have on this industry and determine whether there are any opportunities for investors. Before we dive in though, we need to understand the Indian insurance sector and the forces that have shaped the industry over the years.
Indian Insurance Industry: An Overview
The insurance industry can broadly be divided into two: life insurance and general insurance. While life insurance relates to risk cover for life or disability and accidents of an individual or a group of individuals, general insurance or non-life insurance covers risk to other insurable assets such as property, vehicles, health, etc. The Indian insurance industry consists of 57 insurance companies of which 24 are in the life insurance business and 33 are non-life insurers. Among these insurers, Life Insurance Corporation (LIC) is the sole public sector company and there are six other public companies among the non-life issuers.
The sector is regulated by the Insurance Regulatory and Development Authority of India (IRDAI). Other stakeholders in the Indian insurance market include agents (both individual and corporate), brokers, surveyors and third-party administrators servicing health insurance claims. Over the two decades, the industry has evolved post-privatisation in 2000. The private players have shown healthy growth since 2014 with the market share of private sector companies in the non-life insurance market rising from 13.12 per cent in FY03 to 55.70 per cent in FY20. The growth has been aided by a workforce that is increasingly getting younger with higher life expectancy, greater awareness and better disposable income and savings, which have been key drivers for almost all insurance products,especially motor and health insurance.
As the number of uninsured in India is so high and the amount of government spending on health care and health insurance is so limited, there remains a huge potential for private players in the industry. A natural focus of the private sector is on developing innovative solutions that encourage more Indians to purchase health insurance and to recognise the value of preventive rather than emergency care. Notable innovations are also occurring in terms of both digital distribution and creating more effective underwriting pools.
"Although it is still early to quantify the rise in premium volumes due to the pandemic as the intensity of the spread still remains unclear, the one thing that is clear is that life and health insurance companies will be key beneficiaries from any rise in volumes."
Government Initiatives
The Government of India has taken a number of initiatives to boost the insurance industry. Some of them are listed as follows:
☛ As per Union Budget 2019-20, 100 per cent foreign direct investment (FDI) is permitted for insurance intermediaries whereas FDI in the insurance sector was capped at 49 per cent under the automatic route.
☛ In September 2018, the National Health Protection Scheme was launched under Ayushman Bharat to provide coverage of up to Rs 500,000 to more than 100 million vulnerable families. The scheme is expected to increase the penetration of health insurance in India from 34 per cent to 50 per cent.
☛Over 47.9 million farmers were benefitted under the Pradhan Mantri Fasal Bima Yojana (PMFBY) in 2017-18. Fasal Bima Yojana (PMFBY) in 2017-18. Fasal Bima Yojana (PMFBY) in 2017-18.
☛The Insurance Regulatory and Development Authority of India (IRDAI) plans to issue redesigned initial public offering (IPO) guidelines for insurance companies in India, which are to looking to divest equity through the IPO route.
☛ IRDAI has allowed insurers to invest up to 10 per cent in additional Tier 1 (AT1) bonds that are issued by banks to augment their Tier 1 capital in order to expand the pool of eligible investors for the banks.
Insurance Industry Financial Performance 2020
Taking into account growth in premiums in the year 2020 for life insurance companies, there was a total YTD variation increase in premiums of 31.25 per cent until February 2020 as compared to the previous year. The Life Insurance Corporation of India registered a growth rate in premiums of 31.75 per cent, whereas the private life insurance sector as a whole registered growth in premiums of 21.37 per cent. Among the private players, Tata AIA Life Insurance Company and Kotak Mahindra led the way, recording growth in premiums of 52 per cent and 41.68 per cent respectively. Future Generali India Life Insurance, HDFC Life Insurance and ICICI Prudential Life Insurance were among those that recorded growth rate in premiums of above 20 per cent.
In terms of the total number of policy and schemes, the highest growth was again seen in Tata AIA Life Insurance Company again, which saw growth in total policies of 56.49 per cent until February 2020 as compared to the same period for the previous year. The growth in total premiums generated until February 2020 for the general insurers was 12.16 per cent as compared to the same period in the previous year. Insurance start-ups such as Acko General, Go Digit, Edelweiss and SBI General were among those that generated the highest growth in premiums.
Impact of Pandemic on Insurers’ Financial Outlook
While the virus pandemic has led to a spike in new policies for the online portals, it has been the opposite for traditional insurers who sell their products primarily via insurance agents. These insurers have been adversely affected due to the lockdown put in place by the government. “There has been a gradual decline in policies sold from the first week of March to the fourth week with sales managers and insurance agents unable to meet customers. However, we recorded 32 per cent growth in February compared to 25 per cent industry growth as people were inclined to buy policies thanks to awareness around corona virus,” says Dr. S Prakash, Managing Director, Star Health and Allied Insurance.
Insurers around the world have been also carefully considering the potential impact of the virus on their short-term and long-term financial outlooks. Claims cost will likely be specific to the classes of business an insurer writes and their policy wordings. However, a bigger factor which needs to be taken into consideration is how the outbreak might affect the economic environment, specifically the prospects for growth and profitability in the insurers’ investment portfolio. The International Monetary Fund (IMF) in its 2020 World Economic Outlook estimated the world economy to shrink by 3 per cent in a stunning corona virus-driven collapse of activity that will mark the steepest downturn since the Great Depression of the 1930s.
If these numbers hold true, then insurers across the board would likely be impacted by a sharp slowdown in economic activity, which would undermine growth and perhaps even contract insurable exposures. The situation is aggravated with major volatility in the equity markets. Property-casualty insurers tend to be especially vulnerable to stock market fluctuations, as they hold more liquid assets in case of catastrophic losses. At the same time, decline in interest rate around the world will weigh heavily on the entire insurance industry, but will most affect operations in the life insurance and annuity sectors given their rate-sensitive products and investments.
No matter the implications, there is bound to be a paradigm shift in how people view insurance in India, at least once they are past the immediate scramble to survive. As this situation evolves, insurers will continue to serve as shock absorbers for the economy and society. Insurers are also helped, in large part, by reinsuring large parts of their books of business, which is one of the ways the industry is able to spread risk. Financially, the insurance industry prepares well for large loss events such as the recent pandemic and should be well-capitalised for an onrush of claims.
In our view, the below mentioned stock may outperform the markets in the coming quarters:
HDFC Life Insurance CMP (Rs ) : 503.75
BSE Code : 540777 I Face Value (Rs ) : 10 I Mcap FF (Cr.) : 25,424.24 I 52 Week High / Low : Rs 646.40/ 339.15
HDFC Life Insurance Company Ltd., formerly HDFC Standard Life Insurance Company Ltd., is a life insurance company providing various individual and group insurance solutions across India. It offers a range of life insurance plans such as term insurance plan, women’s plan, health insurance plans, child education plans, unit-linked insurance plans (ULIPs), and savings and investment plans. It has approximately 410 branches in over 900 cities and towns in India.
Looking at the numbers of nine months i.e. 9MFY20, the total income was reported at Rs 29,193.65 crore, registering a growth of 20.11 per cent as compared to Rs 24,306.26 crore in 9MFY19. The total asset under management (AUM) for 9MFY20 was Rs 136,500 crore, up by 16 per cent as compared to Rs 117,700 crore for the corresponding period for the previous fiscal year. The company reported PAT in 9MFY20 at Rs 983.55 crore, increasing by 7.75 per cent from Rs 912.78 crore in 9MFY19.
Taking into consideration the annual numbers, the total income saw growth of 19.51 per cent to Rs 38,877.88 crore in FY19 from Rs 32,531.43 crore in FY18. The total asset under management for the year ended March 2019 was Rs 125,600 crore, up by 18 per cent from Rs 106,600 crore in the previous fiscal year. The company reported growth in PAT of 15.42 per cent, rising to Rs 1,277.93 crore in FY19 from Rs 1,107.20 crore in FY18. HDFC Life’s new business margin improved by 260 basis points in 9MFY20, with value of its new business growing by 44.9 per cent YoY to Rs 1,407 crore.
Its operating return on EV stood at 19 per cent while the Indian embedded value (IEV) increased to 19.8 per cent YoY to Rs 20,841 crore. The company’s saving business grew by 32 per cent in 9MFY20, whereas its protection business also grew by 32 per cent. During Q3FY20, HDFC Life launched a new product, ‘Sanschay Par Advantage’, which could contribute to better growth going forward. The management indicated in its earnings call in Q3FY20 that this product was picking up well.
In line with the company’s strategy of maintaining a balanced portfolio, the share of non-par savings products reduced to 35 per cent in Q3FY20, whereby the company achieved its targeted non-par savings exit rate percentage for 4QFY20 in the third quarter itself. Even though the company has seen some softening and stress in the ULIP business given the nature of the product, HDFC Life is better insulated from downturns due to a more balanced product mix. The company is well-placed amongst its peers with balanced growth across all segments. As a result, we recommend our investor readers to BUY this scrip.
