IRDA Releases October 31st Numbers. Is The Industry Really Moving Forward?

The Insurance Regulatory and Development Authority (IRDA) recently released a detailed half-yearly datasheet on premiums mobilised by Life Insurers between 1st April 2016 and 31st October 2016. How did the industry fare in the seven months of the Financial Year compared to the same period last year? Prima facie - very, very well.

The report indicates a 30.37 per cent growth (from 66,997 Crores to 87,343 Crores) in the mobilisation of first year premiums compared to the business sourced in the corresponding period. If that sounds too good to be true - well, that's because it is. A closer examination of the industry numbers tells a different story.

First, let's understand very briefly how a profitable Life Insurance business is built. Life Insurers collect two different kinds of premiums from clients - namely, single and recurring (non-single). These premiums can be further bifurcated into 'group' and 'individual'. Think of single premium policies as more of the 'wham, bam' variety and the recurring ones as a long-term commitment to insurers and their clients. Coupled with a magic number called persistency, the quantum of 'individual, non-single premiums' mobilised form the heart and soul of any Life Insurance business. Persistency is a measure of the percentage of policies that continue to stay in force and don't get terminated year on year. The more the individual non-single premiums - and the better the persistency - the more cash flow the Life Insurer can be assured of in the times to come. Read - long-term business profitability.

It appears that the lion's share of the 20,000 odd Crores of 'growth (as much as 16,529 Crores of it) is actually stemming from an increase in the quantum of 'single premium' mobilisation. What's even more disturbing is the fact that nearly 10,000 Crores of this purported growth is arising from increased sales of a rather dubious category of products called 'group single premium' policies. A few years back, the erstwhile IRDA Chairman J. Hari Narayan had raised concerns about the rampant proliferation of this sub-group of policies. They seem to create limited value for the end-user (the insured person) - since many a time, clients remain blissfully unaware of what the policy is all about and even receive poor after-sales service. In a manner of speaking, these are bulk deals done by Life Insurance companies (a total of 1630 YTD deals made by insurers amounting to a premium of 47,233 Crores would indicate a net average deal size of 29 Crores). These deals surely do help jazz up the numbers, but the fact that they create limited value for end users is unquestionable. In fact, they don't even create an equivalent positive impact on the profitability of insurers; simply helping to window dress the top line.

This is probably why the APE (Annualized Premium Equivalent) number is a better indicator of growth, per se. The APE is calculated by adding the volume of recurring premiums mobilised, with 10 per cent of the volume of single premiums mobilised. Comparing the APE for April to October 2016 with the corresponding period in 2015 yields a more modest growth rate of 19.55 per cent. Still good.

The actual concern lies in the 'number of policies mobilised' figure, which is probably a much better representation of how the industry is faring. Despite the mighty increase in premium mobilisations, the 'number of policies sold' grew by a miniscule 0.31 per cent. Dig deeper, and you'll discover that the number of recurring individual policies actually fell by 0.75 per cent, from 1.15 Crores to 1.14 Crores. What this essentially means is that this growth is really an outcome of higher ticket sizes (Rs. 19,550 per annum versus Rs. 16,954 per annum) more than anything else. Is that growth? Well, yes. Ideal? No.

Bottom line - yes, the industry is growing; but not quite as quickly and as well as the number seem to portray. The basis for this renewed focus on group single premium plans is suspect (more IPO's in the offing, maybe?). The number of recurring policies sourced isn't going up, but the ticket sizes are. Considering that insurance has traditionally been considered a key component of the promotion of financial inclusion, perhaps it's time the industry got together to draw more of the projected 60 Crore+ insurable Indians into the fold - rather than targeting higher ticket size businesses and chasing bulk deals that serve to shore up their top lines and achieve little else.