That said, Suresh Ganapathy of Macquarie Capital cautions that competitive intensity has lately increased and he would be cautious on pricing. “Many (insurers) may not even be hedging appropriately and taking a risk into the shareholder's account for giving the guaranteed returns,” he spells out.
There are two other critical aspects that would also decide the trajectory – the slowly rising share of unit-linked insurance plans, or ULIPs, as characterised in Q2, and the trend emerging in the persistency ratios (which indicates how long customers continue with their policy).
A sharp rebound in equities has put the limelight on ULIPs, after four quarters of lull. Barring HDFC Life, where the share of ULIPs continued to decline in Q2 to 21 per cent from 27 per cent in Q1, SBI Life and I-Pru Life witnessed an incremental improvement in ULIPs’ flows. In absolute proportion, the share of ULIPs reduced from 67.2 per cent a year ago to 47.8 per cent in Q2 for I-Pru Life and from 43 per cent to 32.6 per cent in the same period for SBI Life. However, of the Rs 2,100 crore of new business premiums, Rs 1,625 crore (60 per cent) came from ULIPs for SBI Life. For I-Pru Life, the number stood at about 50 per cent – Rs 701 crore of ULIPs out of Rs 1,465 crore worth of new premium. Even as life insurers guide that they would maintain the product mix prudently, the overall market momentum may be the ultimate guiding force.
Likewise, persistency ratio trends are quite varied for each player (see chart). Going ahead, if insurers decide to focus more on maintaining or expanding the 13-month persistency, it may eventually impact profitability.
More importantly, as analysts at Nomura say, the key risk for life insurers is the worsening of the current Covid-19 situation and the inability to sustain the current improvement in growth and margins, and improve persistency. Despite these concerns, if life insurance
stocks appeal to investors, the recent meltdown in valuations needs a mention. This has positioned the stocks as attractive for long-term investors.