I don't think the protection segment will be impacted much. But one of the reasons for buying an investment product was tax incentive.
From the consumer’s perspective, some attractiveness will go away not this year but in the future, and there'll be some continuity for a few years. It is both an opportunity for the industry to look more at innovation and protection, but it's a challenge from various investment points.
RM Vishakha: Tax incentive
was actually a motivation for individuals to be careful and more risk aware, as well as to protect their families. This is a disservice to customers at large. As a country, we're not very risk aware, and if we take away even the incentives, I am worried about how are we going to be creating that entire risk management awareness to a customer. From an insurance company’s point of view, we will find another way. Obviously, we will find different ways. We will talk about protection and savings; we will talk about certainties of life and we will figure out how to sell better. If today’s tax saving was a sweetener, we will now need to figure out how to work without the sweetener. Our sales efforts will have to intensify and we will figure out how to sell better.
The reason for which the Indian customer is buying life insurance is not tax saving. If you look at the trends in the market, there was a time when there used to be a huge queue on the business in January-March every year. But if you look at it, and even if you were to give our example where probably we were, let's say 44 per cent of our business used to happen in the fourth quarter, it has now come down to maybe 34-35 per cent. And we are seeing the trend coming down.
It could be in terms of planning for exigencies, improving quality of lifestyle, or for child education. There's been a lot of innovation which has happened in terms of savings. Clearly on the annuity and the protection side there are a lot of products which people do go back and buy.
We have not received any pushback from our sales team or heard that tax is the first thing that gets pitched now, when insurance is getting sold. So the understanding based on the data is that most people are wanting deduction. Now the current regime allows you the choice going forward, whether that choice will remain three years down the line, we don't know. My personal take is that people have been exercising the choice in favour of deduction for so long in such large numbers, they should continue to do that.
I actually don't see any impact whatsoever because of this change. In the short term, I think it makes sense for the bulk of the customers to continue with the exemption regime. The issue will only arise when we are forced to shift to a new regime of no exemptions at all. The protection product will absolutely have no impact, because it is always sold on a need basis and not on a tax platform.
With 55 million income tax payers and 30 million policies being sold every year; tax becomes irrelevant. The high net worth individuals are not bothered about this. Then there are rural customers who are not supposed to file an income tax return. Then there is the middle segment, which I believe has already been tapped and only the newcomers’ may be interested in these exemptions. In the long term, we have to educate the customers that life insurance is for protection, not for the tax savings and the saving part was an added benefit.
Should the 49 per cent foreign investment cap be relaxed?
Increasing 49 per cent to a higher percentage is a reform that has happened in other sectors. Insurance industry will continue to consume capital. So if you can attract large pools of capital from abroad, it's a good thing for the industry as a whole. If you look at the three-four listed players here in life insurance industry, we have all grown between 40 and 60 per cent. It is good for us as a country to take advantage of this situation and attract foreign capital.
It is better to have an open economy with more competition coming, which will benefit consumers rather than having restrictions on foreign investment. An Indian promoter may not have the wherewithal and a foreign company can come and run it the way it wants to. So, it will be better for the consumer. We need to cross the bridge when it comes. But if 20 per cent plus needs to be divested by promoters, and not enough time is given, I don't know who has that much money to invest in.
It is very important, especially for companies which are not yet listed. When they go for listing, and if the FDI limit is capped at 49 per cent, they may not attract any foreign institutional investors.
Life insurance as a long term saving product leads to a huge corpus which the government can tap for infrastructure and many other such areas. I would think that yes, if you are able to open the sector to a 74 per cent, like in some other sectors, it will add a lot of value. And maybe the foreign players who come in will bring with them their core strengths, and it will add a lot more value in terms of what we can do in the industry.
If you don't run a business well, and you lose out because of that, that's one issue. But if it's because of just access to capital, I think that's a pretty sad situation. FDI has only benefited every sector. So what's the big issue?
Is it easy for you to go for an initial public offer (IPO)?
There is a perception that our investments are determined by the government of India. No, it's not like that. Investments are determined by LIC
Act and Insurance Regulatory and Development Authority of India (Irdai) regulations. Yes, being in the life insurance industry, we are a little conservative.
About 68 per cent investments are in government securities and state development loans which are sovereign guaranteed. On February 1, when the market fell after the Budget announcements. What was our investment that day? It was hardly Rs 200 crore, which is just a normal, routine day. Our investments in equity are based on two factors: one is growth and the other is value. The life insurance contract being a long-term contract we have to look at it from that angle also. So it's not that we are pushed into it. There is an investment committee which looks into the second part to ensure transparency.
Till now we have not received any formal communication from the government, but I believe that they have started some exercise at the ministerial level. The government has very clearly said that we would like it to have happened in the second half of the next financial year.
How prepared are you?
We don't have any expertise and experience on how the IPO
works, so we will have to get some information from the industry and the other segments of the market from where IPOs have happened. We have never calculated embedded value because we were not required to. The announcement came on February 1 and presently we are on the job of managing internal perception. We have to talk to 1.2 million agents, and we have to talk to 110,000 employees. On February 2 itself, the finance minister has gone on record saying that sovereign guarantee will not be affected.
How does the IPO change the rules of the game?
Whatever I have seen from the outside and interactions with LIC, it is very unlike a lot of other PSU. It is a fairly competitive, very competent, high technology investment organisation. Usually, an IPO makes entities more competent. So, quite honestly, according to me nothing will change. They are already growing pretty well in the last couple of years, as fast as the rest of the market, or faster.
Other than the fact that listing in general is good in terms of transparency and openness, which is what the regulator also wants, LIC
discloses quarterly financials, which are fairly detailed. Obviously, embedded value and all is another angle which comes with listing.
I think it's important for us to understand that after so many years of insurance, and with 23 other private players being in place, as a country, premium as a percentage of GDP continued to stay at 2.7 per cent in 2018. It's not really been changing much. If you look at the Swiss Re report, they talk about a 92 per cent production gap in the country. This effectively says if as a country, we should be insured for a certain amount, we are only covered for only 8 per cent of that. Now, these are numbers which are staggering. And you know, as an industry, we have a long and huge opportunity to go forward. Frankly, any listing will bring forward more disclosure and bigger transparency. Whenever an organisation like LIC
lists it will bring a lot of innovation and dynamism in the market, because there will be a lot of push and pull.
I feel that IPO or no IPO, LIC is one of the toughest competitors in the industry. About 20 years of liberalisation and even now, if you look at the total receipt premium on the first year basis, LIC has a 70 per cent market share. And it has over Rs 31 trillion of assets to manage. It is huge and it's probably the best known retail financial services brand in the country. We are minnows compared to the behemoth. And it has done a fantastic job with technology and with the steps taken in the last couple of decades. So, the industry will be competitive and LIC will be a very significant player, IPO or not.
Now, IPO also opens up a good class for investors, institutional or domestic, to own a piece of the insurance industry, the much larger piece of the industry. With more players listing, potential investors get to know about the industry much more. I don’t know the valuation but I guess very quickly it will get into an index. So that will open up a big asset class for the investors so every way it is good. We should welcome it with open arms. It will be good for the industry. It will good for the market cap of the overall industry and we become more significant by way of market.