Ulip surrenders grow in single digits for pvt players
Oct 02 2016
Contrary to the trend, policy surrender for public sector behemoth LIC rises 47% to Rs 11,434 crore
Insurers said while the stock market volatility could be one of the reasons stopping policyholders from exiting, insurers, too, are consciously focussing on customer retention to improve persistency and profitability of their business as they prepare to list in the coming time. However, public sector behemoth Life Insurance Corporation (LIC), which has a large portion of traditional policies, is surprisingly seeing a higher incidence of policy surrenders.
After the country’s largest private life insurer ICICI Prudential Life got listed last month, the regulator is working on making listing mandatory for all insurers that have completed 10 years of operation.
A study by Financial Chronicle shows that policy surrenders have been declining since 2015-16 and in April-June 2016 for private life insurers. ICICI Prudential Life Insurance saw surrenders fall by 13 per cent to Rs 2641.8 crore during the first quarter ended June 30, 2016. Of the total number of policy surrenders reported during the first quarter of the current year, the highest were from Ulip policies at Rs 1409.3 crore and Rs 990 crore from Ulip pension plans. Policy surrenders/withdrawals were Rs 3,037.6 crore during the same quarter of the previous year. For 2015-16, surrender payouts at ICICI Prudential Life Insurance stood at Rs 11206.7 crore — a fall of 0.9 per cent.
Lower policy surrenders indicate that customers chose to pay their renewal premium on time, which helped improve the persistency levels of the business. Persistency ratio is the percentage of life insurance policies remaining in force. In other words, it is the percentage of polices that have not lapsed.
Persistency is a valuation metric, which indicates an increased scope of future income from existing policies and has been going up. ICICI Prudential’s 13th-month persistency ratio for FY16 stood at 83 per cent — highest among all private life insurers — compared to 79 per cent in FY15. Its 49th-month persistency ratio stood at 62.9 per cent in FY16, against 54.4 per cent reported in the year-ago period. The 61st-month persistency too improved to 42.6 per cent compared to 14.5 per cent in the year ago period. The company’s assets under management (AUM) as on March 31, 2016, was Rs 1.03 lakh crore.
At a recent press conference, ICICI Prudential Life Insurance officials said that the surrenders were happening from old Ulips policies and not from the new policies, which have helped improve its persistency ratios.
Ulips are insurance-cum-investment plans where a small portion of the premium is deducted (as the mortality charge) towards providing an insurance cover while the rest of the premium is invested into equities/debt or a mix of both. While policy surrender is a problem for all companies, it is more pronounced in the case of the insurers that have large banks as bancassurance partners. This is because after October 2010, when the regulator revamped Ulip regulations, insurers that did not have banks as distributors cut down selling Ulips and moved towards selling traditional policies. However, the insurers, which had banks distributing their policies, were better placed to offer Ulips to high networth individual customers of banks. On account of a well-developed banking sector, bancassurance has become the largest channel for private players.
HDFC Life: For the first quarter ended June 30, 2016, surrenders in the case of HDFC Life rose by 8 per cent to Rs 1,421 crore, compared to Rs 1,310.6 crore. However, for 2015-16, surrenders/lapsation fell by 21 per cent to Rs 4,950.4 crore, compared to Rs 6,289.7 crore in 2014-15.
SBI Life: SBI Life, which had been witnessing a consistent fall in surrenders year-on-year, reported an increase in policy surrenders by a whopping 136 per cent to Rs 1,678.13 crore (as on June 30, 2016), compared to Rs 710 crore reported in the same quarter of the previous year. Of this, Ulip surrenders formed the major chunk, with Ulip life policy surrenders at Rs 919.54 crore and Ulip pension plan surrenders at Rs 89.21 crore. For the year ended March 31, 2016, surrenders were to the tune of Rs 3,397.26 crore, compared to Rs 4,694 crore in 2014-15 and Rs 5,214 in FY 2013-14 for SBI Life.
Arijit Basu, managing director and chief executive officer of SBI Life Insurance told FC, “The surrenders are coming from products that were launched post-December 2010, after the new Ulip regulations were introduced. The new products had a lock-in period of five years. So the first batch of these customers has become eligible to surrender. While some customers have chosen to surrender their policies, the majority have chosen to continue with their policies. Therefore, the number of surrenders that have happened forms a small portion of the total surrenderable pool.”
“The surrender claims have decreased by nearly 28 per cent during 2015-16. Other claims have increased on account of payouts from discontinuance fund,” said SBI Life in its Annual Report 2015-16.
For SBI Life, the 13th-month persistency ratio (on premium basis) has also improved to 77.67 per cent in FY16, from 76.29 per cent in FY 2015. However, it stayed low at 17.35 per cent in the 61st-month during FY16, compared to 9.94 per cent in FY15.
An insurance official said higher surrenders were seen in the case of the policies sold in 2010, 2011 and 2012, as the revised Ulip norms capped surrender charges at Rs 6,000. After surrender, the money is transferred to the policy discontinuation fund and the customer earns 4 per cent interest on the premiums he had paid.
For LIC, policy surrender rose 47 per cent to Rs 11,434 crore in FY17 Q1 compared to Rs 7,755 crore reported in the same quarter of the previous year.
Policy surrenders bad for insurers: Before the Ulip regulations were put into place in September 2010, Ulips had high surrender charges that would help insurers to shore up their profitability. Prior to these regulations, the insurance industry was rampantly misselling Ulips as insurance products to a large population that did not understand the vagaries of the stock market. This was leading to high lapsation and surrenders of policies. Also, many agents lured customers to surrender old policies and buy new insurance plans. This would help insurers as they could eat into the premiums paid by a customer as ‘surrender charges’ while the agent could earn up to 40 per cent of the premium as the first-year commission. These were the main reasons that prompted the previous Irdai chairman J Hari Narayan to cleanup the system.
The insurance regulatory and development authority of India (Irdai) first revamped the product design for unit linked insurance plans (Ulips) in 2010 and Ulip pension plans followed by new product regulations for the traditional policies and variable linked insurance plans in February 2013.
The Ulip guidelines capped upfront charges (paid by policyholders), returns and the commission payouts to agents. Soon after these guidelines were put into place, during FY11 and FY12, the industry witnessed a shift in the product mix — from linked products to traditional products. The premiums fell at an annual rate of around 19 per cent during FY11 and FY12.
The life insurance industry was focussing on selling Ulips and Ulip pension plans between FY05 and FY10, as these carried high charges for customers; the risk, too, was borne by the customer. The performance of Ulips is directly linked to primary capital markets, which witnessed a boom between FY06 and FY08, which, in turn, benefited insurance companies. In FY09 and FY10, a slowdown was witnessed in the economy, which impacted the sale of policies. The sources of revenue for a life insurance company include the investment income from the shareholders fund, operations, high persistency of policies, assets under management, profits from lapsed policies and surrender charges on old products sold.
In FY11 and FY12, a consolidated positive movement was witnessed in the reserves. However, this positive movement was mainly driven by lapsed profit on linked policies issued earlier. Insurance rules before September 2010 allowed insurance companies to write back the lapsed money as income in the books over a period of time.
Similarly, in the new traditional product norms, the sum assured was increased, the minimum death benefit was increased, and there was the linkage of an agent’s commission to the premium-paying period for all products. Under new rules, guaranteed surrender values (GSV) of traditional plans for the customers have been defined and increased substantially. Prior to 2013, the GSV was 30 per cent of all the premiums paid minus the first-year premium and had to be paid only if premiums have been paid for three years. In the new products, the GSV increases progressively with the tenure of the policy. It would be 30 per cent of the premium paid in second policy year, 50 per cent of the premium paid till the seventh year and progressively increases after that.
While in a traditional life insurance policy a policyholder has to pay premium for at least three years to get a surrender value, in a Ulip, this rule does not apply. In case a traditional insurance policyholder has not paid premium for three continuous years, then all the premiums are forfeited by the insurer and nothing is paid to the policyholder at the time of closing the policy.
However, in case of Ulips, if a person has bought a policy before September 1, 2010 then he can go back to the insurance company, ask for surrendering the policy and the company, based on the current NAV minus the surrender charges, will refund the money. In case the policy has been bought after September 1, 2010 then there is a minimum lock-in period of five years. But one can stop making the premium payment and even if the policyholder has made just one premium payment, he does not have to make a payment for five years. The money gets transferred to the policy discontinuation fund and the insurance company is entitled to deduct maximum of Rs 6,000 from that fund. The balance amount will remain in the policy discontinuation fund and be given at the end of the five-year period, which is a minimum lock-in period. In the interim period, the policyholder gets a minimum interest at the rate of savings bank account, i.e. 4 percent per annum.