People surrender old Ulips, renewal premium falls

Tags: News
Life insurance companies have been witnessing a significant drop in renewal premiums over the past one year, a factor that would severely impact their profitability in the coming months.

According to insurers, reasons for the drop in renewal premium are many. A large number of policyholders who had bought old unit-linked insurance plans (Ulips) bearing high charges are surrendering them with the three-year lock-in period ending and falling sales in the wake of the September 2010 regulations on Ulips. Policyholders are also timing the market and not paying renewal premiums. Insurers, on their part, are focusing on selling single premium policies and plans having premium holidays.

The renewal premium of the country’s largest private life insurer ICICI Prudential Life Insurance witnessed a negative growth of 11.6 per cent for the half-year ended September 30, at Rs 3,852 crore compared with Rs 4,306 crore for the half-year ended September 30, 2011.

The renewal premium for SBI Life Insurance degrew by 15.7 per cent for the six months of the current financial year at Rs 2,185 crore compared with Rs 2,593 crore for April-September 2011. The renewal premium for Reliance Life Insurance declined by 25 per cent for April-September at Rs 1,257 crore compared with Rs 1,676 crore for April-September 2011.

Similarly, Bajaj Allianz Life Insurance had a renewal premium of Rs 1,668.6 crore from April-September 2012 compared with a renewal premium of Rs 2,124.3 crore from April-September 2011, a negative growth of 21.4 per cent. However, Life Insurance Corporation (LIC) managed a marginal growth of 2.3 per cent in renewal premium at Rs 52,384 crore for April-September 2012 compared with Rs 51,191 crore for April-September 2011.

Malay Ghosh, president and executive director at Reliance Life Insurance, said, “Renewal premium growth happens when the new business premium of last year grows more than the exits (example people exiting a plan through surrenders, plans maturing, policies with a premium holiday). Renewal premium is also a function of persistency. For example, there are existing policyholders who are not surrendering their policy, but are also choosing not to pay their premiums.”

Deepak Sood, managing director and chief executive officer of Future Generali Life Insurance said, “Renewal premium growth is negative for insurers as many policyholders are surrendering their old Ulips whose three-year lock-in period has got over. This is because the new Ulips that came after 2010 have a lower charge structure compared to the older Ulips.”

The Insurance Regulatory and Development Authority (Irda) had introduced new regulations for Ulips which became effective from September 2010, capped the charges in such plans and increased the lock-in period from three years to five years. These regulations shrunk the margins for insurance companies and lowered commissions for agents. As a result, insurers slowed down pushing Ulips which were driving volumes for them and began pushing traditional products (which still have high charges and commissions for agents). The new business premium growth for the life insurance industry has been dragging since the new Ulip regulations from September 2010.

Decline in new business premium does not impact the bottomline immediately for the insurers, but it has an effect in subsequent years. New business premium and renewal premium also fall, directly impacting bottom line.

Insurers said with the stock market doing well, many Ulip policyholders are timing the market and have stopped paying renewal premium, but are not even surrendering their policies. Insurers said that when policyholders stop paying premium in a Ulip plan, the death cover lapses, but the maturity value or the fund value does not decrease.

Another reason of expected fall in renewal premium is the increase in sale of single premium policies by insurers, which means there will no renewal premium in subsequent years.

Tarun Chugh, chief distribution officer at ICICI Prudential Life Insurance said, “Negative growth in renewal premium is reflective of lower new business premium in the past three years. If the new business premium falls, the renewal premium in subsequent years will also be lower. Also, till 2010, most insurers had life insurance products that had premium holidays which means you pay premiums in the initial years after which you don’t have to pay premiums to keep the policy alive, which too brings down renewal premium growth.”

“In the past two years, insurance companies have moved towards selling more endowment plans, so renewal premiums should build up and the positive impact will be visible in the next year and the year after that. However, the new business premium for us has grown by 20 per cent for first half of this financial year, so we hope to do much better in renewal premium collection in the subsequent years,” added Chugh.

Ghosh of Reliance Life said that people have a wrong notion that old Ulip products had higher charges than the new products. “The old Ulips had high charges in the first three years which reduce drastically in subsequent years while in the new products the charges are lower in the initial years.”

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