By Aveek Datta and Anirudh Laskar, Mint, New Delhi
Aug. 18--The recent tightening of life insurance rules by the insurance regulator has begun having an impact on the industry with Reliance Life Insurance Co. Ltd, one of the fastest growing private sector life insurers, planning to slash agent costs by half.
In a meeting with analysts of Execution Noble on Monday, Reliance Capital's chief executive officer Sam Ghosh said the move is one of the cost rationalization measures that it is planning to bring down operating costs and maintain profitability.
The Reliance-Anil Dhirubhai Ambani Group (R-Adag) controlled life insurer currently has 1,247 branches and 1,99,711 agents. During the April-June period, the company sold at least 490,000 policies for a total new business premium of '605.3 crore.
"The company is planning some cost rationalization measures to bring down its operating costs by 10-15% by consolidating some of its branches and increasing per branch and per employee productivity," Ghosh said at the meeting. It is also "planning to cut agent expenses by around 50% and link agent commissions with persistency to maintain profitability in the new regulatory regime."
Average agent commissions on unit-linked insurance plans (Ulips) may drop to 7-7.5% from 14-15% due to the changes in norms. The firm will try to boost productivity to ensure agent incomes don't decline.
"The amount of reduction in agent commission will vary from company to company depending on the product mix and the premium collection patterns," Ghosh said. "If a company depends largely on single-premium policies from agents, it may not cut the first year agent commission by 50%. Going by our sales structure, the agent commission will be coming down by 50% in the first year for Ulips, but we will also increase the productivity of the agents."
Following the cost-cutting measures, it expects to bring down its expense ratio to 20% for the current year from 25% last fiscal.
"Whilst growth in life insurance business might get impacted in the next two-three months due to change in product structures and lower commissions, for the next two years the management expects its new business premium growth to be 20-25%," Execution Noble cited him as saying.
Ghosh said the company is about to take significant measures to bring down costs by consolidating some branches in big metros and bringing operational efficiency in terms of higher sales per employee.
The Insurance Regulatory and Development Authority (Irda) in July capped various charges relating to Ulips, hybrid insurance products that combine an element of investment in equity. Following this, to maintain profitability and sustain growth, insurers are having to cut agent commissions, restructure their products and infuse more capital.
Reliance Life, which is the only domestic private firm without any foreign partner, has pumped in a total capital of '3,000 crore so far.
Till July, there was no concept of lapsation in Ulips, and neither was there any cap on discontinuance charges. In the absence of these restrictions, insurers used to charge up to 100% of the fund value of a policy whenever a customer withdrew prematurely. In July, Irda not only capped surrender charges in Ulips, but also imposed restrictions on fund management charges. The surrender charges have to be the lower of '6,000 or 6% of the fund value in the first year for Ulips with annualized premium above '25,000. These charges decrease progressively during the term of the policy.
With persistency levels, the proportion of policies that continue to generate renewal premiums, tending to be low in India, surrender charges accounted for as much as 40% of income for some companies.
With Irda's cap on surrender charges, the break-even period for insurers could be delayed by at least two years and valuations affected significantly, according to industry experts.
The changes are effective 1 September onwards and insurers are currently in the process of filing new products.
aveek.d@livemint.com
From American Chronicle, published on Wednesday, August 18, 2010 7:26:21 PM
