HDFC Life Insurance is taking a calibrated approach on issuing term policies to keep costs under control and price risk better and has provided adequately for a possible third wave of coronavirus infections in the months ahead.
“We have done a couple of things here. One is that we continue to write business in customer profiles we are comfortable with,” MD and CEO Vibha Padalkar said in an interaction with Moneycontrol. “However, when you look at categories where medical tests are not possible, or say factors like comorbidities, then we will be cautious.”
The private life insurer carries out stringent underwriting, including financial underwriting, which involves checking past data from the Insurance Information Bureau of India and seeking income proof for the purchase of additional term plans. Medical tests are conducted for term plans to gauge a customer’s general health, which has been a challenge amid COVID-19.
“We can’t do home visits for everybody because in some cases, we need them to come to go and get a medical test. What we are saying is that we will defer writing a policy until maybe we are a little bit out of the woods on the pandemic front,” she added.
While the company is enthused about the opportunities, that doesn’t mean it should throw caution to the wind.
“We have to be convinced that the risk-reward is very much in the zone because you know, growing term is not difficult but it has to be a risk that we are comfortable taking. Overall, we are taking a calibrated approach,” she said.
HDFC Life’s standalone profit fell 33 percent to Rs 302 crore in the first quarter of FY22 from a year earlier after an increase in COVID-19-related provisions.
The individual annualised premium equivalent (APE) grew 22 percent to Rs 1,306 crore, while protection based on individual APE decreased 4 percent to Rs 108 crore. APE refers to all regular premiums and 10 percent of single premiums collected during a period.
The term business was 8 percent of the individual APE in the first quarter compared with 11 percent a year ago.
Is there a blanket ban on term policies?
Padalkar explained that underwriting is done on a case-to-case basis.
“There is no blanket ban on term policies and there was never such a decision taken. Eventually, COVID-19 will became just another disease. All that we ask for is disclosure because not disclosing means that we don’t know the risk and the underwriting becomes opaque. We need these details to price the risk better,” she explained.
HDFC Life is looking into aspects like over-insurance and staying away from prospective customers with comorbidities, company executives said during a call with analysts. Due to the increase in COVID-19 claims, insurers hiked term insurance rates in 2020. Padalkar said no price rise is in the pipeline for 2021.
“But we will, like with every product, we will continue to evaluate how the experiences pan out,” she added.
Provisions for COVID-19
HDFC Life said on July 19 it had created an excess mortality reserve of Rs 700 crore for potential adverse mortality. This is over and above policy-level liabilities calculated based on applicable regulations and in addition to Rs 165 crore of provisions.
In Q1, the insurer paid over 70,000 COVID-19-related claims amounting to about Rs 950 crore (net of reinsurance).
Padalkar explained that the decision to increase provisions was taken after the pandemic situation deteriorated significantly in April and May 2021.
“There was a sudden rise in the number of deaths. Typically, we’re seeing a lag of about two months between the death and the claims intimation. Now, we are seeing a drop in new cases and deaths in India. But there is a fair bit of conservatism, which is why we have created the Rs 700 crore reserve,” she said.
While the number of daily COVID-19 cases and deaths in India has declined from a peak in April-May, fears of a third wave in the months ahead loom large.
Read: HDFC Life Insurance to stay away from group term business
Third wave and impact
Padalkar explained that the company has provided adequately for a possible third wave and is monitoring the situation daily.
“If the third wave is worse than the second wave, then we would have to further strengthen our reserves. But then, we’re getting into the realm of the unknown. Nobody really knows how it is going to pan out,” she added.
HDFC Life has built statistical models to monitor COVID-19 deaths, possible claims and the lag in intimation of claims. Padalkar said based on the model, the company is on track on the provisions.
Give the lag of about two months, claims for COVID-19 deaths in June should come in by August-end or mid-September.
“So, by the time we close our quarter two (July-September) numbers, we should have a good sense as to what the claims are. This will also help us plan better,” she added.
Agency-led growth
While the pandemic took the sector by surprise in the first quarter last year, Padalkar said the company is well prepared this year. Agents added in the first quarter should start getting productive by the third quarter, after some initial handholding.
“The fact that we’ve already got 6,500 new agents (in Q1) means that we are able to build on this momentum and we can spend some time on training and then giving them leads and help them in field sales,” she said.
Unlike pre-COVID-19 times, Padalkar said physical interaction is not essential and customers are comfortable in purchasing products digitally.
Branch rationalisation and going ‘phygital’
HDFC Life had plans to go ‘phygital’ in FY21, combining physical branches and digital sales/servicing. Padalkar said this strategy continues and cited the example of executive servicing a policy via video interaction.
“We need to see if it is really worthwhile to have a large full-fledged branch where footfalls are low. It could be a hub-and-spoke model,” she said.
The sizes of branches could come down, considering that customers are comfortable transacting remotely.
On annuity payments, HDFC Life has started allowing senior citizens to submit their documents from home.
“One needs to log in to the application, blink a few times and a facial-recognition model based on AI will recognise whether it is the same person. It just takes two minutes and the senior citizens can get their annuity payments without stepping out of their home,” said Padalkar.
Persistency improvements
HDFC Life’s 61st month persistency – policies that are renewed after being in force for five years – stood at 53 percent in Q1, similar to the level a year earlier. The 61st month persistency rate has been a cause of concern for the life insurance sector.
For HDFC Life, contacting customers for policies sold five years earlier has been a challenge.
“What we have started doing is reaching out to customers early so that you have a year before they are to complete their five years. So that has helped big time in terms of being able to, first of all, connect. Wherever we are able to connect, we are able to retain almost 60-70 percent of those customers,” she added.
However, FY21 was an aberration because customers faced pay cuts and job losses. Disposable income was lower and that led to more policy lapses. To deal with this situation, Padalkar said HDFC Life is offering loans against these policies.
“We are telling customers that you can take a loan against these policies (over the counter) at interest rates that are substantially cheaper than personal loans. If you have some temporary cashflow issue, then please don’t surrender your policy but take a temporary loan,” she said.
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