MC Interview: 2023 to see rise in margins and growth, says HDFC Life CFO Niraj Shah

Edited excerpts:

Q. Year 2022 has been a slow one for insurers, in terms of growth after the post-pandemic recovery. How much of a growth rate would you see the industry reporting next year? What business growth is HDFC Life aiming for in FY23 and the next year?

A. This year, the Indian life insurance industry has continued to clock double-digit growth despite a challenging macro-environment. During the COVID-19 days, the private life insurance sector has grown at a two-year CAGR of 14 percent.

We are closely tracking the inflationary environment across the globe and consequent interest rate movements, thereby potentially impacting consumption and purchase of long-term protection products in the short run. Over a medium to long term, life-stage products, such as annuity and protection, are relatively insulated from such factors. We believe that the life insurance industry is well positioned to address the multi-decade opportunities of protection, retirement and long-term savings. We expect the industry to grow faster than the nominal GDP rate and our endeavour at HDFC Life would be to grow faster than the industry, as we have in the past. We expect margins to continue inching up on the back of higher share of margin-accretive products like protection, annuity and long-term savings, and realising economies of scale.

Q: Profitability has been at the centre of performance of insurers so far this year. Would we see this sustaining next year or would we see a bit of consolidation? What is the outlook on margins?

A: We have seen an improvement in margins across product segments in the light of improving persistency ratios and operating leverage. On an APE (Annualised Premium Equivalent) basis, HDFC Life saw 24 percent growth in overall protection and 44 percent growth in annuity business, aiding the expansion in margins. We are confident about margin expansion on a standalone basis at HDFC Life and the acquired business of Exide Life, and are close to achieving our aspiration of maintaining FY22-margin neutrality for the combined entity for this fiscal year. We expect to continue improving our margins over the next 2-3 years, as we continue to invest in expanding the franchise.

Q: The IRDA recently announced a series of measures that could free up capital as well as provide easier access to funds for life insurers. How much of an impact would you see from measures such as allowing non-promoter holding to be 25 percent, relaxation on solvency ratio etc?

A. The proposed regulatory changes are aimed at increasing insurance penetration and facilitating a sustainable growth for the industry and ease of doing business.

These measures would enable insurance companies to optimise their capital structure, and, at the same time, maintain sufficient risk capital to address multiple growth opportunities in protection and long-term products. Further, the IRDAI is also examining the implementation of risk-based solvency approach. We believe that this will benefit the sector by not just freeing up excess capital deployed but also by ensuring that the capital required is in line with the risk on the balance sheet. Additional avenues like financial reinsurance, which are commonplace in more mature markets, can further this objective.

Q:  Will the relaxation on solvency ratio change the product mix strategy for life insurers? Will there be capital reallocation?

A. The relaxation in solvency requirement for unit-linked products would result in a meaningful release of solvency capital for the sector. At HDFC Life, product mix is a function of addressing customer needs of protection, retirement solutions and long-term savings while maintaining portfolio diversification. This approach has enabled us to deliver consistent performance across different economic, regulatory and customer preference scenarios. We will continue with this approach of maintaining a balanced product mix.

Q:  Retail protection growth has underwhelmed in recent times. What is the outlook that you see here? Will growth improve?

A. During the pandemic, there was a surge in demand for retail protection. We saw higher levels of customer interest in life insurance, with the concept of human life value gaining relevance. The elevated interest was also reflected in the higher number of online searches for term life insurance. Gradually, with the fear of COVID-19 receding on the back of a robust nationwide vaccination programme, the demand has returned to pre-pandemic levels.

The macro realities, however, remain the same. The protection gap in India is one of the highest in the world, with most of the population not having adequate life cover, despite affordability. The protection opportunity in India is structural and needs to be approached in a calibrated manner. HDFC Life continues to address the protection opportunity in a holistic and calibrated manner, with a steady growth and market leadership in attaching protection when customers are borrowing, through our group credit life offering. With a combination of data analytics, insights into customer profiles and calibrated risk retention, we expect individual protection to pick up in the coming quarters.

Q: IRDA has increased the distribution tie-ups for corporate agents and digital players from three to nine. If we see this, along with the proposed measures on expense management, will they change the dynamics of current partnerships?

A: The key premise of open architecture is to offer a wider choice to customers. Banks have adopted different approaches. Some have adopted open architecture while some have remained captive distributors for their group insurance companies.

Given the higher degree of complexity involved in understanding life insurance products, we believe that it is unlikely that the count of insurers per bank will increase significantly. At HDFC Life, we work with more than 100 corporate agents across different financial services and we operate in an open architecture environment with most of our partners. We will keep exploring potential partnerships, in light of the recent developments. The proposed regulations on expenses of management provide more flexibility to insurance companies to manage their expenses and profitability while staying competitive. These regulations would not increase affordability.

Q: Is the proposal of composite licence under the Insurance Amendment Bill a game changer for insurers such as you?

A. As far as composite licence is concerned, financial groups in India are operating in the insurance sector with different structures. Larger insurance companies have been in existence for over two decades and are operating at certain optimal level of scale and efficiency. Globally, both structures co-exist -- mono-line as well as composite insurers. Multiple considerations would be at play as players evaluate the appropriate structure – scale and maturity of businesses, availability of capital, group dynamics, etc.

For life insurance, we believe health insurance is a complementary segment which enables us to offer a seamless solution to customers. We have been working in partnership with HDFC Ergo to offer a comprehensive financial protection plan that offers the dual benefits of life and health insurance. Another key change proposed is allowing insurance companies to distribute other financial services products. This has also been an ask from HDFC Life and would give the industry the ability to earn fee income by leveraging our existing distribution architecture to offer a one-stop solution to customers.