Interview: IRDA, govt steps to change industry structure in 5 years, says Kannan of ICICI PruLife

Kannan believes that once the composite license comes into effect after the proposed amendment to the insurance act is underway, there will be insurance conglomerates and life insurers can offer a suite of products including health and general insurance under one roof to the customer with ease. In the meantime, smaller life insurance companies will benefit immensely from the capital measures even as large firms continue to thrive. Edited excerpts:

Right now, the insurance industry is skewed towards the large players? Will IRDAI’s measures change this?

There has been a bit of big getting bigger because what is relevant for insurance is distribution and brand. Insurance is the longest duration product for the consumer and so brand becomes critical and trust becomes critical. So naturally, this has meant that bigger players have cornered a big part of the market. But I believe that there will always be enough opportunity for all companies. In the short-term, there may be disruptions from smaller players but in the long run, there is enough for every player. Some can choose to operate in a niche segment. The government and the regulator are in sync with the opportunity of the industry.

IRDAI has announced a bunch of measures that free up capital. How much of an impact do you see of this?

One of the things that the regulator has acceded to is the industry’s demand for bringing more money for growth capital. These guidelines indicate that a lot of flexibility has been given, specifically to attract long-term growth capital. I would say that this helps small players and big alike. If I look at it from large listed players like us, it gives us more flexibility for bringing non-dilutive growth capital because there is more flexibility given to raise subordinate debt capital. We don’t have to issue fresh capital and dilute existing shareholders. What IRDA has done is double the capacity of Tier-2 capital. We have raised about Rs. 12 billion of Tier-2 (capital), and through these measures, this is now doubled to Rs 24 billion. This will boost solvency in a big way.

The 25 percent capital being allowed without being promoter will expand the investor base. Concomitantly, the government has come with a draft bill for amendment of the insurance act.

The easing of solvency ratio also helps on the capital front? Does this change anything on product mix?

This is precursor to a risk based capital regime. One of the mission of IRDAI is risk based capital. ULIP (Unit-Linked Insurance Plan) capital relaxation is very positive for us. It boosts the solvency ratio by 10 percent for us. The PMJBY relaxation will push inclusion for insurance. This will benefit Pradhan Mantri Jeevan Bima Yojana (PMJBY), it increases the capital available for this segment. The PMJBY product line will benefit as more capital will be available. Again, ULIP relaxation will benefit the product as more capital is available. This is on immediate basis.

If we take the proposed risk-based capital through the draft bill, the impact will depend on the risk underwritten by each player. What the risk-based capital will do is align the liability computation to the risk of the product. For example, in ULIPs, the risk is complete pass-through and the liability kept aside by the insurer is far less. So this will release more capital from pass-through businesses like ULIP and give us ability to deploy this in long-term risk capital requirement such as protection business.

Will the measures affect protection or annuity business?

It is capital-positive for these two businesses. It is a good tailwind for those businesses from a capital perspective. The constraint for protection business has not been capital but from the supply-side issues relating to fulfilment. We had a pandemic going, companies had made huge claims for Covid and reinsurance companies suffered losses. The underwriting activity suffered and standards became stricter. There is no dearth of demand actually, in fact the momentum is up because the pandemic made people acutely aware of the need of insurance. Annuity has been growing quite well, for us the Year-on-Year performance has been satisfactory. For H1, it has grown 70 percent year-on-year for us. Yes, protection has seen  a YoY decline but sequentially it has stabilised. But this retail and overall protection has been growing, mainly driven by group.

For the short-term, where do you see protection growth heading? Are pricing hikes behind now?

I think pricing has stabilised. There is no proposal to increase the pricing anymore, even the last round of increases we haven’t seen a big one. The only thing which is getting better is the removal of supply side constraints. For us, Q4 will see year-on-year growth in protection and next year too we will see growth in retail protection. Five years back, we had 5 percent protection share but now it is 20 percent and that is a significant increase in the share. I feel in the medium-term, this can go to 25 percent and more.

The next big enabler from IRDA is the increase in the distribution tie-ups for corporate agents and digital players. Again, for large bank-sponsored players, this may not be a big mover. Is it critical for small players?

I believe that it is overall very good for the industry. While we are a bank-promoted entity, we have about 31 bank partners through whom we distribute. For a bank promoted company, we have the most diversified bancassurance partners in the industry. In these instances, the competition has been there for quite some time. It will increase opportunity for us in business. We will focus on tying up with more banks and to that extent it is positive. I would see this adds an opportunity rather than competition. Some of this disruption from IRDA is towards development of the market.

How will the proposal on commission cap and expense management affect insurers?

I don’t see any meaningful changes. It puts the onus on the boards of the company from the regulator. This is ease of business and IRDA is doing away with micro management. The IRDA has clearly articulated that it is going to be development-focused and ease-of-business-focused. The industry has always been sensible about expenses and shareholders have also been aware. When the caps come into effect, we will comfortably meet all caps.

Before IRDA’s relaxations, there was a view that life insurers will see moderation in growth in the coming years? What is your outlook for the industry for FY24?

I always felt that beyond the pandemic-led moderation, the long-term potential of the industry is intact. Savings and retirement opportunity is intact and the segment will grow at the rate of the nominal GDP growth. So 12-13 per annum is comfortably visible for the savings and annuity business. Within this, of course, retirement business will grow faster because NPS (National Pension Fund) retirees will buy annuity. Life insurance is the only industry that can provide annuity.

Coming to protection, it will grow higher than nominal GDP simply because of under-penetration. If we look at pure protection policies, it is just 22 percent of GDP now. If we look at other countries such as Malaysia and Thailand, it is as high as 50 percent. As per capita income increases, wealth increases the need for protection for human life, earning becomes important. This is a multi-decade growth opportunity. Protection is really stabilising after the pandemic now. What I think is that in the next 3-5 years, the structure of the life insurance industry will be drastically different. I am seeing this happening already. IRDA has done reforms and on the government side, the kind of changes being proposed such as a composite licence for life and health and general insurance, has the potential to create conglomerates. For a large player like us having 200 thousand plus agents and more than 30 bank partners and other partnerships, we have the ability to get into a general insurance type of area. We can synergise distribution and give a customised solution to the customer. So the structure of big players and the industry would be different in five years. The amendment bill has also talked about entering the allied areas of business such as health, wellness, technology etc.

How would the composite licence work for you when you already have a general insurance group company?

For our perspective, it is ultimately the question for shareholders. As an executive in the management of ICICI PruLife, I can say that we have a larger distribution and comprehensive set of products on life insurance. What is lacking is some of the areas of health where it is very complementary to life insurance. We would be able to sell some of the general insurance too. How to go about it and the structure would be left to the shareholders to decide.

Where do insuretech and digital players come into this?

The starting of the opportunity is the amendment bill again. What we believe is that there is some expertise lying with start-ups in insuretech. For example, we worked closely with an Artificial Intelligence (AI) providing startup for humanoid calling. Our customers get a call through AI to increase persistency. There are two opportunities. One is invest into these start-ups which increases our skin in the game. The other is to acquire these companies and make them an integral part of our system. This is where fintechs, healthtechs and wellness companies can really contribute.