Does life insurance make sense without tax benefits?

Premiums of pure protection term insurance policies are unlikely to rise this year on the back of favourable mortality experience – fewer death claims – in India, he said.

“If the mortality experience continues to be favourable, I would expect a marginal reduction over the next couple of years,” Tripathy said.

Life insurance companies effected multiple rounds of hikes, driven primarily by COVID-19-linked risks and a rise in global reinsurance rates. However, now that the threat of large-scale COVID-19-induced fatalities has subsided, term insurance premiums could see a correction.

Also read: How health and term insurance buying changed completely due to COVID-19

Bigger than tax breaks

From April 1, if the annual aggregate premium paid towards traditional endowment policies exceeds Rs 5 lakh, the maturity proceeds will not be eligible for tax exemption under Section 10 (10D). The tax-free status for maturity proceeds was one of the USPs of life insurance policies.

Since this exemption was in force even for high-value policies until March 31, agents and insurers aggressively pushed them during the month, leading to bumper sales. New business premiums (individual, non-single premium segment) for the industry logged 39 percent year-on-year growth in March.

Max Life recorded growth of 63 percent in this segment. January, February and March are typically when taxpayers tend to make their tax-saver investments.

Life insurers’ sales are expected to dip in the last quarter of FY24 in the absence of the tax benefit. However, Tripathy does not foresee a major adverse impact as people value life insurance beyond tax benefits.

“If at all, I expect a marginal impact, which will be visible in Q4 of this financial year because of the very large base (as huge sales were registered in March 2023),” he added.

For Max Life, the high-value endowment category’s share was 2 percent in terms of policies and 8-9 percent on a premium basis in FY23. The amendment to the tax rules will not prompt any change in product strategy for the company.

“Plans with large ticket sizes accounted for just 2 percent of our policies. We are still getting good ticket sizes and are hopeful that it will continue,” he said.

Upbeat on pure protection term policies

“(Despite the rise in over three years), the premiums are not as high when compared to rates in foreign countries. The hikes were more due to reinsurance frictions… But as a category I feel extremely bullish about protection,” he said.

As per the company’s India Protection Quotient survey, term insurance ownership remains very sluggish, which means potential for growth is high.

“People have recognised the value of term insurance post COVID-19 and this will continue to grow,” he said.

Max Life’s persistency ratio – the policy renewal rate – for term insurance has been high compared to its other products.

“We easily cross the 90 percent mark. It’s even higher for customers who are buying these products through digital channels,” said Tripathy.

Lower persistency

Despite being promoted as a long-term product, life insurance persistency – the customer retention record – remains poor. A low persistency ratio translates to a high lapsation rate, pointing to the exit of many dissatisfied customers.

“We do need to do a better job,” Tripathy said. “In developed countries, the benchmark for 13th month persistency will be over 90 percent and for the 61st month, it will be upwards of 65 percent. In our country, a large number of players are between 80 percent and 90 percent. And, if you were to look at the 61st month, companies’ persistency ratios are in the range of 50-55 percent.”

Persistency rates for the 13th month indicate the number of policyholders who paid their first renewal premium, while 61st month persistency reflects the renewal rate in the sixth policy year.

“Max Life is number one and number three in terms of 13th month and 61st month persistency, respectively. We have more work to do, but if you were to go back 10 years, these (industry) numbers were between 70 percent and 80 percent for the 13th month. Almost everybody has now improved and persistency has been going up, at least for the large players,” he said.

Aadhaar-based documentation, richer data, evolved sales processes, efficient information gathering and premium collection processes, among other things, will boost persistency.

Greater flexibility

It’s been almost three months since the Insurance Regulatory and Development Authority of India’s new expenses of management (EoM) and payment of commission regulations came into force. The regulator gave company boards more flexibility to manage expenses, including commission payouts.

“The regulator has created more flexibility by empowering the boards to determine the commissions depending on the efforts which the distributors are putting in. However, I'm not expecting that it will have any material impact on the final EoM outcomes. We were already significantly below the allowable limits,” he said.

Max Life’s EoM and commission structure has not seen any major change due to the amendments. The changes are of a tactical nature – not strategic – and not transformational, according to Tripathy.

Focus on protection, retirement

In FY23, non-participating, guaranteed plans made up around 40 percent of the company’s product mix, with ULIPs accounting for 30 percent. Participating products constituted about 20 percent of premium inflow, while retail protection’s share was 7 percent, with retirement plans making up the balance.

As in the case of other life insurers, the non-participating, guaranteed endowment category was the top performer for Max Life in FY23.

“The market was also quite favourable for that. People were looking for guaranteed returns and especially in the last month of the financial year, when the Rs 5-lakh ticket size became important,” Tripathy said.

This year, he intends to focus on protection and retirement, besides non-par.

“The first two months have shown good retail growth on protection, and we hope to maintain that momentum. We are trying to focus on protection and retirement as two categories… non-par share is going to be higher than perhaps the share of unit-linked insurance policies (ULIPs) and participating endowment policies,” he said.