Kotak Life’s focus on traditional products has boosted VNB margins, embedded value and AUM growth, says MD Balasubramanian

This is because the top players already have a general insurance company within their group. For a few companies, though, it may open up avenues for entering the health insurance business. Edited excerpts

The insurance industry has seen multiple regulatory changes over the last two years. What has been the cumulative impact?

The insurance industry has been through a lot of changes over the last 24 months and the impact of all that is probably what has been playing out. The first change was the withdrawal of tax-free status on maturity proceeds of traditional policies with premiums of over Rs 5 lakh. In a way, this tax amendment boosted the 2022-23 numbers, as policyholders were able to avail of the exemption until it lasted. This was followed by the Insurance Regulatory and Development Authority of India’s (IRDAI) expenses of management and surrender charges circulars. These changes have necessitated a calibration on the strategy for almost all players in the industry. In the first half, the performance of the industry was quite good. In the second half, across the board, across all channels, the performance slowed down, and the industry registered about a 10 percent growth on the individual side of the business. Since some of the main reforms are behind us, we are looking forward to a period of stability, which will give the industry additional impetus for business growth.

Some more amendments are in the offing, particularly Budget 2025 announcement on 100 percent FDI and the proposed amendments to the Insurance Act…

100 percent FDI in insurance and composite licence are the two important changes being spoken about and more or less everybody believes these will fructify. It is a welcome initiative, but is it going to lead to a lot of players and more money coming in? We will have to wait and watch because life insurance has been kind of a difficult journey for many companies. So, somebody needs to come with very deep pockets and with a long-term view of India’s growth. We might also see some changes with existing promoters offloading their stakes and some realignment of stakes will happen. On the composite licence, there could be new entrants who may wish to combine life and health or general Insurance. I do not believe it's going to be a big change for the life insurance industry, because all of us—at least the top players—do have a general insurance company within their group. For a few companies, it may open up avenues for starting health insurance.

What is the likely impact of the new, more taxpayer-friendly tax regime, given that the allure of Section 80C tax benefits will fade further?

Tax paid will be lower in the new tax regime for most taxpayers. However, people are looking beyond tax benefits while buying life insurance policies today. Also, policyholders who buy life insurance plans are still eligible for tax exemption on their maturity proceeds, subject to certain conditions (that is, tax-free status under section 10(10D)), is available to ULIPs and endowment policies as long as their annual premiums do not exceed Rs 2.5 lakh and Rs 5 lakh, respectively). So, I don’t see any adverse impact on the life insurance business due to the changes announced under the new tax regime. Also, Budget 2025 has clarified that such ULIPs, which are not eligible for section 10(10D) tax benefits, will — subject to conditions — be treated as equity-oriented mutual funds (that is, any gains of over Rs 1.25 lakh will attract long-term capital gains tax of 12.5 percent versus slab rates that incomes under the head ‘other sources' attract). So, that is a positive for the ULIP business.

What is your outlook for the industry this financial year and Kotak Life?

We expect to grow faster than the industry this year. While we have not been able to grow better than the industry last year, one of the reasons is that we focus more on traditional products and less on ULIPs, especially in the agency business. We have the highest percentage of traditional products in the kitty – the share was close to 73 percent in the last financial year, which is in the region of 40-50 percent for most players. This has helped us maintain focus on longer tenure policies, which is reflected in our VNB margins, embedded value growth and also the AUM growth. It was a conscious decision to focus more on endowment policies, which will continue. We believe in a balanced approach – one-third in par, one-third in non-par and a little less than one-third in ULIPs and the balance is in protection. We believe the right balance of product mix is always good for the long-term sustenance of this business.

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There is no clarity on the proposal to grant GST exemption to life insurance premiums. What are your views?

I think on pure protection products, GST needs a relook. The common view is that the 5 percent slab is fair and we subscribe to that view, because India needs protection. It is an underinsured country and the protection gap is very large on the individual side.

How did you realign commission structures after the surrender charges norms came into force?

Surrender charges did have an impact on our reassessment of our products and commission structures. I would expect that the growth for this year could be better than last year. We may go back to our normal growth of 14-15 percent, which the industry has seen on the individual side of the business. On the group side of the business, we expect it to be better than last year, because the microfinance business would probably bounce back. On surrender charges, all of us did a combination of three things. For some of our large institutional distributors, we introduced clawbacks. Those clawbacks will come into effect from this year. All of us also had to take a relook at our commission structures. So, most players have reduced upfront commissions and increased deferred commissions. The idea is that we give more incentives for renewals.

How have distributors reacted to the change in commission structures?

It's more or less settled now. When we first launched it, there were some doubts, but honestly speaking, at Kotak Life we did not make too many changes. For the industry the second half of FY 2024-25 has been difficult for the agency business, so now we will have to start looking at how we will be managing one full year with all these changes.

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Reports suggest that the Insurance Regulatory Development Authority of India wants insurers to reduce reliance on bancassurance channels. How do you see this channel’s contribution to the insurance business?

Firstly, all companies should have the right balance between channels and any over-dependence on a particular channel is avoidable. Secondly, it’s a fact that the overall reach of bank branches is far higher than life insurance offices, and banks have a relative advantage in selling insurance as they normally have a stickier relationship with the customer than any other financial business. So, it will always be a very important part of portfolio planning for customers and an important revenue stream for banks. At the same time, as an industry, we should continue to focus on the right product for the right customer segment, sold in the right manner so that we all reduce the post purchase dissonance. The Bancassurance channel will continue to be a very critical channel and is a key enabler for all of us in fulfilling the stated mission of ‘Insurance for all by 2047’.

Could you elaborate on your plans and objectives for next year?

We intend to add around 70 branches and take the branch strength to 400 by the end of 2025-26. Business is nicely balanced between bancassurance and agency for us, with the former contributing about 48 percent of the business, while other channels account for the remaining 52 percent of the business. We will continue to expand our agency channel too. We are pretty happy with our progress on the product side. In the last two years, we have launched several new, innovative products, and all of them have been quite successful in the marketplace. We launched the Kotak Assured Pension plan about two-and-a-half years back, along with Kotak Guaranteed Fortune Builder. Each of these products has been able to occupy a sizeable portion of our business. We also launched ‘Kotak TULIP’, which has now become virtually a generic name for such plans in the industry. In addition, we launched Kotak Gen2Gen Protect—a protection plan designed to cover two generations—and Kotak Gen2Gen Income, a participating income variant based on the same concept. Most recently, we introduced the Confident Retirement Savings Plan, a participating pension product launched in February this year.

So, we are really looking at our portfolio and seeing what the gaps are, and what the current trends in the market are – how are customers perceiving our products? We keep launching products backed by some good, solid research and feedback coming in from our distributors. Ultimately, the products need to contribute to your new business premium. And we are happy that all the new products today easily contribute more than 35 to 40 percent of our new business premium.

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We view our portfolio through the lens of a five-platform framework: protection, participating traditional, non-participating traditional, retirement and ULIPs.