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HDFC Life watchful on omicron mortality; eyes growth with product, distribution

Moneycontrol logo Moneycontrol 03-12-2021 Ishan Shah
HDFC Life watchful on omicron mortality; eyes growth with product, distribution © Ishan Shah HDFC Life watchful on omicron mortality; eyes growth with product, distribution

Private life insurance is growing at a healthy pace and is expected to pick up momentum in the second half of this financial year. While the deadly impact of the pandemic’s second wave has passed, insurers are keeping a close eye on the new variant of the COVID-19 virus, Omicron.

HDFC Life Insurance Company Ltd. MD and CEO Vibha Padalkar talked to Moneycontrol about trends, negotiations with reinsurers and more.

Edited excerpts:

Q. How are insurance trends evolving?

People in the metros are no longer asking why they need insurance, but it is more in terms of which ones they need and how much they need. So these are constructive developments we are seeing.

It’s a multi-pronged approach where we continue to innovate on products, and that’s something we are known for – right from online terms to looking at ‘Sanchay Family’ products. New products are doing fairly well. So many innovations continue to happen, be it bundling products and simplifying and solving for bite-size products, insurance on the go riders, and combination products with our group company.

Q. What’s the strategy on product composition?

We are very close to an ideal composition for a split between unit-linked, par and non-par. In H1FY22, about 26 percent was unit-linked, 30 percent par and about 32 percent non-par. The rest 12 percent is in pure protection, including mortality protection of about 7 percent and longevity protection, which is an annuity of about 5 percent.

This is as close as we can get to as an ideal product mix, with the only caveat that annuity and protection can grow as much as it can grow. Consequently, others will go down, but ideally, we would like to see one-fourth outcome of each category – unit linked, par, non-par and pure protection plus longevity protection.

Q. How’s the distribution strategy shaping up, even as the Exide Life deal effect could play out later?

Corporate agents and bancassurance comprise 60 percent, agency channel hovers between 13 and 15 percent, our broker channel is 6 percent and direct, which includes online, is about 21 percent.

In an ideal mix, we would want our agency channel to contribute to 25 percent or one-fourth of our business over the next five years. This is within very much the objective with the Exide Life deal to get to 25 percent contribution by agency channel by both organic and inorganic means.

Agency channels are growing faster than company level growth and as a result, their contribution will continue to move upwards.

Q. So does that mean the weightage on bancassurance will come down? Or will you let it grow at its own pace?

Absolutely. All our channels will continue to grow well. Still, some of our channels took slightly longer to grow for various reasons in the past because we wanted to ensure quality business, get the right persistency, address mis-selling complaints, etc. However, we were getting all of these things right in all channels and now we are poised for growth.

Our corporate agency and bancassurance will continue to grow well. Still, some of our smaller channels like agency and direct channels will grow faster and hence contribution will continue to increase.

On bancassurance, apart from HDFC Bank, which, given its broad customer base and deeper penetration, will continue to do well. Some of our newer partnerships like Bandhan Bank, IDFC First Bank, Yes Bank, ICICI Securities are continuing to trend upwards.

Q. To what extent are you prepared as the new variant has emerged in some countries?

As far as business is concerned, we are in a much better position. While we were fairly advanced in our digital proposition and capabilities, between wave one and wave two, everything in the lifecycle – from soliciting the business to writing a policy to servicing customers – all is digital. If the customer and partner are willing, we have the tools. So we have the infrastructure in place if we happen to go into another lockdown. I hope we don’t have to go through it.

We have been relatively conservative in our assumptions in terms of the underwriting aspect. Over the past seven-eight years, we have shown positive mortality experience against our actuarial assumptions. That is something we have been careful about and disclosing this as well.

We don’t have the DNA to take on risks that we don’t understand or ignore some of the emerging trends in mortality. So, the second aspect is back in time, and we were perhaps the first to call out that between wave one and wave two, we saw a 4-10x increase in the claims and started increasing our reserves and mark-to-market mortality assumptions. That is very important as assumptions and embedded value are what we see today as against hoping things improve because that would be a fairly aggressive thought.

Thirdly, wherever we are seeing business that is currently not supportable by our estimates, either could be that somebody has to wait a little longer or go through more tests before we can issue policy, irrespective of what others are doing, because one can get swayed as the market is moving more aggressively. So, we are writing new business and, on the way, we are seeing new risks emerging.

On the group business, we have been open with our partners and open to say, look, this is how claims are trending, we need to solve together and perhaps ask more questions to assess risk and see how it fits in the framework.

Q. Would you want to shore up reserves?

We will see how data emerges. As soon as we have some credible data on mortality, we need to separate out mortality from infection rate. There can be a lot of discussion and debate around the infection rate. Still, the infection rate versus the vaccinated status and how that can hopefully cushion the mortality incidence needs to be seen. If we start seeing credible patterns emerging, we will absolutely not wait to defer the decision and we will begin to shore up the reserves.

Q. Would the evolving situation impact renegotiations with reinsurers? And if prices go up, would you absorb the cost or pass it on?

Reinsurers will also watch the space, but they are just looking at things and seeing the prices vis-a-vis wave two. It is still a quarter away for them to react to wave three. So I do hope they take a longer-term approach over a pandemic-led approach. I think that’s how they have been thinking. The increase in rate revision is less to do with the pandemic and more to do with how underlying mortality trends of the Indian population are emerging as we move away from the salaried metro kind of profile to a more interior profile. So it’s less about the pandemic, to be fair to them.

We are writing new business on the way we are seeing new risks emerging.

That’s the point I made even before the pandemic, that it is very conceivable that rates will go up down the line and that’s precisely how it has happened. So, here and now, our negotiations are going on and there will be some rate revision. Our strategy has not been an Excel or spreadsheet kind of one to pass through as it would not be fair to customers, especially to customers who are ideal profiles like younger lives with no comorbidities.

Even last time when we increased prices, it was at a risk-adjusted basis where we had seen risk, then it is justified on those profiles. So we will look at pricing on a profile basis and risk basis as to which cohorts we really want to increase.

Q. How’s the Exide Life deal shaping up?

We are delighted that we have got CCI (Competition Commission of India) approval within the timeframe, our regulator is supportive, and it's a great moment for the industry as it is the first M&A in the life insurance industry.

I don't really see roadblocks. In a month or so, we should get the approval to go ahead.

As soon as we have some credible data on mortality, we need to separate out mortality from infection rate.

Q. Post that the merger would take place? Any specific timelines?

We are engaging closely within the regulatory norms with the Exide Life team. There’s a lot of positivity among the teams. We have connected to set the context and agenda twice in person. They see value in becoming a part of a big company and we see value in learning from them in many niche segments, especially in agency tier-2 and tier-3 towns, they have a USP. There’s good talent in the company that will be absorbed. So, things are on the track right now.

It is in two stages; upon acquisition, it becomes our step-down subsidiary that should happen in this quarter, and there will be NCLT (National Company Law Tribunal) approval, which could take 7-9 months.

Q. The largest life insurer, Life Insurance Corporation, is mostly on its way with its IPO this financial year. Thoughts?

It’s always good that the country’s largest financial institutions are listed – that’s always a desirable outcome and brings a fair bit of disclosure and transparency. What would be good is that some of the objectives are met in terms of, you know, how some of the legacy, like is there a sovereign guarantee? What happens to their par book and non-par construct and all that? I guess the government is reviewing clarity on these aspects, but overall a very, very good development for the country and life insurance sector.

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