Listed life insurers in India have been unable to generate sufficient returns to cover their cost of equity in the past two to three years, according to a report released by the global management consultancy, McKinsey & Co.
In its report titled “Steering Indian insurance from growth to value in the upcoming ‘techade’”, released last week, McKinsey says that this raises questions about the long-term viability of their business model.
The three largest listed private life insurers had return on equity (ROE) minus cost of equity (COE) ranging between –3.9% and 1.6%.
Although value-of-new-business (VNB) margins for these leading players improved during this period from about 17% to more than 25%, they remain relatively low compared with MNC players in the Asian market, which boast VNB margins exceeding 50%.
Despite achieving a robust CAGR of more than 17% in new business premiums (NBP), the top five private life insurance companies in India have experienced tepid net profit growth of under 2% CAGR over the past five years. This underscores potential challenges in cost management and operational efficiency and can be attributed primarily to escalating expenses, including increased commissions, operational costs, employee-related expenditures, and marketing expenses, which have risen faster than premium growth.
Additionally, the modest growth in investment returns has not kept pace with the growth in premiums, further constraining net profit expansion.
The increase in new business premiums for life insurance has been driven primarily by larger ticket sizes, while the number of new policies has not risen. Additionally, there has been a gradual decline in the number of in-force policies over the past six years, indicating that new lives are not being covered sufficiently to close the mortality protection gap.