Brokerage firm CLSA compared the benchmark cost ratios of Life Insurance Corporation of India (LIC) and four other top private life insurers — SBI Life, Max Life, HDFC Life, and IPRU Life. CLSA states that LIC has ‘limited’ ability to compete on costs with the other four private insurers — especially in non-participating (non-PAR) products where cost is not a pass-through — owing to the insurer’s ‘high-cost structure’. Among private insurers, the CLSA report stated that SBI Life was one of its preferred life insurance picks.
“Within private insurers, SBI Life’s cost ratios are the best in class, partly driven by parent support. Max Financial followed by SBI Life are our preferred picks in the life insurance space,” states the CLSA report.
LIC:
The CLSA report states that before the 2010 fiscal, LIC was a cost leader. However, over the past decade, the company’s employee costs have risen about four- to five-fold, but its operating leverage has been ‘limited’. As a result, now, its cost ratios are much higher than the other four top private insurers. This will impact LIC’s ability to compete profitably in non-PAR products.
The report further added that LIC’s cost ratios were lower than private insurers till the 2010 fiscal. “Post ULIP regulations (in the 2010 fiscal), private insurers cut down costs, while LIC’s overall operating expenditure increased, as its per-employee costs have increased 4-5 times in the last 10 years,” stated the report.
“LIC’s operating expenditure to individual APE ratio, which was at 30-40 percent in FY08-09, is over 100 percent now, while for private insurers, operating expenditure to individual APE has remained around 40 percent. LIC has a large renewal book where operating expenditure should be minuscule as compared to new businesses. Even, taking into account renewals, its operating expenditure to total weighted premiums is higher than some private insurers,” stated the CLSA note.
When it comes to private insurers’ benchmarking, CLSA states that SBI Life remains a cost leader.
SBI Life: Stating that SBI Life was one of its preferred life insurance picks, CLSA note added: “SBI Life’s cost ratios across metrics have been lower than peers given the parent’s support and distribution strength. This leads to SBI Life’s relatively higher margins even in low-margin products like ULIPs. SBI Life is best placed in case of a pricing-based competition.”
Max Life: CLSA said that it was behind on cost ratios vs peers, given its smaller size. “Over the last few years, it has narrowed the cost gap with peers and that has enabled the company to lower dependence on participating policies (cost pass-through product). With the completion of the deal with Axis Bank, we expect a larger rerating in Max Financial,” stated the report.
HDFC Life: CLSA retained ‘O-PF’ rating for HDFC Life, stating: “Headline cost ratios are higher, but that is mainly due to higher share of the non-PAR business (more costs) and a higher share of non-bank distribution. HDFC Life has been most ahead on product innovation.”
IPRU Life: The CLSA note stated that high ULIP dependence led to a loss in market share in the last two years. Now, the company is gradually diversifying its product mix. “Headline cost ratios are lower than HDFC/Max due to higher ticket size and possibly some parent support,” added the note.
