Tuesday, March 26, 2013

LIC's Capabilities High, But Now Challenges are Higher

LIC has been demonstrating higher and higher capabilities to weather the downtrend in the industry, even while keeping its equity investment business productive, both on the buy and sell side. Due to these high capabilities, significant opportunities like the default NPS annuity scheme have come knocking on its doors, but it can't be underestimated that LIC's challenges too are getting multi-fold higher, like its sluggish new business premiums as well as its leading role in the nation's divestment program. The state-run insurance major has been formulating new strategies on every business front to keep its large machinery agile to meet the new opportunities and challenges head on. Will it be successful in this exercise?

LIC has recently opened a new front in its battle to outpace sluggishness in the conventional policy space.

Its latest product, Jeevan Sugam, a single premium plan, offers risk cover of 10 times the premium paid for a fixed period of 10 years. At the end of 10 years, the policy will mature and be ready for redemption of guaranteed sum. Jeevan Sugam is open for children too, with those aged between 8 and 45 years, welcome.

On maturity, the survivor will be paid sum assured along with loyalty benefits. For example, to get the minimum maturity sum assured of around Rs 60,000, the single premium would be Rs. 33,759. The life cover, on death before policy expiry, is 10 times the single premium amount after deducting service tax.

In case of death after five years of the policy term, loyalty addition will also be paid, although that amount is not specified upfront.

For maturity sum assured of over Rs 1,50,000, an additional maturity sum assured of 3.5% is provided to the policyholder. For maturity sum of over Rs 4,00,000, higher additional maturity sum assured of 4.5% is provided.

This plan suits even those who don’t foresee a regular income in future but still want to protect themselves by taking a risk cover now with some money they have now. A single premium plan is also less cumbersome for those who want to avoid paying regular premium. Jeevan Sugam favours the young the most, as the policy’s maturity value is higher for people in the lower age groups.

The real value of the plan is hidden, as the real value will be if and when the interest rates come down significantly over the next 1-5 years, and doubling of money even by 10 years would appear difficult. In such a scenario, it can be seen that Jeevan Sugam’s life cover comes virtually for free.

The scheme which is closed-ended and open only till March 31st, has been garnering good subscriptions. LIC had to make this innovative scheme closed-ended as it provides assured rate of return, which mandates that the offer period should have a uniform interest rate in the country.

New products like Jeevan Sugam is critical for LIC as the insurance heavyweight’s best performing class of products continue to be single premium ones.

All insurance companies including LIC has seen new business premiums dipping in the April to January period. Though it can be argued that LIC’s new business dipped more than that of private insurers for the first time, not only is the relative underperformance small - 6.5% against 5% - but the absolute volumes speak for itself - with LIC still accounting for more than double of the business of all private insurers combined.

LIC continues to record this kind of performance based on their relatively superior honouring of life cover claims, as well as its unique sales model driven by a large pool of agents.

The lapsation rate with LIC is a low 9%, which is attributable to fair claim processing as well as the efficient servicing by agents. The penetration of LIC agents into the vast Indian population is legendary, with LIC and its agents reported to have covered every region were 1000 people were living with at least one agent, way back from 1969. Despite alternative distribution channels like bancassurance being mooted, LIC’s agent army remains one of its core strategic advantages.

Hints from the recruitment side also shows that LIC is not planning to lie low during this sluggish phase for the industry, but that it is actively preparing for the next growth phase. Life Insurance Corporation has recently invited online applications for filling up 750 vacancies for the post of Assistant Administrative Officer (AAO).

Candidates recruited will be able to work in different streams such as Marketing, Finance, Investment, IT, Customer Relations, Underwriting, Actuarial, HR and Legal. The total emoluments for the post is handsome, compared with say public sector banks, at Rs 33,418 per month in any ‘A’ class city.

LIC should indeed be preparing for the good times, as its unique capabilities are attracting massive new opportunities.

Recently, pension fund regulator PFRDA has chosen LIC as the default annuity service provider for subscribers exiting from New Pension System (NPS) and seeking withdrawal of accumulated pension wealth.

PFRDA had earlier empanelled seven Annuity Service Providers (ASPs) - LIC, SBI Life, ICICI Prudential Life, Bajaj Allianz Life, Star Union Dai-Ichi Life and Reliance Life Insurance - for providing annuity services to NPS subscribers.

While subscribers were earlier required to select an empanelled ASP along with an annuity scheme from those offered by the chosen ASP at the time of exiting from NPS, PFRDA has now decided to assist subscribers by providing a default option - LIC. While choosing LIC for the prestigious role, a top PFRDA official clarified that, “LIC has been chosen as the default ASP,and this default option is being provided in the subscribers' interest and to avoid any delay in claim processing.”

The opportunity is huge, even for LIC, as under the provisions of NPS, a maximum of 60% of corpus accumulated at the time of exit, which is normally on the attainment of 60 years of age, can be withdrawn but a minimum 40% of corpus has to be utilised for purchasing an annuity.

And the numbers are huge. Even while the NPS was only open for the new recruits who join government service on or after January 1, 2004, by the end of 2012, over 42 lakh subscriptions were enrolled with a corpus of over Rs 26,000 crore. And from May 2009, the floodgates were opened, when the NPS was opened up for all citizens in India to join on a voluntary basis.

The default scheme from LIC offers annuity - which is a kind of policy by an insurer designed to provide payments to the holder at specified intervals for life - with an additional provision of 100% of the annuity payable to spouse during his/her life after the death of the annuitant.

LIC is also going great guns in its other core area of operation - capital market investments. Though there might be critics of the way in which LIC is said to have ‘bailed out’ various disinvestments of the government like NALCO, NTPC, Oil India, Hindustan Copper, NMDC, RCF, & SAIL, only time will prove whether it is a bailing out or highly attractive investments for the insurer.

If LIC’s recent performance in profit-booking is any indication, LIC has that rare ability to make good on all these investments. Reportedly, LIC is set to end the current financial year with record profits from sale of equities, amounting to about Rs 24,000 crore, which is its highest ever. The state-run insurer smartly sold off massive quantities of long-held stocks into the recent FII led rally.

But as always, it has been not a mindless sell-off, but a prudent churn. For example, it cut it position in Federal Bank even as it emerged as the largest investor in Karnataka Bank.

On the longer horizon, another shot in the arm will come by way of LIC, when it gets into banking through its subsidiary LIC Housing Finance. Commenting on the recent RBI guidelines on new banking licences, LIC has openly come out with its ambition to float a bank.

LIC Chairman DK Mehrotra recently summed it all up to reporters, where the organization is standing with regard to its ambitious Vision 2020 Program. “Going by the enthusiasm and response, we hope that giving a policy to every insurable person by 2020 should be fulfilled. It includes any insurance product, depending on the person's ability to buy it. Each of these persons should have a cover of insurance with LIC. If he thinks about insurance, it should be LIC.”

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