In today’s Finshots, we see why India’s largest insurer seems to be struggling a bit.

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The Story

LIC (Life Insurance Corporation) is going through a tough time. Its market share of premiums from new policies or the New Business Premium (NBP) dropped from 68% to 59% in the past year. And maybe the writing was on the wall. Maybe people knew this was coming — its shares have fallen over 20% ever since it went public last year.

But what ails LIC, you ask?

Well, to understand that, we first need to rewind a bit.

See, LIC began operations in the 1950s when the government heading the newly independent India decided to nationalize a lot of businesses. Insurance was one of them. They felt that Indians needed to protect their life and the government had to have a say in it. So a bunch of existing private Indian and foreign companies were all squished and merged together. That’s how LIC was born. The business model was simple — they’d employ a massive salesforce of agents. These folks would collect money (premiums) from clients and, in exchange, promise to offer future monetary benefits upon death or upon the completion of a certain period of time. Once they collect these premiums, LIC would invest these monies in stocks, bonds and other financial instruments according to guidelines prescribed by the regulator.

And for around four decades, LIC ruled the roost. It had no competition and was a monopoly.

But in 2000, the government tweaked the rules. It allowed private insurers a route in. New business models and policies began to emerge. But LIC stuck to its guns. It kept doing what it had done for nearly 50 years. Why change what wasn’t broken, right?

And one of these traditional business methods was selling policies through insurance agents. Now if you’re a millennial you’ve probably heard stories of people in your family or their friends becoming LIC agents and how it changed their life. Years ago earning a respectful living didn’t come very easy. That would probably mean bagging a government job. Or sometimes the next best thing was earning big fat commissions from being an LIC agent. Lured by this opportunity, lakhs of people turned into agents.

For instance, in 2005, LIC had 9.8 lakh active agents. But since then, the progress has been slow. By the end of 2023, it still only had 11.4 lakh agents who were active on its rolls.

Now there are a couple of reasons why this happened. For starters, young folks now have different outlooks on career opportunities. And being an LIC agent might not even be the last thing on their mind. If you look at the age group of LIC agents, you’ll see that only 15% are below the age of 30.

But the bigger problem is that LIC isn’t even able to retain its existing agents. People are leaving in droves. And they’re heading to rivals in the private sector.

See, LIC agents bring in over 90% of new business for it even today. But it can’t really keep throwing more commissions or incentives to get them to stay. And that’s because the insurance regulator IRDAI (Insurance Regulatory and Development Authority of India) has regulations that cap agent commissions and incentives. But at least in the private sector, the career prospects can be better. For instance, many private insurers are linked to their banks — like HDFC and ICICI. So there’s often a ready customer base to sell to. It might even offer the opportunity to shift careers from pure insurance to banking. And these things could affect agent attrition further.

Sure, LIC does have a large stake in IDBI Bank. But it’s not the same thing. LIC gets just 3% of its business from corporate agents such as banks. Whereas the private sector really leverages on this segment that contributes to 58% of new business.

Also, a mere 0.16% of its sales happen directly on its website. This is compared to 2.30% for the private sector. So LIC might really need to up its technology game as customers’ perspectives of insurance have changed today. They want to sit at home and compare policies online at their convenience from a website that’s easy to interact with. And HDFC Life, India’s second-largest private life insurer, is already showing that’s the way to go. In FY23, it spent approximately 40% more on improving technology for its insurance business over the previous year. And that was much above the tech budget growth of about 15-30% it saw in the earlier couple of years.

And beyond all this, it’s also about the product mix.

You see, as insurance penetration improves in India, people might be realising that the best way to protect one’s family in case of a demise is to take a pure protection product. One where the insurance company just takes a low premium from you and pays up in an adverse event. But LIC doesn’t offer many of these products. At least that’s not where they make most of their money. Instead, they sell policies that could be best described as part insurance, part investment products. That could be a problem as the younger cohorts get more financially savvy.

Also, a large portion of its sales comes from something called participating products — Where customers are entitled to some of LIC’s profits in addition to other policy benefits. In fact, an article in Rediff says that 94% of its new premiums came from these products in FY23. And you can bet that shareholders won’t be happy to dole out profits to policyholders in this manner. And that could affect how they treat the stock too.

So yeah, put all these together and you’ll probably understand by now why LIC’s business as well as its stock has been in a bit of a rut.

Until then…

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