In this week’s Finshots Markets, we explain why people haven't been too impressed by HDFC Life’s recent performance despite the fact that life insurance has been the talk of the town this past year.


The Story

Insurance works because of risk pooling. It is one of the fundamental building blocks of the industry. A risk pool involves a group of people coming together (prompted by an insurer) to pool small amounts of money to cover those who might need money in the event of a catastrophe. Like Death for instance.

Unfortunately, for most people thinking about death and insurance can be extremely challenging. In fact, most people in India buy insurance products because they have a pushy uncle who happens to be an agent or they’re trying to save on taxes. So, if you’re a company trying to create and sell insurance products, your biggest challenge is to market them.

But then, insurance companies found another workaround. They changed the composition of the insurance product in a bid to make it more enticing. And the most infamous product within the lot is a ULIP (Unit Linked Insurance Product). Think of ULIPs as part insurance, part investment products. A small chunk of the premium is allocated towards providing you with an insurance cover (decent payout in case you do die). And the remaining funds are invested in stocks and bonds. Eventually, at the end of the payment cycle i.e. maturity (say 10 years), you will be paid the final investment corpus so long as you are alive at the time. Meaning, you don’t have to die to gain from your insurance policy making it very appealing to the average Joe.

Now most prudent financial planners will tell you ULIPs aren’t particularly useful. The cover is insufficient to really help your family in case catastrophe strikes and the investment bit won’t yield outsized returns considering that a sizeable part of your premium is deducted before they’re invested. But despite this sub-optimal allocation, customers always seem to think they’re getting a bargain. And the agents selling these products make sure of it.

But despite their popularity, ULIPs aren’t high-margin products. The real high-margin products? Standalone term insurance policies — where the payout only happens when you die. So HDFC Life would much rather have you buy these products as opposed to ULIPs. But as we already noted, this has never been an easy product to sell, until last year.

Now, most people think the pandemic would have been kind to the likes of HDFC Life. After all, this was the first time when a disease wreaked havoc on a truly national scale. Almost everybody had a close encounter with Covid-19 and common sense would have you think that this would prod people to insure their lives.

However, the first few months of FY21 didn’t exactly pan out as most people expected. Agents couldn’t visit their customers. Walk-ins vanished overnight and brokers had trouble conducting business online. Even though people began sensing the utility in buying a life insurance product, they still couldn’t make the purchase due to external conditions.

However, as the country began opening up, HDFC Life did witness an uptick in sales. Fear and general paranoia affected purchase behavior and what was once a push product became a pull product. HDFC Life’s revenue meanwhile shot up 140% compared to FY20. And while this number might seem incredible, do bear in mind that about 45% of the revenue was attributable to investment income (because of market conditions last year). Despite that, the company still witnessed a robust increase in premium income and everything was positive on the top line front.

However, the bottom line story was a bit different. Due to an uptick in claims, net profit only grew by about 5%. HDFC Life had to spend a lot of money settling these claims. And it gets worse. During the first quarter of FY22 i.e. the months between April and June 2021, HDFC Life paid out 70,000 claims totaling 1600 crores. That’s almost 3 times the sum they paid in the same quarter last year. They’ve also set aside an additional 700 crores for future claims that may accrue in subsequent quarters. All in all, this has had a visible impact on the company’s bottom line, which perhaps explains the current predicament.

We’ve finally got to a point where people are willing to buy life insurance policies. Not simply as an investment tool to save taxes, but to protect their loved ones in their absence. It’s an enviable spot to be in, however, it has come at a cost. The second wave and a future third wave could dent the bottom line even further. Unlike health insurance policies, where insurers have a lot of wiggle room to deny claims, life insurance policies are more watertight. If it’s a death claim, it's very hard to contest the payout. Insurers have little choice but to settle your claim. And that means they have to be very particular about the kind of people they insure.

Which is kind of what we are seeing right now. Insurers are now revising their risk underwriting guidelines. They are capping the maximum cover for certain groups of people based on their occupation and medical check-ups are now being made mandatory for most customers. So while there is a massive rush for pure protection high margin products right now, insurers also have to be extra cautious about the kind of risk they’re taking on right now. And if HDFC Life somehow manages to successfully navigate this tightrope, then perhaps these short-term results won’t matter as much for the company’s long-term ambitions.

After all, they're still one of the leading life insurers in this country.

Until then…

Share this story on WhatsApp or Twitter.

Finshots Daily

Why Reliance acquired Just Dial?

Last Friday, Reliance Retail announced that it was acquiring a controlling stake in Just Dial for about 5700 crores. And while that may not be a gargantuan sum by any account (considering the kind of money we’ve seen being thrown around for internet startups), you still have to ask here — “Why is Reliance interested in Just Dial?”

Well, if you want a concise answer to that question don’t forget to read our article from Tuesday

Share this story on WhatsApp or Twitter.