Indian Life Insurance Industry under the lens of COVID-19

Life insurance is an agreement between the insuree (customer) and the insurer (insurance company). According to this contract, the insured person has to pay regular premiums to the insurance company. In return, the family of the insured person will receive a lump-sum amount in the event of the insured person's death. New types of life insurance also provide you with periodic returns and a maturity benefit amount if the insured person remains alive until the expiry of the policy.

The Indian Life Insurance industry is dominated by the publicly-owned Life Insurance Corporation (LIC). It has a market share of 69.25%. The rest of 30.75% of the market is shared between 24 private life insurers. In the private sector, SBI Life and HDFC Standard are the two biggest players with a market share of 7.68% and 6.56% respectively. Till 1993, private players were not allowed in the industry but reforms in other sector provoked the government to bring reforms in this industry as well.

COVID-19 has impacted almost all the industries, mostly negatively. What about the life insurance industry? Let’s have a look.

The Impact on Investment mentality

COVID-19 has changed the way customers behave. Life Insurance demands that people need to invest more in the initial years. They have to wait for several years to get their benefits. The modern type of insurance helps you in gaining returns from year one. But those returns are way less than the premium which has to be paid by the customer for a first few years.

All in all, life insurance helps you to decrease your risk of income in future but for that one has to pay now. Currently, people want to reduce their risk exposure but are not ready to pay now for that. If the insured person has to invest right now, and that too, without getting any benefits, why would he do that in the middle of the pandemic when he has unstable cash inflow?

Many people have faced wage cuts, job losses and business failures. This has substantially decreased their income, though their expenses are still similar to pre-COVID times. Many of them have to use their savings to run their households. So, when you have a reduction in the inflow of money with similar outflow, one would think twice before investing his/her money at a place where he/she has to wait for years to get benefits. This is a case when we say that people are looking to fulfil their short-term needs and are avoiding to make any long-term plans for which they have to incur the cost right now. 

Numbers confirming the fall

New business premiums decreased by 32.6% in April of this year. Only Rs 6,728 crore was collected in April 2020 when compared to Rs 9,928 crore in April 2019. It is reported that the sector has faced a 12% fall in first-year premiums. First-year premiums were amassed to be Rs 72,321.5 crore from April to July 2020. This was Rs 82,146.5 in the same period last year. The overall sum assured also faced a steep reduction of 9.2% between April and July this year.

The state-owned LIC witnessed its new business premium dipped to 2/3rd in April 2020 of what was in the previous year. Life Insurance Corporation recorded Rs. 3,582 crore of new business premiums in April. This number was Rs 5,639 crore one year ago.

Among private insurers, HDFC Life insurance and ICICI Prudential Life Insurance saw a big fall in their new business premiums. The former recorded a decline of 53% whereas the latter recorded a decline of 60%.

Headache for the insurers?

Unfortunately, COVID has taken a lot of lives. With no vaccine out in the market, more people will succumb to this disease. Many of them will be insured as well. Thus, whenever their family files for mortality claims, these life insurance companies are liable to pay them. As the claims have increased, insurance companies’ outflow has also increased. This has added more pressure on these companies financially.

Claim settlement ratio is one of the most important metrics to judge any insurance company. It refers to the percentage of claims the company has paid out relative to the claims which were filed inside one year. A life insurance seeker is always advised to look at this percentage before choosing the life insurance entity.

If the insurance companies do not pay the claims which have been filed recently due to COVID, this ratio will face a fall which will give a negative outlook to the potential customers. Thus, companies will lose more business next year.

Positive output in the long-term?

Not many Indian are aware of life insurance benefits. A very few numbers of people might be knowing that paying insurance premiums also helps you in making tax savings. The people who have awareness about life insurance, don’t want to invest now and wait for benefits which will be received only after a few years. All this leads to a very less number of people insured in our country. According to the data, India has a life insurance penetration of mere 3.69%.

With Covid-19 pandemic, the awareness and the need for insurance have risen sharply. People are realising that they could have been better off if they have invested their money. This global crisis will make them understand that it is very important to have a safety cover because one cannot predict what can happen in future. Thus, the industry can hope for a revival once the people starting having a stable cash position. The insurance company leaders have a dual fight in front of them. Firstly, to manage their operations in these disrupted times and secondly, making new policies which can attract people after the spread of virus decreases.

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