India’s private life insurance companies have delivered returns far below cost of capital, destroying investor wealth for nearly a decade now as they continued to focus on building scale instead of selling high-margin protection products, a study by global research firm McKinsey & Co. said.
“Unlike other markets, however, growth in India’s life insurance industry is correlated more closely to equity market performance than rising GDP. And profits remain elusive: for more than a decade, the private industry has delivered overall returns far below the cost of capital and even below the returns in other Asian markets,” the consulting firm said in a report dated 20 January.
According to McKinsey, a rebound in returns during 2011 and 2014 was mainly due to policy surrenders and lapses of unit-linked insurance policies (ULIPs) and a drop in cost of acquiring new business as incremental business fell.
“The industry’s negative returns are no surprise, since most Indian private life insurers have chased volume by building large sales forces with significant fixed cost infrastructure and who focus on selling low-margin ULIPs,” the report said.
Not only are the private life insurers failing on returns, the gap between the leaders and laggards is massive compared with other markets. The top three insurers grew their surplus by an average of more than 25% between 2002 and 2013. “McKinsey research into value-creation amongst the 15 largest insurers in the market reveals an 81 percentage point spread in book value growth between the top and bottom performers,” the report said.
