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Life is uncertain. This harsh reality struck us hard when India was battling a public health emergency during the second wave of Covid-19. Visuals of long queues of ambulances carrying gasping patients and wailing relatives of the deceased outside hospitals could take a long time to fade out from our memories. The increased mortality rate during the second wave has also started to reflect in the results of life insurance companies during the first quarter of this financial year. Insurers may be crying hoarse about the sudden rise in claims denting their bottom lines but it is that money that provides succour to a family hit by the death of an earning individual.

Q1FY22 data shows that private life insurers’ profits have taken a blow due to fatalities recorded during the second wave of Covid-19. LIC, the largest insurer, has not shared the first quarter results yet.

Increased claims

Here the picture is grim. The increased mortality rate during the second wave synchronises with the result of Q1FY22. For example, HDFC Life revealed that the company witnessed a steep rise in death claims of around 3-4 times of the peak claim volumes in the first wave. The insurer paid over 70,000 claims with gross and net claims amounting to Rs 1,598 crore and Rs 956 crore, respectively.

Similarly, ICICI Prudential Life reported Rs 500 crore of Covid-related death claims. Moreover, its claims and benefits paid more than doubled in Q1 of FY22 to Rs 5,668 crore over the year-ago period because of an increase in surrenders and death claims. LIC has not yet put out the first quarter result on its website.

The impact of Covid-19 has been much severe at the start of this financial year compared to the last year, as it faced low claims due to Covid-19. The Reserve Bank of India noted in its Financial Stability Report that the claims that the life insurance industry settled related to Covid-19 death in 2020-21 stood at a paltry 0.3% of the total premium collected during the year.

“During 2020-21, the life insurance industry received 22,205 claims worth Rs 1,644.56 crore where death was due to Covid-19 and related complications, which amounted to 0.3% of total premium income of the year. Of these, 21,854 death claims amounting to Rs 1,492.02 crore were settled and there was no significant impact on the financials of the life insurers,” the central bank said.

Compared to last year’s numbers, HDFC Life alone has registered 70,000 claims in just the first quarter. It goes to show how bigger the impact could be for the industry if the third wave is not tackled properly.

Higher provisions

As expected, the impact of the rising claims has been seen directly on the increased provisions among top private life insurers. HDFC Life has created an excess mortality reserve of Rs 700 crore for potential adverse mortality.

In the note to the exchanges, the company said: “Our continued approach would be to review the adequacy of this reserve at periodic intervals based on emerging experience. The strength of our balance sheet and back book surplus has enabled us to absorb the shock of heightened claims, whilst continuing to deliver growth.”

HDFC Life currently maintains a solvency position at 203% against the statutory minimum requirement of 150%.

Similarly, ICICI Prudential Life set apart provisions of Rs 498 crore for future Covid-19 claims, including incurred but not reported provisions. Kotak Mahindra Life Insurance Company also announced earlier that the company expects to incur a loss in the estimated range of Rs 225-275 crore due to high fatalities during the second wave.

“The second wave of the pandemic led to an unprecedented increase in fatalities in the country and consequently death claimed being reported to the company from May 2021.” Kotak Mahindra Life Insurance Company said in a regulatory filing.

Impact on margins

Insurance companies’ losses have increased on account of higher claims and increased provisions created in anticipation of the third wave. HDFC Life’s profit after tax dipped by 33% at Rs 302 crore compared to Q1 FY21. Similarly, ICICI Prudential Life reported a net loss of Rs 185.73 crore for the June quarter 2021-22. It had posted a net profit of Rs 287.59 crore in the year-ago period. In the previous quarter (January-March 2021), the insurer reported a profit of Rs 63.78 crore.

New business

With increased claims and higher provisioning, the first quarter is weak for life insurers, though there is enough opportunity with the increased awareness about insurance. A strong digital presence has contributed to the rise in demand along with new product launches to generate customers’ interest. Demand for products that provide guaranteed returns also continued to remain in demand.

Consider this: New business margins (NBM) for HDFC Life have seen an improvement on a sequential and YoY basis on the back of growth and a balanced product mix. The NBM for Q1 FY22 stands at 26.2%, higher than 24.3% delivered in Q1 last year and 26.1% in full-year FY21.  Value of new business stood at Rs 408 crore, a growth of 40% over last year.

The valuation of a life insurance business is not just based on the present value of the company, it also depends on the future value of its business. Value of new business (VNB) is the present value of the future profits related to new business written during the year.

In the case of ICICI Prudential Life, net premium income grew by 19% YoY, led by a 40% and 89% growth in the regular and single-premium business. Thus, the new business premium grew 71% YoY.

Outlook

Though the insurance sector was rattled by the second wave of Covid-19, brokerages are quite upbeat about the sector due to increased awareness and a strong digital presence.

“We estimate IPRU to deliver 36% CAGR in VNB over FY21-23E, led by robust premium growth, buoyed by new partnerships and product segments, thus enabling operating RoEV (Return on Embedded Value) of 17% over FY21-23E.”

The embedded value is equivalent to the book value in other sectors and calculates the present value of future profits from “existing policies”, assuming the company stops writing business today.

“HDFC Life remains focused on maintaining a balanced product mix across the business, with an emphasis on product innovation and superior customer service. However, in the near term, the Non-PAR/Annuity and Credit Life segments are likely to see healthy growth.”

One of the important things to watch out for is the premium rates, as higher claims in the case of a third wave can certainly mean higher premium rates for new policyholders.