Near term profitability of life insurers under pressure

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A higher number of people are realising the importance of having life protection policies amid the Covid-19 pandemic. However, the pandemic has created a two-way impact for life insurers. On one side, demand for protection policies is on a rise. But, their short-term profitability is impacted by the number of claims going up along with the provisioning requirements.

Rising number of claims

Most insurers have reported a higher number of claims in FY21. And, they are not expecting any respite even in FY22. The fatality count has gone up to 1.50 lakh in the first three months of the current financial year as against 1.63 lakh for the entire financial year of FY21.

There is also a possibility of a third Covid-19 wave in the country, which is likely to add up to the number of claims. Even in the absence of a third wave, life insurers are staring at a possibility of a healthy number of delayed claims that are likely to emerge going ahead.

As per the reports, the life insurance industry has cumulatively settled 25,500 Covid-related death claims worth Rs 1,986 crore in FY21. It is 15.7% of the total Covid-related fatalities during the year. Among the listed private insurers, HDFC Life, ICICI PRU, and SBI Life settled 2,300, 2,500, and ~5,000 death claims, respectively, in FY21 and spent Rs 150 crore, Rs 260 crore, and Rs 320 crore, respectively, towards claim settlement.

Elevated provisioning

Three of the biggest private life insurers have increased their provisions. HDFC Life, SBI Life and ICICI PRU have made provisions worth Rs 165 crore, Rs 183 crore and Rs 330 crore, respectively.

Insurers are likely to strengthen their provisioning buffers to prepare for the impact of the third Covid-19 wave. It will restrict their profitability over the next couple of quarters. However, it is unlikely to put the balance sheet and solvency ratios of the listed life insurance companies at any risk.

Protection business gains momentum

Rising claims and provisioning requirements have definitely impacted the near-term profitability of life insurers. However, the business momentum has turned positive for them due to the increased awareness about protection.

Protection share in total APE has risen sharply for the majority of players. Increasing demand for protection policies, being the most profitable product, is highly positive for life insurers. It has helped life insurance companies to raise their VNB margins.

(The author of this article is the CIO, Teji Mandi Investment Advisor. Views expressed are personal.)