Profit pressures force life insurers to downsize

Life insurance companies have started to cut down their workforce and branch network following tougher norms that came into force in September and exerted pressure on their bottomlines.

More than half a dozen life insurance companies -- that are operating for nearly a decade now -- have cut their branch presence significantly in the last six months in a bid to cut cost and increase efficiency.

ICICI Prudential Life, largest private sector life insurance player in the country, has closed down more than 500 branches over the last one year.

Currently, it has 1,404 branches as against 1,923 on March 31, 2010.

In the same period, Max New York Life reduced the number of branches by 200, whereas others like HDFC Life, Birla Sun Life, Aviva Life, Tata AIG Life and Bharti AXA Life have reduced 35-75 branches. SBI Life, the second largest private life insurance player, is an exception.

It has increased its network from 494 (as on March 31, 2011) to 629 branches. Rough estimates suggest nearly 300,000 of the 2.4 million life insurance agents have shifted out of the industry after the new regulations.

Following the downsize, most of the insurers reported improved profits in 2010-11, despite new business income across the industry going down in the second half of the last financial year.

"Life insurance players, particularly those operational for more than seven years, are now concentrating on bottomline rather than expansion," said an insurance analyst.

"This move was further aided by the new regulations of the Insurance Regulatory and Development Authority (Irda), which called for cost efficiency and improvement of sale practices, among others," added the analyst.

For instance, while ICICI Prudential Life reported a net profit of Rs 808 crore (Rs 8.08 billion) for 2010-11 as against Rs 258 crore (Rs 2.58 billion) in the corresponding period previous year, Max New York Life reported a 12-fold jump in its net profit to Rs 283 crore (Rs 2.83 billion)

in the same period.

According to analysts, promoters who have invested capital for nearly a decade, are now demanding positive returns.

During 2010-11, the private insurers posted a marginal 2.55 per cent rise in premium collection to Rs 39,381.30 crore (Rs 393.81 billion), compared to Rs 38,399.33 crore (Rs 383.99 billion) in the corresponding period last year.

During the same period, the industry recorded a growth of 15 per cent in new policies.

"In an effort to enhance productivity while rationalising on costs, the number of branch offices was right-sized.

"However, this right-sizing was done in a manner that no geography was exited and, more importantly, no customer was denied uninterrupted access to financial solutions provided by the company," said an insurance official.

"We have used real estate more smartly by clubbing multiple branches in a city," said an official from Aviva Life.

Last September, Irda had capped the commissions and other charges on unit-linked products. Similarly, the regulator also increased the lock-in period for unit-linked products from the existing three years to five years.

This had resulted in a sharp drop in sales of the unit-linked plans, which constituted more than 90 per cent of the sales of the life insurance companies.

"With the new regulations coming in, there has been a need to be more efficient and profitable.

This calls for mergers of multiple branches in the same city," added an official from Tata AIG Life.