Exactly a decade ago, the yield on investments that Life Insurance Corporation of India (LIC) fetched for its policyholders was 8.10 percent. As of September 2023, it is 9.06 percent. During the same period, the insurance whale has lost market share hand over fist to private sector peers.
For a life insurer, there shouldn’t be a connection between the investment yield and market share or even profitability. But for LIC, there is.
Yield on investments is the return that the life insurance gives to its policyholders, specifically participatory policies that include traditional savings products and market-linked policies. For all the argument, insurance is still sold as an investment and not as a necessary hedge against a risk.
For LIC, its portfolio of policies was mostly made up of participatory products, unlike its private sector peers. Its chairmen have reiterated that their goal is to safeguard this yield on investments for policyholders. It is the main incentive for buying an LIC life insurance policy, though it shouldn’t be.
It has taken nearly a decade for the yield to increase by 96 percentage points and the market share to nosedive more than 10 percentage points. At any given point in time, LIC policy returns do not even match that of bank fixed deposits. This strike against its policies has been one of the reasons that the insurer is losing market share. What’s more, Indians have become aware of the purpose of insurance and willing for non-participatory simple term plans that offer only cover against life. Of course, private sector peers are nimbler and have managed to capture the generational shift in attitudes towards insurance faster than LIC has. That and the technological savviness of private sector life insurers has been a bane for LIC.
LIC now must have a two-pronged approach to protect and even increase its profitability. One is to increase the share of non-participatory products which it is doing actively. The share of non-participatory policies in its portfolio has risen to 11 percent in September from nearly nil a decade ago. Non-par policies do away with the need to generate a higher yield as the policyholder is clear that the product is only a life cover and not for investment.
Until non-par reaches a significant level, LIC will have to keep at its second task, one of becoming more active in its investment management. At roughly Rs 41 lakh crore worth of investments, LIC dwarfs the rest of the industry in its investible might. But historically, LIC has been a passive investor, perhaps more passive than any other insurer.
To be sure, investments are dictated by the sector regulator, and it requires LIC to invest nearly half of its surplus into government and quasi-sovereign securities. What is left is then, at the discretion of LIC’s investment committee, deployed in shares and debentures of private entities. Since risk-free government securities are low-yielding, LIC must power its private investments into generating more yield.
LIC’s investment strategy has mostly been inferred by the market and never officially stated by any of its chairmen. It is understood that the insurer has adopted a contrarian investment strategy and it has the luxury of absorbing big losses given its sheer size of investments. This explains why LIC was unscathed by the recent turmoil in shares of the Adani Group. In the episode of the IL&FS collapse too, LIC didn’t suffer any bruises.
The biggest grouse against LIC is being the government’s cookie jar. The government has regularly sought LIC’s investible surplus in bailing out several public sector entities’ share sale. The returns on such investments for LIC are unclear.
It is time for the life insurer to take some risks for yield here. It should also unlock value from some of its smarter investments. The company’s regulatory disclosures show that the insurer made close to Rs 3.2 lakh crore worth of investments in the first six months of FY24. Of this, nearly 60 percent was made in equities and entirely categorized as long-term investments.
If LIC wants to increase its profitability, it must try hard to shake off the sovereign’s duress on investments and behave a little more like its private sector peers. Until its portfolio is more of policyholders seeking only life cover, the insurance whale would need to keep its customers happy through a high yield.
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