Four metrics that LIC needs to focus on before divestment through an IPO
For an industry that believes life insurance policies to be push products, the Section 80C deduction benefit was an important nudge. But with the new tax system that aims to make 80C deductions redundant, the life insurance industry is in panic mode. Budget 2020 has proposed lower tax rates for those who offer their entire income to tax and are willing to let go of many deductions and exemptions. This means insurance agents will not be able to sell bundled and complicated life insurance plans as tax-savings tools. This, of course, is a huge setback. But there is another development that the life insurance sector is now carefully tracking, at least the listed insurance companies, and that is the listing of the state-owned insurance behemoth, Life Insurance Corp. of India (LIC). In Budget 2020, the government announced it wanted to partly disinvest its stake in LIC through an IPO; it aims to complete the process by the end of the next financial year.
In her budget speech, finance minister Nirmala Sitharaman said that listing disciplines a company and unlocks its value. While the government could benefit from the unlocking of LIC’s value, the policyholders stand to gain by the disciplining of the company that manages over ₹28 trillion of householders’ money. Four areas that should come into focus as the company heads to tap the markets are its product mix, persistency ratios, its expenses and its role as the ultimate bailout entity.
LIC does poorly on the first metric of product mix. While the private sector has slowly warmed up to selling unit-linked insurance plans (Ulips), LIC has almost all its money in the non-linked portfolio. Non-linked or traditional plans bundle investments with a thin wrap of insurance. Given their opaque nature and high exit penalties, they are more of wealth-destroying than wealth-creation vehicles. This brings the focus on the second metric of persistency. For a behemoth that’s been in the insurance business much longer than private insurers, it sure has a lot to learn in terms of retaining its customers. According to the public disclosure document of the company, its 13th month persistency ratio for FY19 was 66%. In other words, of the 100 policies sold, only 66 came back for renewal after a year. In comparison, persistency ratios of listed private insurance companies look much better at over 70%.
Source : Live Mint