The idea sounds good. But it has one big problem: Very few PSU banks are as lucky as State Bank of India, or ICICI Bank, for that matter, when it comes to monetising investments in life insurance ventures, because most banks have remained marginal players in the insurance industry with negligible market share.
There are nine bank-promoted companies in the life insurance sector, of which six are from the public-sector stable — SBI Life, PNB Metlife, Canara HSBC OBC, IndiaFirst Life Insurance, Star Union Dai-ichi and IDBI Federal Life Insurance. But none of them, except SBI Life, which is valued at `46,000 crore, can claim to be an influential player in the industry because their individual market share is less than 1%.
The state-run banks have underperformed in the sector despite the fact that insurance companies world over are willing to give an arm and a leg to associate themselves with Indian banks because of that latter’s customer base and distribution strength. One key reason PSU banks lagged behind is that they neglected their joint ventures that could have been a jewel in their crown. Besides, they did not train their staff, ignored the value of fee income from the distribution of financial products, and allowed the top management to be pre-occupied principally with the bad loan problem.
“Valuations of public sector bank-promoted insurance companies have not grown because their distribution networks have not delivered value,” said SB Mathur former chairman Life Insurance Corporation. “PSBs have not learnt the art of selling third-party products.”
For some banks, bad timing was also a factor behind the failure of their insurance ventures. In other words, they were late entrants. They jumped onto the bandwagon when the Unit-Linked Insurance Plans (ULIPs), which propelled the industry growth, was at its fag end. Once the regulator cracked the whip in 2010, the industry, which was growing at 35% between 2000 and 2008, led by ULIPs, crashed to 6-8% in 2009 and 2013.
“Most PSBs got licences in the second phase when the life insurance industry was in a high-growth phase riding on the ULIP wave,” said G N Bajpai former chairman LIC and the Securities and Exchange Board of India. “PSBs’ financial strength should have been assessed before allowing them to enter the highly capital-intensive life insurance business beyond their core.”
Public sector bank-led insurers, in general, have been laggards. IndiaFirst Life, a joint venture between Bank of Baroda and Andhra Bank, is ranked 11, Star Union Dai-Ichi — a Bank of India-Union Bank of India venture — is at 18, Canara HSBC OBC is ranked 14 and IDBI Federal is ranked 12. SBI Life, on the other hand, is at No. 2 and PNB Metlife, one that is faring better than the rest, is at 6.
In contrast, privatesector insurers, such as ICICI Prudential and HDFC Life, are ranked No. 1 and No. 3, respectively. In fact, Max Life, which is being sold to HDFC Life, is ranked fourth, thanks to Axis Bank’s distribution network, which fetches it 55% of its total premium.
DISTANCE FROM PARENTS
While private sector insurers work closely with banks that controlled them, there in a chasm between state-run banks and their insurance arms, except SBI Life, which gets 60% of its business from the sale by the parent bank.
The success of private banks in the insurance industry can also be attributed to the staff ’s eagerness in bank branches to peddle insurance policies or mutual funds when a customer is done with the work for which he stepped in.
But the same kind of drive is absent in the employees of PSU banks. It could be because the banks did not invest enough in training their staff.
“Most of the private banks have been able to leverage their network for sales, through integrated targets and performance management with lesser issues than those faced by PSU banks with a legacy culture,” says R M Vishakha, MD and CEO, IndiaFirst Life Insurance.
The entire value in a bank-promoted insurance company comes from distribution. ICICI commands around 90 times multiple to value of new business.
ICICI Prudential had a valuation of Rs 46,000 crore at the time of listing in September 2016. Its value of new business was Rs 412 crore in 2015-16. Compared to this, state-bank run insurers are commanding a valuation of about 30-40 times the value of new business.
“Valuation is based on multiple factors of new businesses, renewals, product mix, average ticket size, cost efficiency and capital utilisation,” says Vishakha of IndiaFirst. “The customer profile of a private sector bank is different to that of a public sector bank. Many of the PSUs will have more than 30% of their customer base as farmers and Jan Dhan account holders.”
While some banks may be looking to sell their assets, for them the opportunity to realise their strength would be by building their insurance business in the next few years rather than selling at this point where valuations may be poor.
THE ROAD AHEAD
There is no doubt the opportunity in the insurance sector is huge. For example, in India, insurance penetration, measured as premium underwritten to GDP, was only at 2.72 % in 2015. This is significantly lower than its Asian peers, such as Thailand, Malaysia and Japan, which have insurance penetration of more than 4%.
Bank channels are the most sought after by insurers for securing business at a low cost.
Bancassurance has emerged as the primary distribution channel, with 53% share among private insurers. For banks, it generates fee-based income enhancing their earnings unlike lending that exposes them to default.
Apart from that, banks’ top executives have to invest more time and effort in training their staff, because sensitising them is part and parcel of their business, which could help them ring in more profits, and, above all, take charge of the venture to drive efficiencies.
“When the bank-promoted model will become bank lead, and not insurance lead, the penetration will be high,” said Rajesh Relan former MD and CEO of PNB Metlife.
In short, all is not lost yet for state-run banks’ insurance ventures. They just need to build their business and get more bang for the buck.