It sounds funny, but don’t chase either topline or bottomline in life insurance business
In any business, you either chase top-line or bottom-line. But in life insurance business, you shouldn’t chase both of them.
Why shouldn’t you chase top-line?
In life insurance, the definition of top-line itself can be misleading. For example, fund business. Fund management for gratuity or other retirement benefits can be huge in size. But what life insurer gets is only a small margin for fund administration. Even that is waived many times due to competition. Then why do you need to do that business? Many insurers still do it only for top-line.
Similarly, in the mad rush for top-line, certain regulatory norms are violated. Some unsustainable guarantees are given. The cost of compliance or cost of guarantees may prove to be much higher than the value added by this business. Many of these costs are not very obvious at the outset. Hence, senior management tend to take aggressive stand as the only target given to them was top-line, making them blind to other risks.
What is the issue in chasing bottom-line?
The profit in life insurance business comes from existing book of business. The business was brought in few years back. The profit margins built in the business would get released gradually. But bottom-line focus would only focus on speeding up this release of profits.
For example, insurers get some surrender profit if a policy is surrendered. You can get more surrender profit by encouraging surrenders. Your profit will increase this year but your future profits from those policies surrendered now will be lost. Any discretionary benefits to be payable to policyholders, like surrender value in a traditional policy, can be reduced to generate more profits. Similarly, discretionary charges can be increased in a unit linked policy, to get more profits. All these may look good in short run but will impact the trust of the customer and hence profitability of the company in the long run.
If not top-line or bottom-line, What to chase then?
There is no problem in chasing both of them with long term in mind. What you need to chase is the value addition to the company. Life Insurers should make profits from small margins in the long run. Adding quality business to the books is the key. Maintaining operational efficiency is critical. Giving best value to the customer is the end objective. Profits will emerge from the quality business over the life of the policy. Any greedy attempt to maximize them in the short run using some shortcuts will only destroy the company over time.
I totally agree with you. However if a company choose to do fund business in ULIPS then profits can be quantified. Take for example if a company is managing a corpus of INR 10000 Crores under ULIP, and the FMC is say 0.25% overall then you are getting a clear profit of INR 25 Crores YoY. Every LI business has profits provided the company looks with a long term view. Few companies in India are highly myopic on the contrary.
Agree with you Sriram completely and that’s the whole point. If you build good AUM, you can manage decent profits with thin margins. But the company should have this strategy in place and work towards it. But some companies are working only for topline and putting long term prospects of this business in trouble.
For any business, profitability comes from 1. Enhancing the investment returns 2. Reducing the expenses.
This is true for insurance industry as well. Smart investment manager will do the first job within the regulatory boundaries on investments. And smart operational manager will bring the most efficient and less costly operational and processes into the system.
We need to ask how many companies have achieved the expense efficiency after say 10 years of their operations say. The answer of this question is sitting in the rule 17 d of Insurance Rules 1939 ( Expenses of management of insurance). Whether the insurer is complying with this rule?
Also, whether insurer is still setting aside reserves for maintainance expense overrun even after 10 years? If the answer to both the above points is ‘yes’ then it is a worrying situation for the insurer and management sholud become actionable and immediately tight the nuts and bolts.
So in summary, insurer should not chase top line or bottom line directly but should chase customers and offer the solution ( insurance products) as per their needs. Once customer is with you, all the. financial lines (top, middle and bottom) of the insurer will be drawn automatically.
My above views may not be cent percent valid but I would like to hear your views as well.