Could you walk us through the big picture for Bajaj Finserv and for the insurance industry? What kind of growth do you see in the life insurance sector now?
This quarter has been quite favourable for our general insurance business. We have grown about 23% on gross premium. We have seen reasonable growth in terms of life insurance. Our gross premium has grown by 18%. Overall, this quarter has been muted, especially for life insurance, because most of the life insurance business happens in the last second half, particularly in the last quarter because that is the tax season. Bajaj Finance growth has been strong. We see considerable demand for consumer loans; we have grown strongly in SMEs, in commercial lending and particularly in our rural lending portfolio.
I want to start by talking about general insurance profits. That has been strongly aided by premium growth and improvement in combined ratios. What led to strong premium growth and improved combined ratio and are those numbers sustainable?
Premium growth would depend on the external factors, particularly sales of motor cars. We are seeing good traction on our health business both on the retail side, on the corporate side and even on the government health schemes. There is slight muted growth in corporate lines like property, engineering and other businesses which companies write.
But generally, on the retail side, we are seeing strong growth. Bajaj Allianz has always been more retail focussed. We are very strong in motor and health insurance and that has aided us. Whether that will be sustainable over the next three quarters or not, one has to wait and see. This is also a business of selection and that is why our combined ratio is one of the best in the industry, probably the best.
Last year, we recorded the highest profits among all private insurers, this year again the combined ratio has improved. Our expectation is that we should be probably the most profitable general insurer this year as well. Our company works with a lot of discipline in terms of underwriting. There are some businesses that you may have to forgo on the top line side in order to maintain the profitability and we have a very strong and stable management team which is really focussed on executing the business with discipline.
This year of course, we have seen lower claim ratios in the first quarter.
What could be the market share growth that you are aiming for general insurance in particular? Which are the segments that a year from now could really aid that bump-up?
We see more growth coming over the next two to three years. I cannot really comment on what will happen now. On the liabilities side of corporates, things like cyber-crime are picking up, directors and officers are picking up. But they are still a small proportion of the market.
On the personal lines, we see strong growth continuing in health insurance. Asset insurances like car and property insurance would follow the asset creation in the economy and usually there is a lag. Once capital formation and car sales pick up after a lag, you would see that they translate into growth for the general insurance industry. Even when GFP growth was quite low, general insurance growth rate was about 10%. In good times, they grow at about 18-20% because the market is seriously underpenetrated, particularly on areas like health, on liability, on various segments of the general insurance business.
For a long time, we debated whether one should follow an agency-based model or focus on the direct model which is the online model and the model of acquiring direct customers. Both have their merits and both have their advantages and disadvantages. Which way are you likely to focus because that will decide the way your cost and margins would be mapped in three to five years?
Globally, agency is always a very strong component of distribution of any insurance company — be it life or general. There are products which require explanation. In case of life insurance, the agent is actually a sort of investment consultant as well to the extent that they need to explain the investment linked products.
In the case of general insurance, if people are buying health insurance, if they are ensuring anything other than simple things like motor cars, they need advice. So, agency will definitely continue to be the mainstay of the business. Direct channels are emerging in India. The type of products that people sell direct are mostly standardised, commoditised type of products like term life and car insurance.
As of now, the traction is not very significant. But as we go forward, direct as proportion should grow. In the long run, there will be three channels which will dominate distribution of all insurance companies. One would be agency, second is distribution through corporate agents like banks — what is called bank assurance and the third is emerging direct sales.
Direct sales can either be online or offline through the sales force. In terms of cost, it is a weighted average cost and how the mix pans out. Ultimately, the customer will decide which channel they want to come to and both our companies are multi-channel companies. We offer all the channels of convenience for customers to come in and choose which channel they want to come to.
Let us understand the dynamics of the life insurance sector now. One is term, second is ULIP. Where do you see growth coming ?Also, are you likely to grow because of the sector growth or are you likely to grow because of market share gain?
Beyond term and ULIP, there is a bigger segment of the market. It is what is called traditional savings products which consists of participating and non-participating. They are mostly guaranteed products. United linked are open ended products which also give direct equity exposure so to some extent they are comparable with mutual funds and the third is term insurance which is either done through the group mode or retail direct individual sales to customers.
As we go forward, retail individual sales is a very small portion of the market. Both the online and offline put together will not be more than 5% of the market. The group term life is also a profitable segment and that is growing and they are largely done through banks. They are sold to protect the banks interest when they lend to customers, if something happens to the customer, the loan gets repaid. Those are big segments of the market.
We do a lot of group insurance also through microfinance and regional rural banks where we are the largest player in the private sector for a number of years now. Between ULIP and traditional, it is function of the markets. We have seen in the past that when equity markets underperform or have a negative performance which is fairly long, then you tend to see that people want guarantees. If the risk environment deteriorates, we find that people tend to go for traditional products.
As a company, we are looking at a sustainable product mix. This quarter our ULIP exposure is reduced from 78% to 61%. We have increased our traditional product mix. The balancing would depend largely on the external factor and again on the customers segment you are targeting traditional products typically have a lower ticket size so the premium growth may not seem large but they are from a margin and profit perspective they can be quite profitable.
If you are in tier 3, tier 4 towns where we are fairly strong. There you tend to have a greater mix of traditional business. ULIP is like ice-cream, there is flavour of the month for a few years. When equity markets are doing well, everybody wants an ULIP; market comes down, people want guarantees.
Our life insurance company did not perform well between 2012 and 2015 because of product regulations and various other factors but last three years we have been growing very strongly on the individual side. We would be depending on: a) market growth, b) return of financial savings into life insurance and c), our own increase in market share.