LIC vs private insurers: How LIC fares in premiums, expenses from its peers

Insurance
3 min read

While LIC premiums are higher, it also has a higher commission ratio as it mainly sells through an army of agents. Private players rely on bancassurance and online channels to keep costs low. LIC, which has nearly two-thirds of market share, fares well in agent productivity and in cost-to-premium ratio. The insurer has the highest commission-to-premium ratio of 5.5% against the median of 4.4% for the top five private players.

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Published On Feb 17, 2022 at 08:00 AM IST

Read by: 100 Industry Professionals

Read by 100 Industry Professionals

LIC vs private insurers: How LIC fares in premiums, expenses from its peers - ET BFSI (2)

The term plan premiums of private insurance players are about 70 per cent cheaper than Life Insurance Corporation's (LIC), which has a sovereign backing.

Claim settlement ratio helps LIC price its premiums much higher than private-sector insurers. However, the difference in premium is too large to be ignored since the private insurers also settle claims.

Also read: LIC shareholders will be able to question decisions after listing: Nilesh Sathe

LIC’s product mix is skewed towards traditional endowment plans, with participating products making up over 70 per cent of this portfolio, with annuity pension and Ulips accounting for 24.86 per cent and 3.84 per cent shares respectively. Guaranteed savings products constitute 0.26 per cent of its portfolio, while pure risk term insurance plans contribute just 0.41 per cent. Private sector players, however, have been increasingly focusing on growing their protection portfolio, as this is high-margin business.

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LIC vs private insurers: How LIC fares in premiums, expenses from its peers - ET BFSI (3)

Commission rate

LIC, which has nearly two-thirds of market share, fares well in agent productivity and in cost-to-premium ratio. The insurer has the highest commission-to-premium ratio of 5.5% against the median of 4.4% for the top five private players.

Also read: LIC has stake in 27 companies, and is a nominee in 59 entities

The commission ratio is the commission paid as a proportion of the new business premium collected by an insurance company during a particular year.

In the current financial year, LIC’s commission ratio has been at 11.5%, which is more than double that of the median commission ratio of 5.4% paid by the top five private insurance companies. LIC has to pay higher commissions to offer enough incentive to agents to sell its policies

The lowest commission ratio is for SBI Life (3.5%). The higher commission is because LIC primarily relies on its agency force to distribute policies, whereas many private companies have a large part of their distribution through banks.

In bancassurance, or bank-led distribution, a big chunk of the distribution costs is bunched with operating expenses. New business premium is the premium collected by selling new insurance policies sold during a year.

Also read: LIC was the mightiest earlier, will continue to be the same: HDFC Life CEO Padalkar

LIC fares relatively better here with an operating expense-to-premium ratio of 8.7% as compared to a median of 11.9%. However, SBI Life and ICICI Prudential have an even lower operating expenses ratio of 4.8% and 7.5% respectively.

Consequently, LIC ranks third in the total cost-to-premium ratio behind SBI Life and ICICI Prudential.

LIC vs private insurers: How LIC fares in premiums, expenses from its peers - ET BFSI (4)

Agent network

As of March 31, 2021, LIC had 13.5 lakh individuals in its agent network compared to 11 lakh individuals for the entire private life insurance industry. The number of individuals for LIC in India increased at a compound annual growth rate (CAGR) of 7% between March 2019 and March 2021 compared to the 4% average for private companies.

Further, LIC also had the highest agent productivity, both by premiums (Rs 4,13,000 in FY21) and the number of policies (15.3 in FY21). In FY21, LIC also recorded the highest new business premium per employee.

Also read: LIC's customer stickiness is lower than its private peers

The state-owned insurer has been growing slower than its private peers with five-year growth lower at 8.6% compared to 26% for SBI Life and 18.8% for HDFC Life and 15% for Max Life. The corporation also has a very low share of unit-linked insurance plans at 1.6%.

While having a predominantly non-linked product portfolio makes LIC’s premium income less susceptible to volatility in equity markets, on the investment side, insurers with higher nonlinked portfolios bear higher risks compared to insurers with higher linked portfolios. This increases the need for more capital but also improves the scope for profits.

After revaluation, the value of new business contribution to embedded value for private sector players is around 10% versus just 1% for LIC.

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