Interview | Separating Insurance And Investment Will Work Only If You’re Disciplined: LIC MD R. Doraiswamy

Over the last 70 years we have built a legacy and, along with it, trust. With the opening up of the industry and the increasing number of players, there is competition. But increased competition is an incentive for us to accelerate our transformation and ensure that we remain relevant and competitive.

We are looking at transformation across the entire insurance life cycle. We are introducing products focused on protection, retirement planning, and the requirements of the emerging population.

There is significant technological transformation so that customer engagement—from onboarding to maturity, annuity payout or death claim—is increasingly digitised and made smoother. We are also looking at improving the benefits payable to customers and providing the required support at every stage. From the time a customer becomes a policyholder until the entire payout is completed, we are transforming the way we operate.

Then there is intermediation. We have a very strong individual distribution network through our agency force, but we are also expanding our distribution channels. We are strengthening our agency network through training, handholding and technology support so that our agents can address customer requirements much better. In that sense, competition has helped LIC transform itself.

It is relative. There are two types of insurance products. One is pure protection, where you can clearly identify the premium being paid as a cost. But when you are using a savings product combined with insurance, you have to separate the pure protection component and its cost. The balance is what goes towards building the maturity corpus.

If you simply take the gross premium and calculate the return, it would not be a fair assessment. You have to ask: if this savings plan did not exist, what would I have paid for a pure protection policy for the same term and the same sum assured? That premium would have been a cost and would not have come back to me.

Once you separate that cost, you can calculate the return on the remaining amount and understand what kind of return the product is actually generating.

All said and done, insurance has been one instrument that promoted thrift. It created the habit of disciplined savings.

That approach does not always work in practice. There is a tendency to start an SIP (mutual fund systematic investment plan) when the markets are doing well because people get attracted to the returns. But the moment the market falls, panic sets in. The SIP may be discontinued, or people may even encash their investments at the wrong time. That is the pitfall.

If you can achieve discipline, then separating insurance and investments works. But when you are investing towards a goal, you need to be consistent. If you deviate midway, you compromise the objective.

The most important factor for the success and survival of an insurance company is the trust it builds. We are not selling short-term products. Unlike general insurance, where a contract can be for a year or even shorter—the contract could theoretically be as short as a train journey—a life insurance contract has to be long term. Therefore, trust is a basic requirement.

If you look at LIC’s history, we have had very few complaints related to mis-selling. We have built a strong legacy and trust over a long period, and we would not want that to be affected in any way.

Our agents know that they have to face the same customer throughout the life cycle of the policy. The same customer could provide further opportunities for future business. Therefore, there is little incentive to break that trust.

The problem can arise when the interaction with the customer is not long term. If someone knows that they are going to meet the customer only at the time of sale and will not be there afterwards, there can be a possibility of such practices. The regulator (Insurance Regulatory and Development Authority of India) has been observing this closely and bringing in measures to curtail it. Since bancassurance plays a major role in insurance distribution, the issue has also attracted RBI’s attention. I hope this will be completely addressed going forward.

LIC has traditionally had a very strong individual agency organisation. We have around 1.45 million agents today. Historically, almost 98 per cent of the number of policies sold and around 95 per cent of the premium came through this channel. Over the last few years, however, LIC has expanded its distribution mix. We have increased our contribution from banks, corporate agents, brokers and other channels.

I do not expect much impact on LIC because we have been very compliant in terms of distribution costs and distribution standards. Even if some changes are introduced, I believe we will be able to adapt and become compliant.

There are two ways of looking at this. I could only target customers who can afford the premiums and continue selling policies to that segment. But LIC has a social mandate to cater to all segments of society and all parts of the country. So we have customers who are well off, but we also have customers who depend on their daily earnings to meet their liabilities.

When you have such a broad spectrum, policies sold to less-privileged sections can come under pressure when customers’ incomes are affected by economic cycles or other factors, including migration. A customer may not be able to pay the premium within the grace period, that is in the 61st month, but we usually allow customers to pay even after the grace period. If you look at our entire policy book in terms of policies in force versus policies sold, LIC will have one of the highest percentages.

The nudge in the form of tax incentives has gone to some extent. But forget about tax and look at insurance as a concept. There are expenses, dependants and liabilities, there’s an income to protect in case of death or disability. That income needs to be protected. The protection can come either as regular continued income or as a lump sum that can be converted into regular income.

It’s even more important today because families are becoming nuclear and everybody has to fend for themselves during difficult times. Earlier, people could depend on their siblings, children, parents or even the wider family network. Whether the same thing can happen today is questionable because the social structure has changed. We, therefore, need to take care of ourselves, both during our productive employment years and after our productive income-earning capacity ends. The need for insurance is more pronounced today.

The challenge is how do people realise it. We need to create awareness, increase touch points so that people learn about insurance, give them time to think about it, and then follow up.

We don’t see this as an either-or choice. We are fundamentally a customer-oriented public sector life insurance company. Our focus is on protecting customer benefits and providing them what they want. In that process, we also have to ensure profitability.

Now that we are a listed entity, we have to protect the interest of shareholders, other than the government. We have to ensure that our underlying performance meets the expectations of both customers and shareholders. We will continue to provide benefits to customers and, through that, improve our margins and the parameters on which shareholders evaluate the company.

When the government holding was 96.70 per cent after the initial public offering (IPO), the public float was very low. That itself was a factor. There was also a supply overhang because the government had a timeline for increasing public shareholding. The requirement to increase public shareholding to 10 per cent within five years of the IPO created that uncertainty. It is a good thing that the government has now raised public holding in one go by another 6.50 per cent (from 3.50 per cent earlier).

That supply-overhang fear is, therefore, no longer there. We now feel that the share should do much better. As the management, our job is to focus on improving the parameters. We have to remain fundamentally strong.

We have also been focusing on the product mix, by changing and improving it.

We are also looking at the channel mix. There was a perception that LIC was not adequately tapping the market through bancassurance. We are also focusing on VNB (value to new business, a profitability metric that measures the expected profit relative to the premiums of new policies sold) margins, embedded value improvement, and returns to policyholders. Dividend distribution has also been strong, increasing from Rs 1.50 per share to Rs 20 per share, along with the (recent) bonus issue.

Certainly. Initially, there was not enough confidence and liquidity in the market because of the low public float. The issue itself, with the base issue and the green-shoe component, gave institutions confidence to take a meaningful stake. I am particularly happy that domestic institutional investors have taken a significant share. This gives retail shareholders confidence. When investors who specialise in investments value the company and hold a significant stake, it signals that they see intrinsic value in the business.

I also hope the share performs well for two reasons. First, the underlying parameters have been growing at a good pace and are increasingly matching those of listed private-sector competitors. Second, the trust and confidence of institutional investors have been increasing.

There has to be a clear identification of roles. I would prefer insurance companies to play their role as insurance and annuity service providers, and pension fund managers to play their role in the pension ecosystem.

We were performing very well when we were a monopoly. Then the market opened up, and we are now completing 26 years of competition. At the end of 26 years, we are talking about an overall market share of around 60 per cent and close to 40 per cent in retail.

We will have to compete, and we will do so. We will do what is expected of us and, more importantly, try to exceed expectations and remain relevant as circumstances change. But I believe insurance companies should continue to be the annuity service providers. That will help maintain clarity in the market.