Chennai, March 1 (IANS) After growing at a break-neck speed in the past eight years, India’s private life insurers are likely to face a tough time in the coming two years thanks to the weak stock markets and the global economic slowdown, say experts.

“Insurers will have to face reduced fee income, increased expenditure, capital scarcity and the possibility of policy persistency falling. The breakeven point of many private life insurers has been extended by a few more years,” an industry official, who did not want to be identified, told IANS.

“The two years (2009 and 2010) will separate men from the boys,” he added, referring to the bumpy road ahead.

The October 2008-January 2009 business figures show that the new challenges have slowed down the growth of the life insurance industry.

In January 2009, the 20-member private insurer club earned Rs.26.42 billion (Rs.2,642 crore) from 1.3 million policies, down from Rs.27.24 billion (Rs.2,742 crore) earned from 1.4 million policies the previous month.

In November 2008, their new business premium stood at Rs.23.06 billion (Rs.2,306 crore) from 1.14 million policies, compared with Rs.23.04 billion from 1.09 million policies in October.

According to industry officials, the Insurance Regulatory and Development Authority’s (IRDA) stipulation of a minimum five-year lock-in period for unit-linked insurance policies (Ulips) is what is preventing large-scale redemptions.

Reliance Life chief executive P. Nandagopal said the slowdown has affected only its large ticket short-term policies.

“Regular long-term business is not affected. We are maintaining a growth rate of over 95 percent,” Nandagopal told IANS.

According to him, the growth potential for health and pension products is largely untapped and Reliance Life is now targeting these two products as well as rural and micro insurance.

In Bajaj Allianz Life chief executive Kamesh Goyal’s opinion, though Ulip sales are down, it is “still a good source for long-term wealth creation with protection element”.

“Moreover, within Ulips there are debt, liquid and balanced funds that a customer can choose depending on his risk appetite,” he added.

Yet, industry officials are not optimistic about the slide in Ulip sales helping traditional products to stage a great comeback.

“Complying with IRDA’s investment norms, a life insurer won’t earn more than 7-8 percent on its investments. After removing expenses, cost of capital and cost of insurance, the customer would get about 3.5-4.5 percent as bonus, which will not be attractive,” said one official.

Given this position, life insurers are now launching traditional single premium products and Ulips, offering investment guarantees on them.

But the biggest challenge for insurers is controlling the spiralling selling and management costs.

Until early 2008, the private players, riding high on expectations, infused funds to expand the distribution network without getting the expense equation right at the branch and distribution point levels.

“Migrating most of the manual operations to electronic platform will keep the costs down. Nearly 75 percent of our policies are electronically underwritten and half of our agency commission payments are credited to agents’ bank accounts,” said Reliance Life’s Nandagopal.

“With life expectancy going up, we raised the limits for accepting non-medical proposals, thereby saving on costs,” he added.

Similarly, Reliance Life gets its non-core work done from business process outsourcing (BPO) units located in semi-urban and rural areas.

Setting up branches in cheaper locations is another way to cut costs.

“All branches need not be located on high streets. There are cheaper locations even in prime areas,” V. Srinivasan, chief financial officer of Bharti Axa Life Insurance, told IANS.

Officials said the tough economic conditions will also put pressure on the existing managements of life insurers.

“It will be interesting to see how local promoters and foreign promoters respond to this,” said one official.

(Venkatachari Jagannathan can be contacted at v.jagannathan@ians.in)