Come months ago, this column argued that an insurance policy is not an investment. From a personal finance standpoint, that is correct. Your insurance policies are for protection against risks. They are not an investment. but, if you look at the stock market performance of insurance companies, you may rue not buying shares of these firms.
A lot is riding on the sale of insurance policies to us. Insurance companies like HDFC Life, ICICI PruLife and SBI Life have outperformed other financial service segments in 2019 in the stock market. Together, the three companies commanded a market share of just under 43 per cent in 2018-19 of insurance policies sold. The robust growth explains the underlying demand for insurance products.
What works for insurance cos?
Insurance companies have been generating a lot of new business. It is captured by the value of the new business or VBN created. The growth in the new business is a simple measure to track the performance of insurance companies. It is expected to grow 20-30 per cent over the next couple of years, according to an analysis by Morgan Stanley.
So far, life insurance companies primarily sell savings-linked products. “Our back-of-the-envelope calculations show that Indian life insurance business is 10-20 per cent insurance; the balance is investment/savings management,” said a note by Edelweiss, a Mumbai-based securities firm on the sector. It means a lot of unit-linked and moneyback policies sold by life insurance companies are competing with other products like mutual funds and government-sponsored saving schemes. The recent surge in share prices of life insurance companies is due to the hope that these companies would sell plain vanilla life insurance policies than savings one, going forward.
By regulation or by the demand in the market, insurance companies are looking to give priority to life insurance or term policies. You may continue paying a premium each year against your life. Your family receives the benefit or the insurance money if something happens to you. Edelweiss expects about 30 per cent growth in pure protection or life insurance policies over the next 10 years or so.
What you must do
Insurance is one of the three significant pillars of personal finance; the other two being your bank account and investments. You must not confuse buying an insurance policy with investments. You must get yourself a life insurance policy that is more than sufficient to cover your liabilities. A lot of life insurance policies also come with riders for critical care health insurance. Your financial advisor can help you choose the right policy for life protection.
The listing on stock exchanges of insurance, mutual fund and general insurance companies opens up a new opportunity for investors seeking to benefit from the growth in the financial services sector. If insurance companies are likely to benefit from more Indians buying life insurance, they are bound to grow in size steadily. If you are already an investor in the stock market, you may want to add these businesses to your portfolio.
The penetration of life insurance in India is low. It is only 10-20 per cent. Most insurance products are savings or investment products. Unit-Linked Insurance Policies (ULIP) excite insurance companies more than pure life insurance products. However, there is a good chance that it could change over the next few years. As insurance companies sell simple insurance policies to more people in India, there is good potential for market leaders in the segment to grow their revenue and profits. As investors seeking long-term growth in investments, you need to identify a couple of companies that are capturing that potential growth.
If you are new to investing, buying stocks directly makes no sense. You may want to purchase mutual funds that focus on the financial services sector or multi-asset classes. That way, you could get the benefit of the market upside in these companies.
Insurance companies are deploying a lot of their existing profits into marketing and creating awareness about insurance products. They see the benefit of the low penetration of life insurance policies as an opportunity. So should you.