They are tough.
Such sectors – even if promising – are my blind spots. But there’s no reason you can’t make them simple.
Here’s an attempt to do so:
A. Life Insurance Sector
1. Time line
- 1956: The sector was nationalised. Only LIC.1HDFC Life, IPO Prospectus, P 168
- 2000: Opened up for private players.
- 2015: FDI limit was increased to 49%
|Basis||Class 1||Class 2|
- Linked: Returns linked to stock and debt markets
- Non-linked: Traditional, pure protection
- Participating: Returns linked to insurance company
3. Performance Measures
Who is selling more?
- APE: Some insurance policies have regular annual premiums. Others have a single lump-sum premium. To bring both to the same page, a blended measure is needed. And that’s annual premium equivalent (APE).2Article on Investopedia: Annual Premium Equivalent (APE)
It is calculated by adding 100% of 1st annual premium + 10% of single premium (i.e. a policy is assumed to last 10 years).
Whose sales is better?
- Persistence: How long do customers renew their policies. 13th month persistence measures renewal after 1 year. 61st month persistence measures renewal after 5 years. That’s important for ULIPs, because surrender penalties lift.
Who is more valuable?
- EV: Policies already sold till now, will bring a stream of premiums in the future. After matching costs, that will in turn, lead to a stream of profits in the future. When you discount those profits to the present, it is called embedded value (EV).3Article in Mint: 5 Metrics to Evaluate Life Insurance Business
Important: EV is about the policies sold till now. It does not take into account any future polices that will be sold.
- VNB: EV is about policies sold in all the past years. Value of new business (VNB) is the same concept, but for policies sold in the last year only.
Note: APE measures the flow of value. EV and VNB measure the stock of value.
Who is more profitable?
- VNB Margin: It is VNB/APE. It indicates product mix. Protection plans have the best margins, then ULIPs.
- Growth rate: Life insurance is growing much faster in the emerging economies than in the advanced economies.