Are you insured?

Are you insured? Our study of insurers in China, Singapore, Saudi Arabia and South Korea during epidemics such as SARS (CY2002-03) and MERS (CY2013-14 and CY2015) suggests that demand for term and health insurance picks up during epidemics even as savings policies may remain weak. Even as we expect tepid capital markets to bring down ULIP volumes in FY2021E, the Covid-19 pandemic will likely boost growth in term and health insurance in a relatively under-insured market.

Expect strong traction in health and protection business. Our analysis of previous epidemics suggests a sharp rise in demand for term and health insurance policies during these periods. It is difficult to quantify the rise in premium volumes due to Covid-19 as the intensity and spread of this pandemic in India remains unclear. Life and health insurance companies will likely be the key beneficiaries of any rise in volumes. A few global precedents:

- SARS (Severe Acute Respiratory Syndrome), a viral respiratory disease, spread in China and Singapore during November 2002 to July 2003. During CY2002 and CY2003, China Life Insurance Company (CLIC) witnessed ~40% CAGR in short-term health insurance and 34% CAGR in long-term health, whole and term life insurance. This is significantly higher than 3% CAGR and 10% CAGR over FY2004-11 observed in these products (Exhibits 2 and 3).

- In Singapore, the overall individual business (excluding annuity) declined 30% and 23% yoy in CY2002 and CY2003 compared to 74%-134% yoy growth over the past three years led by drop in non-linked business (down 18% to 36% yoy) (Exhibits 5 and 6).

- MERS (Middle East Respiratory Syndrome) spread rapidly in Saudi Arabia during 2QCY13 to 3QCY14. Bupa Arabia, one of the largest health insurers, reported 44% and 81% yoy growth in premiums during CY2013 and CY2014. Overall industry health insurance premiums increased 22% yoy in CY2014 compared to 14% CAGR over CY2010-13 and 2% CAGR during CY2015-19. Overall life insurance premiums increased 7% and 15% yoy in CY2014 and CY2015 respectively as compared to 2%-7% yoy decline over CY2010-13 and -3% to 8% yoy rise during CY2016-18 (Exhibits 9 and 10).

- When MERS spread to South Korea in CY2015, the overall gross term insurance premium reported 9% yoy increase in CY2015 compared to 4% CAGR over FY2010-14 and 3% CAGR during FY2016-11MCY20 (Exhibit 11).

Expect pressure on ULIPs. Lower ULIPs volumes in FY2021E pose risk of lower overall APE growth and more importantly, negative operating variance. This remains the key risk to FY2021E VNB growth, in our view. In China, Ping An reported 76% and 90% yoy decline in non-traditional first-year premium volumes in CY2002 and CY2003 respectively; this compares with 17% decline in equity market index during FY2001-04. In Singapore, persistency ratios declined significantly during SARS outbreak and remained weak over the next 2 to 3 years (Exhibit 7). A slowdown in the economy and muted capital markets will likely affect growth in savings policies. In our view, volumes in ULIPs will take a severe knock in FY2021E. Weak capital markets, coupled with changes in regulations, led to -12% CAGR in private sector APE during FY2010-14 as compared to 30% CAGR during FY2006-08. Apart from slowdown in ULIPs, increase in surrenders is another risk for the sector. While ULIP volumes moderated post FY2018, decline in persistency has been negligible. However, the decline in persistency post FY2010 was much higher, likely due to higher misspelling.

Will higher demand for term policies offset rise in reinsurance rates? Market sources suggest that most reinsurance companies are raising rates over the next couple of weeks. While the quantum of hike is not known, the current view is that insurance companies may not fully pass on the hike to its policyholders. However, with rise in appetite for term policies due to Covid-19, insurance companies may be well placed to pass on the rise and maintain their VNB margins in this segment.

Source: kotak Institutional Equities Research