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Over a period of time, fresh money will come in to spur investment: Vibha Padalkar

HDFC Life’s CEO on new business growth, margin expansion, 90% 13-month persistency & more

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Last Updated: Jan 24, 2020, 02.15 PM IST
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Vibha Padalkar, HDFC Life-1200
We cancel a lot of policies upfront itself rather than declining a claim later based on risk monitoring, says Vibha Padalkar, MD & CEO, HDFC Life. Excerpts from an interview with ETNOW.

The VNB (value for new business) growth was up 45% year on year for the quarter gone by. What aided this growth?
It was a combination of factors; we bettered our products mix versus the same period last year. We sold more protection, more long-term investment products under the banner of Sanchay plus and also focussed on the annuity segment. This coupled with overall control on costs led to over 200 bps expansion in margins.

Margins remain strong at 26.6% but there is a decline compared to the first half of this year. What led to this moderation?
We had mentioned in the first quarter itself, that the margins at 29.8% were really an outlier. It was due to the very high margin of about 65% plus of our newly launched Sanchay plus product. At that point in time, I also mentioned that as a philosophy, HDFC Life believes in a balanced product mix and by the end of Q4, we will bring it down from over 65% to 35%. By the end of Q3, we have managed to bring it down to 35%. This is really a normalised margin even at these levels of growth of 45%. 26.6% is very good in terms of margin expansion.

Gross Written Premium (GWP) grew by 15% while profit could grow by just 2% year on year in Q3. What would you attribute this performance on the profit front to?
On a year to date basis, in nine months, overall Indian GAAP profits have grown by almost 8%. However, that masks the fact that our back book of all the policies that we have sold in the past, are nicely delivering profits for us. Our back book has generated profits and the growth has been 27%. However, the new business train is a reason that we have written a lot more of policies this year and growth APE has been robust at 31%. The strain that has caused has pulled down the Indian GAAP profits. However, when you read that in connection with the value of new business and the growth of 45%, the profits will unwind over a period of time as policyholders pay their premiums. Indian GAAP does not allow us to straight line the expenses. You hit the P&L as and when you incur it and a large chunk of these expenses are incurred now but the profits will unravel over the life of the contract.

Shares of ULIP have fallen about 11% versus 22% in the nine months FY19. What is the growth that you are seeing in this segment? Do you expect to continue to shrink your exposure here?
In the third quarter, on a standalone basis, unit linked is about a third of our business, but on a year to date basis it is lower. We drive product mix at an underlying channel level and not at a company level and by that I mean, the bancassurance channel typically sells more unit linked than an agency channel because of a couple of things. One is the underlying cost of acquisition. One channel might be more expensive than the other channel as well as rights selling and product suitability to the underlying customers. That is how we run the business and these numbers are there in our investor presentation.

This particular year agency channel in the first nine months has grown about 66%. Our online channel has grown by about 125%. These channels do not sell a lot of unit linked and on an aggregate company level, optically it looks like we have reduced our unit linked but we are really driving it at an underlying channel level.

Persistency ratio for the nine month improved on a yearly basis. What led to this kind of bump up and was this improvement witnessed across all segments or in specific pockets?
Yes, to your second question. It is witnessed across all segments and persistency has been really a very core of our KRA because if the policy-holder is not convinced and paying his or her renewal premiums, then really there is a fitment issue or an understanding issue and right selling might not have happened so there is a focus.

And several measures have helped us get there; one is the contactability of the customer. A lot of focus is given on whether we have the right details at the time of sale because if we are able to contact the customer, then our persistency is very high but if we are just not able to contact him or her, then really it is up to that person and we are not able to give the nudge to that customer.

The second aspect is that we do 100% pre login verification to ensure fitment.

Third is that we have a fair amount of risk parameters as to how we treat the elderly customers, what is the right kind of a product for a particular customer in a socioeconomic class or in a non metro or a non-salaried customer and so on. Our risk team which is separate from the sales team is monitoring this almost on a concurrent audit basis. We do cancel a lot of policies upfront itself rather than declining a claim later based on this risk monitoring and unless we are convinced that this is a right sale.

So, all of this has come together as our persistency rate is good. But the 13-month persistency number of 90% also includes the single premium. If we were to exclude the single premium, it would be a bit lower.

If we look at the operating return on EV there has been a decline. What levels do you see on the ROEVs and could they sustain at and what really is the outlook going forward?
Yes, there is a slight decline but it has more or less been in the range of about 18-19-19.5%. While our value of new business has grown, our VNB margin has also grown. The unwind rate is dependent on what is the prevailing interest rate and the risk free yield curve and that is really a macro factor and not in our handsIt has been caused by a lower amount of an unwind of the embedded value and that is what is causing the lower EVOP percentage.

There are reports that term insurance prices are set to rise. When can we expect the hike and also the impact of this on growth in the near term?
The reinsurers have notified a lot of life insurance companies to say that they intend to increase the reinsurance rate and that is really what is causing a conversation about would term prices go up. I do see this happening. It is a question of when and not if and whether companies pass on all of this to the customer or retain some . We will have to see that.

One has to put this into context because in India, rates are at all time low despite the quality of life or longevity being a lot lesser than some of the advanced countries. Yet term prices are at a rock bottom.

It is not inconceivable that some correction takes place. HDFC Life has been in the forefront of selling, especially the online term and we are finding that experience of mortality what we have seen in metros is quite different to what we are seeing in hinterland.

The pricing, at some point in time, has to take into account some of the way the experience is panning out.

What are your expectations from the Budget? The government may hike FDI limit from 49 to 74%. What would this mean for the sector and your company in particular?
Any kind of relaxation and free market is always beneficial to any industry. A lot of other industries and sectors have it already and hence just taking a leaf out of the books of say telecom, there is no reason why insurance also should not progress to that. Some of the naysayers would say that this would not result in fresh funds coming in and would just be promoters selling out etc. But you know one has to start somewhere and I am a big believer that over a period of time fresh money will come in to spur investment because penetration levels are very low. I do not know what horizon, but it is inevitable that fresh money comes in.

As far as my wishes on other aspects are concerned, I believe that it is the right time for the government to carve out for pension something similar to what they have done for NPS and to also give it to the insurance sector. That could be a win-win as long-term capital would focus in this area. Worldwide, people do not just buy a long term protection for longevity. It is usually on the back of some sweetener in terms of tax benefits. It will be great if the government looks at that aspect.

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