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COVID-linked claims remain an overhang

* Provisioning buffers to be shored up further; business metrics steady

 The surge in COVID-19 infections and fatality rates has raised concerns on mortality claims the industry may witness in the coming months. Most insurers reported a higher claim experience in FY21 and have made provisions to absorb potential claims that may arise in the wake of a more devastating COVID 2.0. We note that against the total COVID-related deaths of ~163k reported in FY21, the fatality count has already increased to ~152k in FY22 YTD. The claim experience is thus likely to stay adverse over the next couple of quarters, all the more due to delays in the reporting of claims. The stringent actions announced by several state governments have helped lower the infection count and the pickup in vaccination rates may prevent another wave of this magnitude. Despite this, claims in 1HFY22 may easily surpass the total claims seen in FY21. 

* We maintain our positive stance on the Life Insurance sector and believe India’s protection growth story is likely to remain strong owing to significant underpenetration and favorable demographics. However, the COVID overhang is likely to cap sector performance in the near term. MAX and IPRULIFE remain our preferred picks in the sector.

Life insurers settle COVID claims of INR19.86b up to 25th Mar’21

* As per media articles, life insurers (in aggregate) have settled claims worth INR19.86b toward 25,500 COVID-related death claims. This corresponds to 15.7% of the total COVID-related fatalities in FY21. Among the key companies, we note that HDFCLIFE, IPRU, and SBILIFE settled 2.3k, 2.5k, and ~5k death claims, respectively, in FY21. Net of reinsurance, these companies have thus incurred cost of INR1.5b, INR2.6b, and INR3.2b, respectively.

Protection mix increases for most players; caution to prevail in near term

* We expect steady trends in the Protection business, aided by the fear psychosis induced by the COVID-19 pandemic. Most of the players have a strong focus on this profitable segment and have reported healthy growth in individual sum assured trends in the last couple of years. The share of Protection in the total APE has risen sharply across players, contributing to overall expansion in VNB margins. Among the listed insurers, HDFCLIFE has a higher share of the Protection business coming from Credit Life, while IPRU and MAXLIFE have a higher focus on the Retail Protection business. SBILIFE has a higher proportion of ROP business in Individual Protection in the range of 84–85%.

Insurers may need to shore up COVID provisions

* All of the three biggest life insurers have made provisions toward COVID claims. While HDFC Life / SBI Life has made INR1.65b/INR1.83b worth of provisions, IPRU has provided for INR3.3b worth of provisions. Given the sharp rise in fatality rates, the insurers would need to shore up their provisioning buffers, which would impact their profitability/EV. However, this does not, as such, pose any material risk to the balance sheet / solvency ratios, in our view.

Group Term products may see further price revisions

* Most insurers took price hikes in early FY21 after an adverse claim experience resulted in reinsurer hiking rates. Given that individual term products are of longer tenure (20–30 years), the adverse claim experience due to an event does not necessitate an immediate price change. However, Group Term products, which are annually renewable, may see price revisions on higher demand for such products in recent times. Long-term Savings products also are relatively more risk-tolerant as the lower sum assured and longer product duration enables insurers to absorb volatility.

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