Insurance Sector Update: Are the winds changing by Kotak Institutional Equities
Unconfirmed media sources (link) suggest that the Department of Financial Services (DFS) has indicated that there will be no restrictions imposed on the bancassurance business. In November 2024, media sources had indicated otherwise, leading to underperformance of the sector. The development, if accurate, reduces the overhang of likely changes and augurs well for the stocks. SBI Life, followed by HDFC Life, are key beneficiaries.
Media suggests assertive view from DFS
Media sources suggest that CEOs of life insurance companies met with the Department of Financial Services (DFS), Government of India, to discuss critical issues including mis-selling, persistency, etc. Apparently, the DFS has acknowledged that bancassurance could play a critical role in deepening insurance penetration. A major takeaway from the meeting was an indication from the DFS Secretary that there would be ‘no action’ on imposing restrictions on the bancassurance channel.
Concerns about bancassurance emerged in November 2024; hit insurance stocks
In November 2024, media sources had indicated that the regulators had expressed displeasure over mis-selling of insurance by banks (link) and expressed concerns about the concentration of business coming through banks. As per that media article, IRDA asked insurance companies to reduce the share of bancassurance in overall APE and also reduce the share of the parent bank within bancassurance (link). Further, as per that news article, IRDA’s view was that bancassurance should be less than 50% of the total business. The share of business from the parent bank needs to come down, but the news does not prescribe any ratio on maximum business from the parent bank. Key listed players had denied the rumor. Exhibit 1 shows that life insurance stocks underperformed in the past six months.
Bancassurance is a large contributor for listed players
Exhibit 3 shows that bancassurance is a large contributor for HDFC Life (65% of APE in FY2025), SBI Life (61% of APE in FY2025) and Axis Max Life (53% of APE in 9MFY25).
State Bank of India has gone slow on selling insurance policies of SBI Life in the past two years, with APE growth of 13% in FY2024 and 8% in FY2025. Acknowledgement from the government and DFS might likely encourage the bank to increase focus on insurance distribution, which will augur well for SBI Life. The insurance company has guided for 9-10% APE growth from the parent bank in FY2026E, with overall APE growth lifted by the agency channel.
Remain positive on life insurance space
We remain positive on life insurance stocks. Negative news flow on regulations has marred the performance of the sector; this news flow is a breather against this backdrop. HDFC Life followed by Max FS are our preferred picks. Any change in business momentum at the parent bank can change the prospects of SBI Life
Data does not suggest any major concerns on complaints
Interestingly, data suggests that customer complaints have not been rising sharply. In our report, ‘Who’s complaining?’, we highlight that there is a reduction in customer complaints made to insurance companies post-Covid. Trends in complaints received by insurance ombudsman bodies suggest a steady increase in complaints between FY2018 and FY2023, but a yoy decline across most players in FY2024. While there is some increase in para banking complaints filed by banks, but these complaints are ~1.3% of total complaints received by the banking ombudsman in FY2024. Mis-selling and total complaint ratios are the lowest for SBI Life, among larger players.
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