Can LIC’s 70 Year Epic Insure Its Public Future?

In what was the biggest stock market listing in India, LIC IPO-d last fortnight at 6 lakh crore or almost $90Bn, rocketing to India’s #5. 

Prudential Tendencies

The story of insurance dates back to the history of mankind itself.

One of the first documented versions of insurance was noted in the Code of Hammurabi, around 1750 BC. The document stated that a merchant receiving a loan could pay the lender an extra amount of money. This would be in exchange for a guarantee that the loan would be cancelled if the shipment was stolen or damaged due to a catastrophe. 

This begs the question, why have humans historically been enthralled by the concept of insurance?

The answer lies in the ‘Prospect theory’, coined by behavioural scientists Amos Tversky and Daniel Kahneman. The theory states that losses cause a greater emotional impact on an individual than does an equivalent amount of gain.

Humans are loss averse by nature. Insurance helps protect the downside by transferring risk to the masses.

It was the year 1818 when insurance finally ended up capturing Indians’ imagination. The British set up the Oriental Life Insurance Company in Calcutta to provide insurance to the European diaspora in India. 

Like most of our colonizers’ contributions to our nation, the “gift” came with a catch – Indians were exempt from the policies. 

After some uproar by eminent people like Babu Muttylal Seal, the foreign insurance companies agreed to cover Indians as well.

However, Indian lives were still being treated as if they were worthless, and with the heavy premiums started being levied, it was extremely difficult for Indians to purchase Insurance.

All this changed in 1870 when the first Indian owned life insurance company, ‘Bombay Mutual Life Assurance Society’ was set up. They provided insurance to Indians at nominal rates.

The Swadeshi movement of 1905-1907 gave rise to a plethora of Indian Insurance companies. These companies successfully carried the message of social security under a veil of patriotism to various strata of Indian society.

With the mass birthing of insurance companies, it was only a matter of time before the legislation would be brought in.

In 1912, the Life Insurance Companies Act was passed. The act made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary.

The nature of the act made it such that Indian Insurance companies would be put at a disadvantage over the foreign ones.

The act was later amended in 1934 to make it more inclusive. This would mark the beginning of a golden era for Indian insurance companies.

Auditing The Status Quo

The bull run had begun for Indian insurance companies.

By 1938, India had 178 Insurance companies with the value of total Insurance premiums amounting close to 300Cr.

To keep the growing Industry in check, the ‘Insurance act’ was passed in 1938, giving the state strict control over both Life Insurance and Non-Life Insurance entities in India.

As India gained Independence in 1947, the voices of nationalizing the industry started to echo across the country.

These voices would be answered almost 9 years later when the Government of India issued an Ordinance to nationalize and consolidate 154 Indian insurers, 16 non-Indian insurers, and 75 provident societies. 

This would be gigantic as an outcome.

Nationalization would be executed as a two-fold strategy; First, the management of these companies would be taken over by means of an Ordinance. Second, the ownership would be transferred as well by the means of a comprehensive bill.

On June 19, 1956, the Life Insurance Corporation Act was passed, leading to the birth of the Life Insurance Corporation (LIC) on September 1 of the same year. The Indian government would infuse an initial capital of INR 5 Cr to start operations.

There were several reasons why India decided to take on the mammoth task of nationalizing and consolidating such a large Industry. 

Post-independence India was not in a condition to provide social security schemes like the US, the UK, and other developed nations for the 36 Cr of its population that fell below the poverty line.

To add to this, India was grappling with high mortality rates, and had close to no women in the workforce, implying that a sole breadwinner who was responsible for multiple dependents was a single point of failure in the path of a family’s economic progress.

Basic financial security was the need of the hour and making life insurance accessible to the masses was identified as the probable best solution to this.

While the private players catered well to the urban markets, the rural pockets that needed them the most were being left out.

LIC was created to solve this.

Unlike other business enterprises, LIC was built not just with the intent to build a nationalized for-profit insurance company but with a fiduciary responsibility to fulfil basic necessities of the Indian people; Roti, Kapda Aur Makaan. (food, clothes and shelter)

The stage was set for LIC to embark on a multi-decade stronghold over the Indian insurance industry.

A National Nominee

LIC was the result of the consolidation of 245 existing insurance companies. 

There was now almost 400 Cr worth of Assets under Management(AUM), 50 lakh worth of policies in force and Insurance covers worth almost 1000 Cr.

The units together comprised 27,000 employees. 

In true ‘acqui-hire’ fashion, these employees were all hired and given the exact same positions, benefits and responsibilities as before; making LIC one of the largest employers of its time.

Defining organizational and functional structure at such a large scale, was an extremely complex problem to solve. 

However, LIC would solve it beautifully. LIC started with 5 zonal offices, 33 divisional offices, and 212 branch offices.  

They realized that since life insurance contracts are long term and during the lifetime of holding insurance, customers would require a variety of services, they decentralized their services to place a branch office at every district headquarter.

The decentralization of services was a stroke of genius, as each branch became its own self-sufficient accounting unit with all the service-related functions integrated.

With the organizational structure set, another major problem that LIC was faced with was defining the ‘need’ itself for insurance, in the minds of prospective Indian customers.

Taking life insurance involves ultra long term thinking, as the benefits of the policy are never seen during the policyholder’s lifetime. To make matters even more complicated, life insurance was a sensitive topic for Indians. Talking about it meant discussing one’s personal finances and family matters.

LIC solved this with a robust ground salesforce strategy, the most effective way to go about reaching the masses in the pre-digital era.

These LIC soldiers would travel to the most remote corners of the country in buses, cars, trains, and bullock carts and propagate LIC’s vision to Indian consumers, coming up with innovative solutions to unique problems that would be thrown at them.

If setting up an office was difficult, they’d use Indian post offices; if medical check-up wasn’t an option, they’d tweak policies to bypass it; if people weren’t convinced with security cover, they’d club it with fixed return policies.

The decentralized org structure, relentless salesforce combined with nominal rates for policies enabled LIC to grow its business from ~200Cr in 1957 to 1000 Cr by 1970, 5x in a new country.

With LIC commanding an AUM of ~400 Cr, the government mandated that it invest a percentage of it into public sector projects. 

LIC recurrently contributed 3-5% of the budgets of the 5-year plans which were responsible for the creation of numerous steel and electricity plants, IITs and IIMs, and promoting rapid industrialisation across various sectors like housing, water, power, transport etc.

In 1965, when the Kashmir conflict escalated into a full-scale war between India and Pakistan, the Indian stock market plummeted. LIC pumped close to Rs 5 Cr into the stock market to provide some stability and keep up the morale of the stock market.

By the 1970s, LIC was growing beyond its footprint of being an insurance company to a full-blown ‘Nation Builder’.

A Competitor Free Grace Period

In the 1980s, India’s economy began to slow down because of multiple factors. 

With multiple wars in the 1970s, unemployment soared and GDP growth took a massive hit. Less than 1% of India’s households had a total income of Rs. 100,000. Buying insurance was the last priority in their financial journey.

Radio commercials and print media ads were the only potent medium available for LIC to broaden its reach in the 1980s. It was yet to fine-tune the agent-led business sales channel through which the business could expand multi-folds.

The premium growth figures were reflective of this. Between 1970 and 1980, the CAGR of premium was just under 7% as compared to a GDP growth rate of 3%. 

Indeed, LIC’s growth was better than India’s GDP growth rate, but for a monopoly player in an underpenetrated sector, the premium growth figure fell short of expectations. 

LIC figured out two significant problems in the business of insurance. 

First, it needed to solve for efficient distribution, and second, families needed convincing that insurance was a necessity for the earning member. The leadership decided to strengthen their fleet of field agents to solve these problems rather than just focusing on promotions.

LIC trained and nurtured its agents in every way feasible. The importance of field agents was communicated within the organization by highlighting the role they played in bringing in the very revenue that would pay out all employee’s salaries.

LIC also clarified how the agency can be a lucrative career path as a profession via success stories, which ensured people wanted to be a part of this phenomenon. For example, many non-graduates, who were now working as agents, made a good amount of money and were able to purchase cars during the 1990s.

Simultaneously, LIC worked on broadcasting its message to the masses in a way that would stick. The iconic tagline “Zindagi Ke Saath Bhi, Zindagi Ke Baad Bhi,” was a masterstroke conceived to communicate their core ideology via emotional messaging.

The stage was set for faster growth. Between 1980 and the 2000s, the premium growth rate was 22%. The company was serving 350 million policies with a total AUM of over Rs. 800,000 Cr (US$100 billion) by the turn of the 21st century.

What LIC had cleverly done to grow so fast was to sell an insurance product as an investment product. People were told that the LIC policy would “mature” at the end of life, resulting in a financial benefit. 

For people who were unclear about the benefits of an insurance product, the investment nature was an incredible hook.

But as India turned a Millenium and was beginning to explode, LIC would be seeing a new storm.

A Comprehensive Cover

After 2000, the Union government and IRDAI decided to end LIC’s monopoly by opening the Insurance sector for private players. 

LIC was not caught off guard. In fact, it was well aware that this was going to come.

LIC focused on three things to counter the threat posed by new entrants – expanding its product portfolio, increasing the user base, and providing better services to customers.

Offering a more comprehensive bouquet of policies had been LIC’s most apparent strategy. 

Being in the business for a while left them better positioned to introduce products at a fast pace. Each year in the early 2000s, LIC launched anywhere between 7 to 15 new products.

Most of these products aimed to provide life cover from ‘cradle-to-grave,’ touching the entire spectrum—women, children, unorganized labour, the rural poor, and the rural landless, right up to high net worth individuals (HNIs).

Next, the focus was on expanding the user base. LIC already had a vast distribution network of agents. They had to leverage that.

LIC added about 5 lakh agents between 2000 and 2006; during the same period, one of the other established private players, Max New York Life Insurance Co. Ltd, managed to build up a team of about 28,000 agents.

Awe-inspiring scale mattered for LIC.

LIC expanded its social and geographical coverage because it now had agents in areas where no private player did. Understanding this, LIC began to look at the unorganized sector and the poor as a potential market. 

Wasting no time, LIC introduced products aimed at unorganized labour (Jeevan Madhur) and the landless poor (Aadmi Jeevan Bima Yojna). The insurer started using creative channels like micro-finance institutions to sell products in these new segments.

With the faster growth, LIC continued to decentralize decision-making in order to speed up the process. 

By 2005, LIC had 2,048 branches across India, a nice binary number.

They segregated the entire organization into a four-tiered structure – corporate office, zonal office, branches, and agencies. This structure allowed officers to make operational decisions at the branch or zonal levels, which increased overall efficiency.

LIC also invested heavily in computerizing its back-end operations, allowing the support teams to understand the customers and offer them better service. One such service was to notify agents about the premium due date or premium missed date. The claim settlement process also became seamless, vastly improving customer experience.

By 2007, LIC’s market share stood at 72% of all new policies sold during the financial year. LIC had settled 99.8%of death claims, and the private sector companies had settled 96.8% of such claims. This strengthened the trust in LIC and its products.

As the market opened up and expanded, LIC didn’t just survive, it thrived with the competition. 

Survival Benefits

The world was hit by a massive financial crisis in 2008 that shook most financial institutions.

Companies worldwide were working to strengthen their financial position and implementing more robust risk management processes.

LIC was not an exception. 

After ten years of competition from private players, LIC still had over 75% market share in terms of policies. In terms of the new premium business, it still had more than 70% share.

LIC’s total premium as a percentage of GDP stood at 5.1% in 2010, compared to a figure of 1.8% in 2012.

However, the insurance penetration in India was still one of the lowest globally. India stood at around 2.5% vs. the global average of  3.5% and the developed markets’ average of 10%. India still had a lot of work to do.

Insurance penetration and density are two metrics, among others, often used to assess the level of development of the insurance sector in a country. 

While insurance penetration is measured as the percentage of insurance premium to GDP, insurance density is calculated as the ratio of premium to population (per capita premium).

But LIC had some regulatory challenges to take care of first. In 2013, RBI had put more stringent norms for systemically important banks, which affected LIC.

Going by LIC’s reported investment and loan portfolio, the insurer had a more significant loan book than some of India’s banks, given Life Insurance firms were required to channel at least 85% of their life funds and 75% of their unit-linked funds into approved investments.

LIC had an investment in more than 25 banks in India, in line with its nation-builder responsibility. 

By the end of 2015, LIC had invested more than Rs. 10 Lakh Cr in the markets. LIC’s infrastructure and social sector investment totalled Rs. 150,000 Cr. 

LIC’s AUM was about Rs. 170 Lakh Cr. More than 1 million agents were working for LIC, and the company employed close to 100,000 people.

In 2016, with a profit of around Rs 40,000 Cr, LIC was the most profitable entity in the country, second only to the Reserve Bank of India. The net income of Reliance Industries, the most profitable private sector company, was not even 60% of that of LIC.

With that kind of number, it was evident that LIC was “too big to fail”. 

During the later part of the decade, the importance of LIC was duly noted by the insurance regulator IRDAI and was announced as D-SII (Domestic – Systemically Important Insurer).

LIC had become integral to the growth and stability of the Indian economy. The insurance industry, almost birthed entirely by LIC was beginning to take shape too. 

Who Claims The Market?

The life insurance industry recorded a premium income of Rs 6.29 lakh Cr during 2020-21. 

This was against Rs 5.73 lakh Cr in the previous financial year, registering a growth of 9.74%. Renewal premiums accounted for 55.67% of the total premium received by the life insurers during the year while new premiums accounted for the remainder. 

The growth in renewal premium was 11.6% up from 7% in 2019-20. New business premium registered a growth of 7.50% in comparison to a growth of 20.59% during the previous year.

India has maintained its 10th rank in the world in the life insurance segment. India’s share in the global life insurance market was 2.9% in 2020, according to the latest annual report of IRDAI.

Insurance penetration in India increased from 3.8% in 2019-20 to 4.2% in 2020-21, registering a growth of 11.7%. In comparison insurance penetration in developed countries like Japan, the U.K. and the U.S. stands at 9%.

India’s insurance density remained the same during 2019-20 and 2020-21 at the level of $78. The level of insurance density has increased consistently from $11.5 in 2001-02 to $64.4 in 2010-11.

During 2020-21, the life insurance industry reported a profit after tax of Rs 8,661 Cr as against Rs 7,728 Cr in 2019-20. Out of the 24 life insurers in operation, 18 companies reported profits in the last financial year.

As of the end of the year, LIC had a 64.1% market share in the life insurance segment with the remainder being accounted for by the private sector insurers. 

What was worrying for LIC is that this is on a downward trend, while the industry kept growing overall.

Outside life insurance, general insurance which included all other insurances kept growing. The industry underwrote a total direct premium of Rs 1.99 lakh Cr in 2020-21 as against Rs 1.89 lakh Cr in the previous year, registering a growth rate of 5.2%.

The Motor business continued to be the largest general insurance segment with a share of 34.1% from 36.5% in 2019-20. The premium collection in the health segment continued to surge ahead at ₹63,753 Cr in 2020-21 from ₹56,865 Cr in 2019-20, registering a growth of 12.1%. The market share of the health segment has increased to 32.1% from 30.1% the previous year. The premium collection in the fire segment increased by 27.9% and in Marine segments decreased by 1.3% in 2020-21.

Public sector insurers accounted for 38.8% market share in the general insurance segment. ICICI Lombard continued to be the largest private-sector general insurance company, holding the same market share of 7.1% in the current year as well as the previous year. Bajaj Allianz, the second-largest private sector general insurance company, which underwrote a total premium of ₹12,570 Cr, reported a decrease in market share from 6.8% in 2019-20 to 6.3% during the year under review. 

Out of 27 private insurers (including stand-alone health insurers) operating in India, 20 insurers reported an increase in premium underwritten in the year 2020-21 as compared to the previous year.

McMarkets

In the non-life insurance business, India is ranked 14th in the world and the country’s share in the global non-life insurance market was 0.77% in 2020.

A nascent market had now begun to take shape. LIC despite it smaller share continued to be the OG.

An Earned Premium

No matter which way one looks at it, LIC is the 100-pound gorilla in the insurance world. 

Even if one were to combine the life and general insurance premiums which would total up to 8.27 lakh Cr for 2021. LIC accounted for close to 49% of premiums collected during the year. 

In fact, LIC is the 10th largest insurance company in the world based on total assets.

LIC is the largest asset manager in India as of December 31, 2021, with an AUM of ₹40.1 lakh Cr. On a standalone basis, it has 3.2 times the combined AUM of private sector life insurers in the country, and also approximately 15.6 times more than the AUM of the second-largest player in the Indian life insurance industry in terms of AUM. 

Not just that, LIC’s AUM is more than the entire Indian mutual fund industry’s AUM and 17% of India’s estimated GDP for Fiscal 2022.

Over 13.3 Lakh agents form LIC’s major strength and which is 55% of the total insurance agent pool in the country. These agents source over 96% of LIC’s new business premium. 

Almost 60% of the agents have been with LIC for more than 5 years. LIC’s agents are also the most productive selling 15 policies a year on average with SBIs being the next best with 4 policies a year.

On May 17th, India’s biggest-ever IPO was completed with the listing of LIC’s shares. The shares, which had been priced at the upper end of Rs. 902-949 price band, listed at a discount of over 8% at INR 872.

The IPO was subscribed 2.95 times. Policyholders subscribed for 6.12 times the allotted shares while the employee’s segment was subscribed 4.40 times, the qualified institutional buyers quota was subscribed 2.83 times, the non-institutional investors was subscribed 2.91 times and the retail segment was subscribed 1.99 times. 

The company offered a discount of Rs 60 per share for its policyholders and Rs 45 apiece for retail investors and LIC employees. The Individual investors participated enthusiastically in the IPO. 

73 lakh applications were received, a record, and possibly it is the largest in the world ever while 50 lakh demat accounts were opened since then.

The valuation multiple of LIC is a mixed bag. As a multiple of embedded value, it was at ~1.1x, less than half of SBI/ICICI Life Insurance in India. From a price to earning, or P/E ratio, it traded at 200x, which is double that of competitors. From a global comparables perspective, all its multiples were on the higher end. 

The government offloaded 22.13 Cr shares selling a 3.5% stake in the company, generating Rs. 20,557 Cr in return. This was a third of the government’s intended target due to market volatility which also pushed back plans for the IPO which was due to list earlier.

But the road for the 70-year monolith is yet to be played out.

The Road Ahead

As large and as successful as LIC may have been, investors will be more interested in what lies ahead. 

This is where one could start finding some gaps. Growth in new business premiums is lacklustre and they continue to cede market share to private life insurers.

Undoubtedly COVID would have had an impact on the ability of LIC’s agents to spend time in the field selling policies. But even if one did account for this anomaly, growth isn’t like it used to be.

Another issue that has now begun to be highlighted is LIC’s complaints, where it received almost 50 for every 10,000 policies processed. This was an industry high.

The fact that LIC offers products that double up both as investment and protection products their margins aren’t particularly lucrative from a margin perspective but are easier to sell. 

As investment opportunities for users continue to grow and financial literacy increases it will be interesting to see if LIC’s dual policies continue to attract as much interest from policy buyers.

While there is no doubt that LIC trumps competition on distribution today, it will need to do more to stay ahead of the curve. 

Digital sales, while still small, increasing rapidly as insurtech companies continue investing in and scaling this channel. Digital channels are now contributing $1.4B of industry premiums. The share of digital is up to 1.7% of individual life premiums in FY20 (from 0.6% in FY18) and ~4% of nonlife. 

Will Digit Simplify Insurance to Pull in India?

The rise has been led by evolving customer preferences, insurers investing in direct digital channels, the rise of web aggregator platforms, online brokers and digitally native insurers. Its contribution is >6% for the policies issued by private players and already has 12- 15% penetration in the term life and auto segments. 

While LIC’s products continue to be unavailable on web aggregator platforms, HDFC Life (N) now has 11% of business sourced digitally and 99% of new application lodging is now digital with 87% renewal premiums collected electronically. ICICI Life (U-pf) has 5% of business through digital channels and collects 79% of renewals electronically.

Product innovation is another area LIC will need to think about. Bite-sized/sachet segment, insurance products continue to gain traction. An example that best illustrates the contrast is how private life insurers are bundling small-ticket protection products with mobile recharges.

Every time the government has chosen to invite private-sector competition in a lucrative domain, the incumbents in the public sector falter soon after.

Air India and Indian Airlines made record profits each year until the government opened the civil aviation market to private players. BSNL thrived as a monopoly until the introduction of Airtel.

But despite the liberalization of the insurance sector post-2000, LIC’s performance has been nothing short of resilient. It is true that they’ve lost market share and growth isn’t like it used to be, but the company is still putting up a fight.

Even with private-sector insurers working on awareness and expanding the market, LIC has remained a tacit beneficiary. The company is still synonymous with insurance in India. 

This is what makes LIC a rare breed of company. For years, the company has toiled to establish insurance. 

Brand LIC was recognized as the third strongest and 10th most valuable global insurance brand in 2021, which is probably its most significant moat. 

We believe India is on the cusp of an unheralded decade. We had a brilliant run from 2000 to 2010, but we are now much bigger. Growth from here will result in much larger increases in output. 

As India moves up Maslow’s hierarchy of needs, safety and security become more important. It will only benefit the overall insurance industry, especially trusted brands like LIC. Its becoming public is a good thing as it brings more scrutiny. This would also likely result in better management.

The flywheel that LIC has built with its distribution and size is going to hold it in good stead. Despite all the challenges, market tailwinds, trust, and its incredible flywheel puts in a good position.

LIC is a giant that has been building an epic story, and going public will be another milestone in insuring its future success.

Writing by Bhoomika, Chetan, Parth, Varun and Aviral Design: Chandra, Omkar, Pragnya