- July 28, 2022
- Posted by: Ramkumar
- Category: Posts
Challenges with LIC Business Model
As LIC shares continued to tumble, few thought India’s biggest #ipo would flop. However, analysts attribute the price decline to #macroeconomic factors like high #inflation, FII sell-off, and the Russia-Ukraine war resulting in #globalequities correction, 𝗺𝘆 𝗮𝗻𝗮𝗹𝘆𝘀𝗶𝘀 𝘀𝗵𝗼𝘄𝘀 𝗮 𝗳𝗹𝗮𝘄 in LIC’s #businessmodel.
As a study, I analysed LIC’s products and how they sold them. For LIC, 𝟵𝟵% 𝗼𝗳 𝘁𝗵𝗲𝗶𝗿 𝗽𝗿𝗼𝗱𝘂𝗰𝘁 𝗺𝗶𝘅 𝗶𝘀 𝗻𝗼𝗻-𝗹𝗶𝗻𝗸𝗲𝗱 (returns not linked to the market), implying that they sold life insurance that offers financial protection in the event of demise.
LIC sells these products through 𝗶𝗻𝗱𝗲𝗽𝗲𝗻𝗱𝗲𝗻𝘁 𝗮𝗴𝗲𝗻𝘁𝘀 (𝗿𝗲𝗳𝗲𝗿𝗿𝗲𝗱 𝘁𝗼 𝗮𝘀 𝗟𝗜𝗖 𝗮𝗴𝗲𝗻𝘁𝘀) and not an in-house sales force. There are two consequences of this sales strategy:
1)First, the 𝗮𝗴𝗲𝗻𝘁 𝗼𝘄𝗻𝘀 𝘁𝗵𝗲 𝗰𝗹𝗶𝗲𝗻𝘁𝘀 and thus 𝗰𝗼𝗻𝘁𝗿𝗼𝗹𝘀 𝗰𝗹𝗶𝗲𝗻𝘁 𝗮𝗰𝗰𝗲𝘀𝘀. The agent gets a commission to sell the product and ensure that the clients renew their plans and pay a premium until the term. Thus agent’s commission structure gets backloaded with a renewal commission that exceeds the cost of servicing and renewing the client. Therefore, if LIC needs to 𝗿𝗲𝗻𝗲𝗴𝗼𝘁𝗶𝗮𝘁𝗲 𝗮𝗴𝗲𝗻𝘁𝘀’ 𝗰𝗼𝗺𝗺𝗶𝘀𝘀𝗶𝗼𝗻𝘀, not in their favour, the agents can persuade clients to switch policies impacting LIC’s renewal growth.
2)Second, if LIC launches 𝗻𝗲𝘄 𝗶𝗻𝘀𝘂𝗿𝗮𝗻𝗰𝗲 𝗽𝗿𝗼𝗱𝘂𝗰𝘁𝘀, the agents demand a higher commission. If LIC does not pay, clients will not offer new products, resulting in 𝗹𝗼𝘄𝗲𝗿 𝘃𝗮𝗹𝘂𝗲 𝗼𝗳 𝘁𝗵𝗲𝗶𝗿 𝗻𝗲𝘄 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀𝗲𝘀.
1)I believe LIC needs to decide between 𝗶𝗻-𝗵𝗼𝘂𝘀𝗲 𝘀𝗮𝗹𝗲𝘀 𝗮𝗻𝗱 𝗶𝗻𝗱𝗲𝗽𝗲𝗻𝗱𝗲𝗻𝘁 𝗮𝗴𝗲𝗻𝘁𝘀. For a product like Life insurance, clients 𝗱𝗼 𝗻𝗼𝘁 𝘀𝘄𝗶𝘁𝗰𝗵 𝗼𝗿 𝘁𝗲𝗿𝗺𝗶𝗻𝗮𝘁𝗲 𝗽𝗿𝗲𝗺𝗶𝘂𝗺 𝗽𝗮𝘆𝗺𝗲𝗻𝘁𝘀 because discontinuing will stop any coverage/protection after death. Thus 𝗮𝗴𝗲𝗻𝘁’𝘀 𝗿𝗼𝗹𝗲 𝗶𝗻 𝗽𝗼𝗹𝗶𝗰𝘆 𝗿𝗲𝗻𝗲𝘄𝗮𝗹𝘀 𝗶𝘀 𝗹𝗼𝘄 and LIC can replace agents with in-house sales, helping reduce commissions.
2)For #ULIPs and non-life products like Fire and casualty insurance, the client’s propensity to switch and discontinue is higher, making such products sold through agents with a commission structure lucrative.
As of March 2022, LIC has estimated its 𝗲𝗺𝗯𝗲𝗱𝗱𝗲𝗱 𝘃𝗮𝗹𝘂𝗲 𝗮𝘀 𝟱.𝟰𝟭 𝗹𝗮𝗸𝗵 𝗰𝗿𝗼𝗿𝗲𝘀. However, if LIC does 𝗻𝗼𝘁 𝗰𝗵𝗮𝗻𝗴𝗲 𝗶𝘁𝘀 𝗮𝗴𝗲𝗻𝘁 𝘀𝗮𝗹𝗲𝘀 𝗺𝗼𝗱𝗲𝗹, then the value of its new business will not increase to sustain its #marketleadership or risk losing #marketshare to private insurers.