Regional concentration in 5 states: The insurer may have a pan-India presence and is the country’s largest insurer, but its business is concentrated in a few regions, as it states in its draft red herring prospectus (DRHP). Nearly half of its individual new business premium (NBP) comes from Tamil Nadu, Maharashtra, Gujarat, West Bengal and Uttar Pradesh. For financial years from 2019 to the six months ended September 30, 2021, these five states contributed 49.77%, 48.99%, 49.21% and 47.54% of the company’s total individual NBP, respectively.
Sales medium based on individual agents: The concentration trend extends to the medium through which the policies are sold. Individual agents are the primary mode of distributions for LIC. Some of LIC’s products can be bought online, but not through third-party websites, something that other insurers offer. Acknowledging this shortfall, the insurer mentions in its DRHP: “If our products remain unavailable for purchase on third-party websites, we may lose market share.”
Bound by fixed-income products: Many of LIC’s products are limited fixed-income products so “rising interest rates could lead to higher levels of surrenders and withdrawals of existing policies as policyholders seek to buy products with perceived higher returns.” The amounts and types of long-term fixed income products in the Indian capital markets are limited and regulations require insurers to invest in certain types of products (such as government securities). This “could severely limit our ability to closely match the duration of our assets and liabilities and thereby decrease our interest rate risk,” mentions the LIC DRHP. If a situation arises where policyholders surrender their policies mid-way, the insurer will have to sell its invested assets to make cash payments to policyholders “at a time when prices of those assets are declining, which, in turn, would lead to LIC incurring losses.”
Duplication in housing finance: Concentration in the housing finance activities can also pose a problem. In January 2019, LIC acquired IDBI Bank, which means an overlap in the two home loan businesses (of LIC Housing Finance and IDBI Bank). The Reserve Bank of India has stipulated that only one of these two can continue with housing finance activities. “… the RBI in its Approval Letter has stipulated that either IDBI Bank or LIC Housing Finance Limited… will have to cease conducting housing finance activity within a period of five years from the date of the Approval Letter and that housing finance activity shall be conducted only by one entity,” stated the DRHP. Moreover, LIC has to adequately capitalise IDBI Bank to ensure it meets the minimum capital requirements for a period of at least five years. This may have an adverse effect on LIC’s financial condition, results of operations and cash flows.
