Cost Structure of Life Insurance Companies

Life insurance companies cost structure details

Major Cost Groups of Life Insurance Companies

(A) Insurance Claims

These are the "Benefits paid" by life insurance company on occurrence of various events triggering the payouts by the company. It includes:

  • Payouts on surrenders; Amounts paid when policy holders surrender the policies prior to the policy term i.e. complete exit of the policy
  • Payouts on withdrawals; Withdrawals are also method of discontinuation of policies and getting cash up to certain permissible withdrawal limits as per policies.
  • Surrenders and withdrawals reflect the persistency of the company i.e. how long the customers stay with their policies.
  • Claims given on maturity or on death i.e. payout on policies completing the policy term and eligibility of money back payouts.
  • Pension payments and annuities
  • Other payments including payments on vesting of pension policy, health claims, premium waiver, termination payouts and interest on unclaimed amounts.

Other than the benefits paid, companies pay bonuses, interim and terminal. Bonus is amount which accumulatesunder the policy on a yearly basis and it is payable on death, surrender or at maturity of the plan, whichever occurs earlier. This bonus amount is payable over & above the benefits applicable under a life insurance policy.

In Revenue Account, there is also adjustment for change in valuation of liability in respect of life policies on the basis of actuarial valuation.

Change in valuation reflects change in the actuarial liability in respect of policies in force and for policies in respect of which premium has been discontinued but a liability still exists. The change in unit reserves represents the change in the fund value of policyholders' fund, under unit linked segment.

(B) Commissions

The Company pays commission to its distributors on the premium income collected during the period. Commission rates on select products are in accordance with limits specified under IRDAI (Payment of Commission or Remuneration or Rewards to Insurance Agents and Insurance Intermediaries) Regulations 2016 from time to time. Variation in commissions is dependent on the underlying business growth, incremental commission rates and change in product mix.

(C) Employee Remuneration

Employee-related costs form significant proportion of any insurance company's total costs, considering the nature of business depending on business growth and inflation.

(D) Other Expenses

Other costs include advertising/publicity, legal expenses, travel, provision for doubtful debts and other provisions in accordance with the requirement of IRDAI accounting regulations.

Top Market Share Holders

Market share of Life Insurance companies
Market share of Life Insurance companies

Cost Structures of Top Life Insurance Players

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Life Insurance Corporation of India

(The figures for LIC are for the year ended March 2018)

HDFC Life Insurance Co Ltd

SBI Life Insurance Co Ltd

ICICI Prudential Life Insurance Co Ltd

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References:  Annual Reports, News Publications, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. The report & references mentioned are only for the information of the readers about the industry stated.

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