I did look at HDFC Life as well. It does seem like one of the best run life insurers companies around with a balanced product mix. To be very honest, after studying the life insurance sector, I wasnt able to answer two fundamental questions about the life insurance companies:
- How efficiently do they utilize their capital? ROEV is not the same as ROE. ROEV is more a measure of growth rather than capital efficiency. The reported ROE doesnt tell the full story as well. The PAT is basically an estimation and the equity is underestimated.
- How good is their underwriting? The nature of life insurance is that claims are extremely long term. While so far embedded values for most companies have seen reserve releases, we would logically expect bulk of the claims to be extremely back ended. Without 20-30 year operating history, how can one be confident that underwriting is good? To make matters worse, the numbers being reported such as VNB, EV, to me dont make much sense. If you see the assumptions that go in calculating them, most of them are being discounted at the risk free rate. I dont really understand the rationale of doing that. Since valuations are derived primarily from VNB and EV, for me its hard to make sense of the valuation as well.
In comparison, the general insurers are far far easier to understand. Claims are shorter term so underwriting can be easily ascertained. ROE is far easier to derive via the combined ratio and we are valuing the companies based on earnings rather than metrics such as EV and VNB which can be easily manipulated.
Now all this isnt to say that HDFC Life isnt a good company. Its just that I dont understand it.
Regarding comparisons between even the health insurance divisions between the life insurers and the health insurers; I think they are fundamentally different. The life insurers are only really allowed to sell benefit policies whereas most of the retail policies are indemnity based. Essentially benefit policies are extremely low touch. You buy the policy, pay the premiums and in case you are diagnosed with the covered diseases; you are immediately paid out the pre approved sum assured. In comparison; indemnity policies are way more service oriented. Claims are made more often; claim servicing is far more important as part of the overall experience and it is also important to build a hospital network so you can have cashless claims, better claims experience, etc. To my mind, even if life insurers are allowed to enter indemnity policies, they wont be able to make much of a dent on health insurers.