It sounds funny, but don’t chase either topline or bottomline in life insurance business

In any business, you either chase top-line or bottom-line. But in life insurance business, you shouldn’t chase both of them.

Why shouldn’t you chase top-line?

In life insurance, the definition of top-line itself can be misleading. For example, fund business. Fund management for gratuity or other retirement benefits can be huge in size. But what life insurer gets is only a small margin for fund administration. Even that is waived many times due to competition. Then why do you need to do that business? Many insurers still do it only for top-line.

Similarly, in the mad rush for top-line, certain regulatory norms are violated. Some unsustainable guarantees are given. The cost of compliance or cost of guarantees may prove to be much higher than the value added by this business. Many of these costs are not very obvious at the outset. Hence, senior management tend to take aggressive stand as the only target given to them was top-line, making them blind to other risks.

What is the issue in chasing bottom-line?

The profit in life insurance business comes from existing book of business. The business was brought in few years back. The profit margins built in the business would get released gradually. But bottom-line focus would only focus on speeding up this release of profits.

For example, insurers get some surrender profit if a policy is surrendered. You can get more surrender profit by encouraging surrenders. Your profit will increase this year but your future profits from those policies surrendered now will be lost. Any discretionary benefits to be payable to policyholders, like surrender value in a traditional policy, can be reduced to generate more profits. Similarly, discretionary charges can be increased in a unit linked policy, to get more profits. All these may look good in short run but will impact the trust of the customer and hence profitability of the company in the long run.

If not top-line or bottom-line, What to chase then?

There is no problem in chasing both of them with long term in mind. What you need to chase is the value addition to the company. Life Insurers should make profits from small margins in the long run. Adding quality business to the books is the key. Maintaining operational efficiency is critical. Giving best value to the customer is the end objective.

Profits will emerge from the quality business over the life of the policy. Any greedy attempt to maximize them in the short run using some shortcuts will only destroy the company over time.