The raising of foreign holding limit in insurance companies after a decade of wrangling between political parties is a landmark in Indian economic history.
What does it mean for the future of the insurance industry?
In a discussion with Shilpy Sinha, HDFC Life chief executive Amitabh Chaudhry and ICICI Lombard chief executive Bhargav Dasgupta open up on what is in store

On the long-awaited enactment of higher shareholding limit for foreigners in insurance companies…

BD For the consumer, increase in foreign direct investment (FDI) from 26% to 49% is not going to change anything.In the general insurance industry , we have had one or two companies entering every year even when FDI was at 26%. The implication of the bill is at two levels -one is the freedom that has been given to the regulator in framing rules and the other is in terms of opening reinsurance branches. On the distribution front, the regulator has placed the responsibility of licensing agents on insurance companies in terms of sourcing, training and licensing.

Any mis-selling by agents can result in a huge penalty . To ensure quality , agents will now have to pass a central exam through a certified body .Another positive is in terms of product guidelines. The product approval mechanism can now move to use and file, wherein the logic is that you don’t design a product and launch it unless it is in the interest of the policyholders. AC Firstly , the bill enables greater foreign capital to flow into India which in a capital-intensive sector like insurance is vital.India has significant mortality and morbidity gaps in addition to the fact that financial savings have fallen in the past few years. Conse past few years. Consequently , additional capital should help the industry expand and invest in infrastructure be it life, non-life or standalone health companies.

Another big amendment in the law is the provision that you cannot deny a claim under a policy after three years for any reason whatever. Earlier, when claims used to come, we would investigate early for suspicious claims in detail. Now you have to investigate a lot more at the on-boarding stage or in the first three years, because you cannot refute any claim after three years. Third, fines have gone up. I am now liable for all agents. However, the act does provide for a redressal mechanism through the Securities Appellate Tribunal in case of disagreements between an insurer and the regulator.Overall, the bill has devolved more power and flexibility to IRDA and that is a step in the right direction.

How does the regulatory capital requirement for the insurance industry differ from that of banks?
BD Freedom has been given to the regulator to allow new forms of capital. The old solvency regulation is archaic. It is a factor-based, not risk-based, model.Secondly , the regulator allows us to operate within certain constraints on agency commission and expenses.There are two sub-limits. One of the recommendations that the industry has been making is to make it one.

There is a lot of debate about the rules on bancassurance. Where does it take the industry?
AC The guidelines introduced a code of conduct for banks, which is a good move and will make them responsible.

While open architecture principally is good, there are second-order ramifications which many people do not understand. It will reverse the shift towards customer-centricity and force insurers to be distributor-centric, especially when it comes to big banks. Today an in surance partner moves in step with its banking partner as it opens more branches and deploys the necessary resources. Insurers can reach small towns and villages through banks. As banks will be forced to share a piece of the pie across three insurers under the proposed regulations, such large-scale investments by insurers and a presence in smaller towns and rural markets may no longer be viable. BD What is being proposed is that a corporate agent cannot sell anything but retail policies. Banks can cover so many SME clients and offer them risk-based products, which is what they should be allowed to do.

What happens to the joint ventures between banks and insurers?
AC A lot of banks have signed up joint venture partnerships on the basis that they will have exclusive distribution arrangements. The guideline caps the amount you can distribute through one company -many of these partnerships will find it difficult to accept caps, which go down to 50%. Secondly , there is a worrisome notion that bancassurance will not be capable of selling complicated products, which other agents and brokers can. Our experience suggests banks have higher ticket size, better persistence and lesser complaints than channels already operating under open architecture as the insurer can no longer influence the agent’s behaviour.

Also, will the bank have to stop selling policies like term, health, annuities, crop insurance, which serve specific customer needs? One doesn’t know these details at this stage. Open architecture could also encourage a churn of policies between insurers. Third, they have introduced a clause that only one registration will be given to a group.Financial conglomerates have multiple entities, each of which today is a corporate agent. I am hoping that was not the intention of the regulator. Fourth, the payout issue. While payment to the group company is covered, it should ex tend to group companies and shareholders in India and abroad through various mechanisms such as equity transfer, etc.

Does that mean joint venture splits?
AC There might be some players who are pure bancassurance companies where the foreign partner has entered on the premise of the bank’s infrastructure being available and may have paid premium to the Indian partner. If this infrastructure suddenly becomes unavailable, the partners will need to re-look at their business model and re-evaluate future plans for the business.

We keep hearing about frauds. Are they really rampant?
BD For the general insurance industry , third party claims have to be paid through courts. In some cases, the proceedings take more than seven years.This time factor helps some people to manipulate documents and facts of the claim. Insurers are paying claims for accidents that happened in the 1980s.The new draft road safety bill says one may not file a claim after one year. In Delhi, the High Court has paved the way for filing of claims within one year through DAR. This has brought down manipulated cases. AC Rampant is probably the wrong word but fraudsters are becoming sophisticated. We have had instances where policyholders are `dead’ soon after they buy policies. An entire chain including local authorities and hospitals may be involved. Insurers have analytics in place to identify such cases early on.

The Industry growth has been tepid. Is it shrinking? Will it grow at all in future?
Is therescope for so many players?

AC The UK has 900 general insurance companies. Ideally it should shrink because a lot of players on the life side are marginalised. But the cost of keeping a stake is low, and at the end of the day , India is seen as a huge potential market. I do not expect too many exits.

Is India a profitable market?
AC India is the least profitable mar ket in the world. There are several reasons. We suffer from the basic fundamental flaw. If you look at the returns that we give, we struggle to compete say against a tax-free bond. Other markets are able to attract a lot more money . Over and above that, we compete with other financial asset classes like deposits wherein interest rates are high. A significant portion of these monies anyway goes to the govern ment. In par products we are forced to invest in government securities 50% goes into government securities and another 15% into infrastructure. It will change over a period of time. As interest rates fall, the differential will fall much faster.

Insurers are net sellers in the equity market. Are surrenders high?
AC Life insurance companies are not real net investors in the market. The growth of life in surance compa nies has been neg ative for the past four years. When people see that the equity mar ket is doing well, they tend to sur render. At the same time I am not generating as much busi ness on the eq uity side so I have to sell my equity to pay off the surrender.

Do changes in the law mean, insurers become the season’s new flavour with a stock exchange listing?
AC Our shareholders have been vocal about listing at the right stage. In any case, the entire chain of processes including FIPB approvals, Sebi and IRDA approvals, etc would take another 12 months or so for a listing to materialise.BD Any decision pertaining to equity stake or listing on stock exchanges will be taken by shareholders.

How do you value insurance companies?
BD You look for price to book future cash flow, premium to brand -it is a normal economic model. We are not risking our balance sheet. General insurance business is a float business as long as you can keep your costs below 100.AC There are two ways this is typically done. Insurance companies get assigned valuations as a multiple of their embedded value, which is nothing but the present value of all the policies an insurer is written till date. Alternately , the EV is taken and we add to it a multiple to the new business profits. The multiple is based on future growth expected. Either of these can be used to arrive at a life insurance company’s value.

Is it possible to shift treasury from insurance companies to a mutual fund?
AC The concept is, if you do not know how to manage policyholders’ money yourself, how will you even assess others’ performance? Earlier it made sense for insurance companies to develop their own expertise but now many have reached a size and scale where a part of the money can be outsourced for management. The regulator is rightfully concerned that this should not lead to arbitrary charges by mutual funds to policyholders. This was happening in NPS in the initial days of the scheme. But that can be easily managed and controlled.

Source: Economic Times

Date: 15-04-2015


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