Warren Buffett’s recent venture in India has cemented many people’s view that the country is poised for major growth in insurance. But, with industry concerns and uncertainty in the way, the road ahead is not without obstacles
Where Warren Buffett goes, the market follows. So when it was announced in early March that the renowned American billionaire had begun selling insurance in the notoriously tough turf that is India, the market naturally tuned in with curiosity.
Interestingly, rather than buying into the market, Buffett has become a corporate agent for Bajaj Allianz General Insurance (BAGI). Berkshire India, which is a Berkshire Hathaway subsidiary, will sell and distribute general insurance products through its online distribution portal and a telemarketing channel on behalf of BAGI. The venture will initially focus solely on motor insurance.
At first glance, making a play in an emerging market may not seem in Buffett’s usually cautious style. But on closer inspection, the decision to begin driving into this difficult market at a time when it is teetering on the brink of success may yet prove to be a profitable one. In turn, this could encourage other large players to the market, thereby creating the competitive culture insurers thrive in.
According to the latest data released by the Indian Regulatory and Development Authority (IRDA), the non-life insurance industry has shown positive growth, underwriting a total premium of R34,620 crore (one crore = 10 million), or $7.8bn, in 2009-10. That’s up 14.06% from the previous year’s figure of R30,352 crore.
This year-on-year growth means that some market analysts see Buffett’s move as expertly timed. AM Best senior financial analyst Philip Chung says: “After a period of intense competition, detariffing and the creation of the Indian Motor Third-Party Insurance Pool (IMTPIP), differences in premium growth rates between public sector insurers and private sector insurers are narrowing.”
The IMTPIP was set up by all general insurers in India in 2007 to collectively service commercial vehicle third-party insurance. The objective of the pool is to make available third-party cover to all commercial vehicle owners at reasonable rates and terms.
But Buffett’s decision to focus initially on motor insurance comes at a time when the IRDA is making swift amendments to its regulatory policies regarding the IMTPIP. Changes include increasing the amount of reserves held in the pool to ensure compensation claims are paid “expeditiously and without fail”.
In a statement issued in mid-March, a week after Buffett’s Bajaj Allianz announcement, the IRDA said it has placed three-year restrictions on expenditure with regard to the issuance of company bonuses and incentives until the pool reserves have been increased. “Such augmenting of reserves will strengthen insurance companies,” the statement said.
Willis Re’s regional director, Kieran Angelini-Hurll, says there is also a growing concern for losses reported through the IMTPIP. “Companies are keen to structure a solution to this issue, which has already had a significant adverse impact on their balance sheets and will lead to the need for more capital to meet solvency margins.
“This is also a deterrent to growth, as losses are shared as per the market share of the company and not the share of motor business sources to the pool. The private players will be closely monitoring developments on this portfolio, as they have close to 40% market share.”
According to Chung, one way of increasing interest in India’s motor insurance market could be through regulation easing. “Depending on the definition of ‘improving the market’, lifting the tariff on the IMTPIP, where the tariff rate is lower than the burn rate, could lead to a more profitable market.”
Long road ahead
If India is really intent on becoming a global insurance player, drastic innovation is required. The government suggested increasing foreign direct investment (FDI) limits from the current 26% to 49% more than five years ago but, as yet, this hasn’t been implemented.
Angelini-Hurll says: “The matter is still under discussion, which is perhaps why this has become one of the more controversial economic reform measures in India. If the government’s proposal to increase the FDI limit to 49% does come through, our view is that it is coincidental to the visit of Warren Buffett.”
Chung is more cautious. “Raising the FDI limits will theoretically allow more funds into the country. This will force more innovation in the insurance sector. In the short term, though, higher FDI limits are expected to result in more persistent underwriting losses, which may not be too bad for consumers.”
“Service levels will improve,” Chung adds. “However, regulations will be very important to ensure that policyholders’ interests are protected in the event of an insurance failure.”
The Indian insurance market has a long road ahead. Angelini-Hurll believes that, at the present rate, the market is likely to double in the next five years because of the growing affluence of the Indian middle class and expansion of investment in infrastructure. But there is clearly a lot to be done to ensure the market reaches its potential.
Meanwhile, motor insurance will continue to drive growth in the Indian market, but it remains to be seen what influence Buffett will have on this emerging region. GR