HDFC entered into the non-life insurance space eight years ago in partnership with Chubb. The tie-up was ended in 2007 and a new 74:26 joint venture was formed with Ergo, a Munich Re subsidiary, in 2008. In his first interview, Ritesh Kumar, managing director and chief executive officer of HDFC Ergo General Insurance, speaks to Shilpy Sinha about where the company stands today and the way ahead. Excerpts:
You are not profitable even after eight years of operation, while the gestation period for general insurers is three to four years. Why?
The company has been in operation since 2002, but it did not invest in scaling up its portfolio and distribution in the first six years. Given the highly transaction intensive nature of the business, there are basic minimum operational costs of Rs 6-7 crore monthly that a company has to bear. No insurance company with an annual premium income of Rs 200 crore and focusing primarily on retail portfolio can be profitable. Also, even if you are not growing, expenses will keep on increasing annually because of normal salary increments and other expenses to adjust for inflation.
We had a change in our joint venture partner early last year. Over the last one-and-a-half years, we have started investing in distribution and skill upgrades. Though we are over five-year-old, but very much like a start-up.
We are presently growing at a healthy rate across product segments and distribution channels in the country.
Profitability is also a function of annual growth. In years when your growth is very high, you will show underwriting losses despite building a profitable book - since according to Indian GAAP, you have to provide for all expenses upfront but you earn the premium over the life of the policy.
Irda has asked six insurance companies completing five years of operations to bring down their expense ratio. Have you also got the letter in this regard?
Yes, we have. There is always a lag before investments in people and infrastructure start yielding results. Our expense ratio has come down compared with last year. Overall, our expense ratio, including business acquisition costs, should be around 28-29 per cent for this year and we are very much within the regulatory threshold as of now.
What are your capital requirements for this financial year?
Last year, our shareholders had put in Rs 50 crore. In this financial year, our shareholders have already invested Rs 175 crore in the company. Any further investment will be need-based. Both our shareholders are financially sound and committed. We have ramped up distribution by increasing our staff count to 930 from 250 over the last 15 months. During 2009-10, we will add about 30 branches to take our overall branch strength to 80.
Are the shareholders worried about the losses?
Our shareholders are completely committed to us. HDFC brings to us a strong understanding of the Indian market and consumer behaviour, while Ergo has over 100 years of international experience and strong technical skills. We are investing according to our business plan with a vision to become a full-service provider. We are in no hurry to grow as our shareholders view every business and opportunity from a long-term perspective.
Irda has asked insurance companies to follow risk-based pricing. Is it the losses that has forced regulator to do this?
Globally, markets have seen a fall in insurance premium rates in the first two-three years immediately after detariffing before the rates recover. In India, we are in the midst of the same post-detariffing phase. The macro economic situation over the last year has accentuated the problem. Underwriting losses are not a happy situation for any company, but that is in line with the global experience. We are beginning to see a gradual correction in rates in some areas.
Are you moving away from loss-making segments such as group health?
The solution lies not in moving away but pricing them correctly. The market is moving towards more sanitisation and, over a period of time, prices will correct. At the end of the day, it all depends on what business one writes and what fits with our overall growth strategy. There is no business which is not doable, but it is the pricing which makes it good or bad. Certain loss-making segments are a temporary phenomenon. Fire was considered the most profitable product at one point of time, but with the price drop, the view has changed.
