'Tariffs have shackled non-life insurance firms'

Q&A: Kamesh Goyal

Kamesh Goyal

Bajaj Allianz General Insurance Company tops the charts in terms of profitability among private players. Of its net profit of Rs 47 crore, as much as Rs 36 crore was on account of underwriting profit, implying that the company has priced its products right and taken good business onto its books.

At the same time, its shareholders "" Bajaj Auto and Allianz "" could well be laughing all the way to the bank looking at the company's return on equity quoting at 34 per cent. So what makes this company tick and top the charts repeatedly?

"Our management philosophy is not to encourage wasteful expenditure," says Kamesh Goyal, CEO of Bajaj Allianz. No secretaries or chauffeurs, Goyal drove down 200 km from Pune on his own to Mumbai. That's what Freny Patel and Rajendra Palande found out when they sat with Goyal across the table. Excerpts:

The insurance industry has seen a growth of just 12.1 per cent in the first couple of months of the current year as opposed to 12.7 per cent last year. Why is the growth in general insurance not keeping pace with the growth in the economy?

In India, motor insurance coverage is the biggest segment in the general insurance industry. Though sales of automobiles is growing at a good pace, premium realisations from motor insurance declines as the value of the vehicle decreases, not to mention the no-claims bonus, which further reduces premium rates.

With competition, premium rates in health and marine insurance business have come down year-on-year. India is growing faster in the services sector. We see a boom in the IT, tourism and BPO sectors.

However, little business comes from these sectors since the general insurance industry continues largely to be driven by insurance of physical assets of the manufacturing sector. New projects are more spoken about than being undertaken.

With the manufacturing sector talking of expansion and brown-field projects, what kind of growth rate do you envisage for the insurance business this year?

Premium rates have fallen in liability insurance business by 30 to 40 per cent in the past one year. Insurance growth this year (2005-06) is expected to be about 10 to 12 per cent.

Considering the GDP growth rate of about 7 per cent, and inflation of about 6 per cent, the general insurance sector ought to grow at a minimum of 13 to 14 per cent, provided awareness levels are higher. If we take into account the greater awareness about insurance today, the industry growth rate could be as high as 20 per cent.

What would trigger higher growth rates for the industry?

Companies need to develop more personal lines of business. With bancassurance tie-ups, it should be easier to sell more health and householder policies. The industry needs to do a lot more if we want to see higher growth rates.

Further, higher growth rates can take place if de-tariffing happens. De-tariffing would be a big fillip to the sector, especially in the case of third-party motor. This will enable companies to increase business income, as they would then lose less in terms of third party premiums.

Today premiums in this line of business amount to just Rs 500 to Rs 700. In other Asian countries, third-party motor premium are two to three times more.

Will the huge investment coming into the booming aviation sector help growth?

Sure, huge investments well in excess of $7 billion have been talked of. However, this investment is expected to be spread over the next five years. Much of this investment is yet to achieve financial closure and bag the necessary approvals.

About 10 per cent of the investment is expected to come in the first year. However, we envisage a growth of 40 to 50 per cent in the aviation insurance premium. This will be despite the fall in premium rates.

Bajaj and ICICI Lombard have been taking turns at the top slot among private general insurance players. How are you gearing up in the race for the top slot?

From our perspective, we want good growth and good return on equity (RoE). In an industry that is not growing very much, profits will fall if we pick up business at low cost since a significant amount goes towards distribution expenses. We anticipate a growth of 30-35 per cent this year and hope to maintain an RoE of 25 per cent.

The issue is not who is first. Positions per se do not make too much difference. In the next five years I want to be among the top three. Our overall market share last year was 5 per cent, which is expected to go up to 6.5 per cent this year. Our first objective is to have a 10 per cent share in the next two to three years.

Meanwhile, we have changed our gameplan. Last year we had built a lot of corporate business in areas of engineering and motor. Today customer service will be crucial and we need to improve upon this. This and underwriting discipline will be our focus areas.

What are the key issues concerning the insurance sector today?

In the past two to three years, underwriting performance has declined. In 2004-05, six of the eight general insurers experienced deterioration in underwriting results.

Except us and Tata AIG, all other general insurers were affected. General insurers need to maintain underwriting discipline to avoid deterioration in claims ratios, especially when one looks forward to a free-pricing scenario.

The need of the hour is to ensure that we are pricing the products correctly. Marine business is a loss-making proposition. Yet, we have been able to help our clients "" a glass manufacturer and an automotive company "" to reduce transportation losses by advising them on better packaging. The question is whether we can do it for more of our clients as we practice better risk management.

Health insurance is an equally loss-making portfolio.

In the past two to three years, health insurance premiums have increased by 20 to 25 per cent. Cost of health cover has inflated significantly as hospitalisation costs have increased. Health premiums are expected to go up annually by 10 to 15 per cent.

Today when the fire insurance business continues to be under tariff, it is virtually subsidising health insurance. It is imperative that we manage costs by identifying which hospitals policyholders go to.

Adopting third-party administrator inhouse has helped with improvement in services. Initially there were a lot of complaints from customers on TPAs. Today we manage about 20,000 claims on the health side, but this is expected to double.

Considering Allianz is not only one of the promoters but also a key reinsurer, it must also be your biggest reinsurance partner.

No. In fact, the General Insurance Corporation of India (GIC) is our biggest reinsurance partner. We have developed a bigger relationship with GIC and have experienced better service support from the state reinsurer.

It is equally competitive in pricing. Allianz would be the second-largest reinsurance partner today, especially when it comes to reinsuring construction and large property risks. About 90 per cent of the risks are reinsured between GIC and Allianz.

Cross-subsidisation between products seems to have become the norm.

No single business enjoys the same kind of profit margins. Each company decides which product it wants to push and accordingly decides where it is comfortable making lower margins or even a loss in order to push product sales.

This is the case in any industry, be it FMCG, services or insurance. Cross-subsidisation is a business strategy. The issue is viewed negatively in the insurance sector because there are tariffs in certain business lines and none in others.

If de-tariffing takes place, health insurance premium will differ for people below 35 years of age and those above 35 years. Currently, health insurance policyholders up to the age of 35 subsidise policyholders over 35 years of age.

Once tariffs are freed, customers would go to one specialised company for a particular line of business. Today, they go to a single insurer for all lines, and this explains why insurance companies are willing to cross-subsidise.

Would you then say that corporate India is taking the insurance industry for a ride, playing one against the other?

They are surely having a good time playing one against the other. But off late, we are also seeing stability as corporate clients are not walking away. At the same time, we as insurers, are willing to be aggressive in pricing and this is our biggest plus point.

Our management expenses are 50 per cent lower than our next competitor. Travel, salary and perks play a big role in management expenses. We do not believe in having secretaries or chauffeurs as we adopt a culture of low costs. Our head-quarter is in Pune and this saves us high rentals. We'd have had to pay Rs 1-1.5 crore had we established our base in Mumbai.

Why haven't general insurers been able to expand the market like the life insurers have?

Non-life insurance companies are bound by tariffs. As much as 70 per cent of our business is based on tariffs or pricing already decided by the regulators. This precludes any attempts at product differentiation.

This means we cannot make efforts at promoting products unless we are able to market differentiating features. In the case of health insurance covers, which do not fall under the tariff regime, general insurers have been marketing them aggressively. We already have three health plans in place and will launch two more products offering much greater flexibility shortly.