Insurance Joint Ventures in India : Who calls the shots

A majority of Insurance Companies who operate in India through JVs with Indian firms exercise significant control in terms of decision making despite having just 26% stake. The agreements signed during the JV incorporation has such terms that it reduces the decision making powers of the majority stake holding Indian promoter.

For instance, we have Bharti AXA which is a JV between Indian Telecom major Bharti & French Financial Services major AXA. The agreement between them has such terms that it allows the foreign minority stakeholder to call the shots despite having just 26% stake.

If any decision is to be approved at Bharti AXA, their articles of association (AOA) says that a majority opinion of the directors alone is not sufficient, if it does not include an “affirmative vote of the Axa director”. Domestic laws allow any shareholder with a 26 per cent stake to veto proposals, though decisions are based on the majority opinion.

Initially, the Insurance Regulatory & Development Authority stressed on foreign investors paring their stakes in local insurance arms if they also held a stake in a company that was part of the Indian promoter group. Over the years, however, weaknesses have crept into the system.

Bharti Axa is not the only example. The articles of association for Max New York Life Insurance also have specific clauses to provide the foreign partners veto power in key management decisions.

In the case of Max New York Life Insurance, if certain decision is to be taken by the JV or its subsidiaries, prior approval of a majority of the board of directors, including approval from at least one director appointed by Max India and one appointed by New York Life, is needed. These conditions nullify the majority enjoyed by Max and make New York Life an equal partner in decision-making.

Foreign partners in these JVs have always insisted on inserting protection clauses to ensure that they are not sidelined once the Indian arm gets the know-how of how to run an Insurance Business.

There are some 5 to 15 areas where protection is available depending upon the comfort level between partners. Majorly, the areas include capital, which ensures that the Indian partner cannot raise its stake without the explicit consent of the foreign players. Investment and underwriting policies and protection of the balance sheet areas are the other areas where both the partners are “equal shareholders”.

Finally, there seems to be a need for the Government to specify the objectives in placing caps in each sector & also to study how the present caps are working in practice.

Consumers should compare insurance quotes and policies for various Indian Insurance Companies online before deciding on their insurance company.

Is LIC India’s most valuable company?

When privatization of the Insurance sector started in 2000, many experts were predicting the gradual weakening and ultimate demise of Life Insurance Corporation of India (LIC0). The state owned life insurance monopoly was perceived to be slow, inefficient and behind the curve. But the situation has turned out drastically different.
In the face of intense competition, LIC has held on to its own and still commands an awesome 70% of the market share . Even more interesting is the fact that in recent months and years, this percentage has gradually creeped up. While the private life insurance companies have tended to pay higher commission margins to their distributors so that they can generate more sales, LIC has been conservative in their commission payouts and generated sustainable, profitable business.

So what then is LIC’s worth. With 2 crore policy holders, assts of Rs 11 lakh crores and 71 % market share in a growth market, LIC’s embedded value has been estimated to be at Rs 2.5 lakh crores, give or take a few thousand crores. Embedded value is essentially the present value of profits from the future, and adjusted net asset value. The recent capping on ULIP charges that IRDA has mandated will help LIC in sales as they have a huge bouquet of traditional products. On top of that, a buoyant stock market and an economy growing at 9% can only lead to an increase in valuations. Though it is difficult to establish a clear ratio between market capitalization and embedded value, India’s most valuable company by market capitalization is Reliance Industries at Rs 3 lakh crores. LIC, with an embedded value of Rs 2.5 lakh crores is not too far from that. Add in the fact that there will be a premium attached with being the leader in a growth industry, LIC can easily command a market capitalization higher than Rs 3 lakhs, were it ever to list in the stock market. And thus become India’s most valuable life insurance company!!

Compared with the valuations that Insurance companies have in China, this will not be surprising at all. China Life commands a market cap of 111 billion USD. LIC could very well have a market value of in excess of 65 billion USD, ie approximately Rs 3 lakh crores.

Factors affecting Car Insurance Premium

Among the retail consumer products offered by general insurance companies, car insurance is the most complicated in terms of the number of variables that have an impact on the final premium. Online car insurance aggregators such as PolicyTiger are working on providing an easy to use interface where the user can compare the insurance premiums charged by different insurance companies for the car of his choice.

The Car Insurance Premium has 3 components- Own Damage, which in most cases is more than 90% of the premium, Third Party and Personal Accident cover.

Now, let us have a look at some of the factors that determine the premium charged for car insurance.

Location: Under the Motor Insurance act, the country was divided into two zones- the top 8 metros and Rest of the country. The premium for a car registered in the top eight metros is a little higher than it is for the Rest of the country as the perceived risk is higher in these top eight cities- Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Pune, Bangalore and Ahmedabad. Even today, most general insurance companies follow the same classification while some companies have refined this further. For eg, certain companies charge higher premiums if the car is registered in Punjab or in Delhi, where the incidence of theft and accidents is higher.

Engine CC: Cars with higher engine displacement (CC) have a higher component for the Third Party part of the premium. The classification here is in terms of <1000 cc (Rs 670), 1000 to 1500 cc (Rs 800) and > 1500 cc ( Rs 2500)

Age of the vehicle: Insurers allow for a depreciation of the vehicle with age. As the age of the vehicle increases, the depreciated value reduces and the Own Damage component of the premium keeps reducing

No claim bonus: Insurers want to reward policyholders who have had no claims or fewer claims. If there has been no claims over the preceding years, insurers offer upto 50% rebate on the Own Damage component of the premium

Car manufacturer: The Insurance companies closely track their claims ratios and try to establish patterns whereby one vehicle model might have had higher claims percentage than another model /make. They factor this into the pricing and load up the premium for vehicles which are more prone to accidents. For eg, assuming all other things being same, the premium for a Mahindra Scorpio might be more than that of a Honda City.

Profession and age: Some companies offer a 5% discount if the policyholder is a Central Govt Servant, teacher, CA etc. Similarly, certain companies have varying premiums depending on the age of the driver. In developed markets of the West, even the car color has a bearing on the premium

As the market evolves in India, we expect even more variables to be added while calculating the premium for car insurance.

Traditional Life Insurance Products to Come under the Scanner..Eventually

Life Insurance companies have been hit hard by the cap on charges that IRDA has mandated on ULIPs.. Come Sep 1, the surrender charges, administration charges and the commission that Life Insurance companies pay on ULIPs will come down substantially. While this is good for the consumer, the worry is that in the short term, it might become unattractive for the distribution channels, and thus fewer people might have access to life insurance. The percentage share of ULIPs as a part of the overall business of the private life insurance companies is greater than 60%. Under such a scenario, the private life insurance companies have begun focusing on traditional, non guaranteed products as there has been no capping on charges on these products.

But recently, there has been a scare among the life insurance companies that once the ULIPs are out of the way, IRDA would look afresh at the guaranteed products. There have been unconfirmed reports about IRDA looking closely at the charges and commission structures of guaranteed products over the next three months. However, the IRDA chairman has come out with a statement recently that there are no plans on IRDA’s front to cap the charges that insurers apply on traditional savings cum insurance products. IRDA is of the view, at least publicly, that the traditional products such as term, money back and endowment are at a mature stage of their life cycle and there is no need to micromanage them by applying the caps on charges.

Public posturing apart, the author is of the view that the regulator will definitely keep a hawk eye on these products to ensure that the insurers, after being stifled on the ULIP front, do not misuse this category of products to go back to the commission and charge levels which IRDA is determined to bring down. IRDA would not want traditional products to provide a loophole to the current regulation that they have painstakingly eked out. On being probed that commissions as high as 80% of the first year premium were being paid on traditional products, IRDA mentioned that they will make sure that such misdeeds are tackled.

In India, because of the rush for business by private life insurers for new business, the system has bred a fat cat distribution system wherein the distributors with higher volumes of business have got used to commission levels as high as 60-70% of the first year premium. It is but natural that these channels will try and protect themselves when these income levels are threatened by the new IRDA regulation. Thus, they will find new ways to beat the system and guaranteed products offer the silver lining to them in this crisis. IRDA would do well to make sure that these products do not become a channel to exploit the average unsuspecting consumer, whose level of awareness and understanding about the life insurance products is quite low.

Life Insurance Policies might get cheaper: Reduced mortality charges

Typically, a life insurance policy has two components- protection and savings/investments. IRDA , through their latest guidelines on ULIPs have ensured that the various charges on the savings/investment component of the life insurance policy will become cheaper. But now, a further change is on its way which will benefit policyholders- the mortality charge , ie the premium that a person pays for the life cover- might also reduce.

In India, mortality charges have primarily been defined by the 1994-96 LIC table. For example, the probability of death of a 40 year old was taken as approximately 2 per thousand while that of a 60 year old was taken at about 13 per thousand. Since then, life expectancy has gone up . Data has been collected from LIC and the private insurers and this has been submitted to IRDA. Actuarial departments indicate that the death rates may have come down by 20-25 % in the higher age bracket. This might lead to a reduction of 15-20% in the mortality charges. The new tables has been prepared and takes the variables of gender , age and geography into account. Earlier, the tables only considered gender and age.

The reduction in mortality charges might not be uniform across segments. Our view is that premiums for younger people will reduce more, for middle aged people it would be less changed, and the jump in premium that we used to see for higher age brackets would reduce.

The impact of this reduced charges might be seen most in pure term policies. However, many private insurance companies had started following their own mortality tables and had reduced the premiums for pure term policies aggressively. In the light of the new change brought about by IRDA where life insurance policies have a minimum sum assured of 10 or 7 times the annual premium, this impact will also be felt on the ULIPs which are extremely popular in the market. For traditional policies, the impact could be in the form of a higher declared bonus rates.