HDFC Life has introduced a slew of new processes to strengthen its quality of business, which has impacted its new business premium collection in 2013-14. Amitabh Chaudhry, MD and CEO of HDFC Life, feels that if the life insurance industry continues to cut costs now, it will have much larger impact on the revenue.

What impact do you see if foreign direct investment is raised to 49 per cent?

Materially it does not change much because in insurance when you expand, the incremental productivity on the revenue is not very high. So, if the growth is around15 to 20 per cent, then the current capital is manageable.

Is FDI a perquisite for listing?

Yes, to some extent. It is because we would like FIIs to invest because they understand insurance and are hungry for good insurance paper. We will also get a better valuation.

You have seen a big jump in profitability at 61 per cent to Rs 725 crore in FY14. What are the reasons for this?

The profitability reflects the money being generated by the back book and the loss in the capital strain in the business that you have written that year. Frankly, if you look at the companies which are not growing, their Indian GAAP profitability is actually moving up, because the back book continues to generate money, while the capital strain is much lower because you are not doing enough business.

Margin is an issue on new business because the industry is de-growing and the cost, which we have all tried to cut, but beyond a point if we cut costs now, it will have much larger impact on the revenue. As a result, the industry is hoping that the scale that they have managed to build up will give them better margins.

There has been a predominant shift to traditional products from ULIPS. What are the reasons for this?

After the ULIP regulations came into force which capped the distributor commission, most companies operating at 100 to 150 per cent cost of acquisition of the premium paid, can charge only 8 to 10 per cent from the customer. So, there has been a dramatic shift from ULIP to participating products for many companies because they had no choice.

With the new product regulations, the regulator has put in a concept of profits committee, which says the allocation of expenses has to be approved by the committee.

So, while your cost of acquisition still remains 100 to 150 per cent, since in participating products you can debit the expenses, life insurers are merrily debiting it.

So, I am worried and concerned that there will come a time in the future when the regulator will do something about it. They have already signalled it by asking companies to form a committee.

Why is the insurance industry not seeing inflows despite expectations of a long-term bull run?

Inflows are not coming in because of the five-year lock-in, because when you start thinking positively about the market, the movement immediately is not to a long-term product.

I think things will pick up but it will take time because in insurance, you are essentially telling the customer that you put in money and it is gone for five years. But even in ULIP, people are selling the proposition, that if you don’t like the return to lapse, you will continue to earn a return on the discontinued fund but insurance company loses a lot of money in the process.

Insurance industry at some stage has to have products, which are like term products have become a pull. But, even there everyone is cutting prices and trying to gain market share. Any new player, who comes has a lower price, so that the margins are going down or vanishing. But I feel overall, if the optimism continues, then you will see an uptick.

Majority of your business comes from HDFC. When bancassurance is opened up, wont if affect your business?

HDFC accounts for 63 per cent of our business in the individual business premium collection and tomorrow I don’t know in what form or shape the norms will come. There is an arbitrage that exists today and at some stage in open architecture, it will go away. But we strongly believe, as we understand the space very well, so if HDFC Bank opens up, then we can make up the loss in the new relationships with other banks as well.

The only issue I have with the broker model is the insistence on the artificial cap of 25 per cent cap on business from an insurer. Also, if some of the joint ventures are going to be hurt badly, they may go to court so it may lead to a complete lock-jam.

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