German insurer Ergo, an arms of the world’s largest re-insurer Munich Re, is a leading player in the Indian insurance market through its joint venture (JV) with HDFC. It also has a JV with the Avantha group in life insurance and 26 per cent stake in standalone health insurer Apollo Munich. Andreas Kleiner, Member, Board of Management, ERGO International AG, discusses the group’s plans for India in the light of the insurance ordinance and its plans to raise stakes in Indian JVs. Edited excerpts:
What impact do you see of the promulgation of the Insurance Laws (Amendment) ordinance?
We would have preferred if Parliament had passed it in the winter session. It came as a belated Christmas present since the ordinance route was chosen.
Having said that, there is some uncertainty because the Parliament needs to approve it subsequently, and our understanding is that if this approval does not come through then the theoretical possibility exists (to raise stake), since it has become a law now.
Even if it (Ordinance) is not approved by Parliament, do you see it as an opportunity in the interim to raise stake?
Yes, that’s right. There is some speculation and there is one school of thought which says that if you step up (stake) during that period, it can be reversed later, you would be lucky because you have used the window of opportunity.
There are voices which say it has to be reversed back to 26 per cent, but that’s pure speculation.
Are you concerned over the Indian management control clause?
I would say yes and no. We would always try to advocate liberal markets but if I am taking a very holistic approach, if I have a shareholder situation where the Indian partner has 51 per cent and the foreign investor has 49 per cent stake, and with voting rights, the majority resides with the Indian promoter.
What that says about Indian control to me is nothing that would otherwise not be stipulated in commonly-crafted shareholder agreement.
Are you concerned about market profitability in the general insurance space which has been facing losses from the third-party motor insurance?
There is concern about market profitability.
The combined ratios in the Indian market are fairly consistently above 100 per cent; but you can always argue that since you have high interest rates, you do not have the same stringent combined ratio requirement compared to a low interest rate environment.
But from a global view point, the Indian combined ratios are a notch higher than commonly expected.
Part of it has to do with the third-party motor liability. The motor pool caused serious problems to the entire industry and it has not been entirely resolved. The pool has been dismantled and now there is a smaller pool where different mechanisms have been introduced which makes the things better but doesn’t eliminate it.
We have been quite happy with the development at HDFC ERGO; we have been managing to outperform the market.
What is the progress on Avantha ERGO?
We are in the middle of the licensing process. In fact, we are going to meet the IRDA shortly. We were held up as Avantha has been going through a strategic review.
There have also been reports of sale on the Avantha Power side and Crompton Greaves. So for us, Avantha and the regulator, it is important to see how the final structure evolves before moving on. From what we understand it is more or less resolved.
If everything goes well, before the end of December 2015, if not early 2016, we expect it to be operational.
What are your investment plans for India for the next few years? Have you begun discussions to raise stake?
Yes, we have the respective clauses in our joint venture agreements and a keen interest to do that.
It also depends on our respective joint venture partners, but we are keen to increase our shareholding.
Any plans to list HDFC ERGO?
We don’t have immediate plans. We have been in discussions with HDFC and we would follow their interests and live with 49 and 51 per cent shareholding.
On the other hand, there is merit in listing, so we are approaching it with an open mind jointly with our shareholder.