Gerry Grimstone, Chairman, Standard Life, talks to Sarbajeet K Sen on a host of issues relating to the insurance sector. Edinburgh-based Standard Life has a 26 per cent stake in HDFC Life.
Q. Standard Life has been associated with HDFC since the insurance sector was opened to private firms over 10 years ago. How has the sector grown, especially private companies, given that Life Insurance Corporation (LIC) continues its stranglehold?
A. The industry started very strongly. We came into the market just over 10 years ago with HDFC to create a fine business. At one point, LIC's market share dropped to 50 per cent. But, the various regulatory changes over the past two years have greatly benefitted LIC and its share is back to about 70 per cent, which is quite extraordinary.
Q. The trend should have been the other way round...
A. Yes, it should have been the other way round. Nobody minds competition, everybody likes competition. But it is important that you compete on a level playing field.
Q. Where do you think the problem lies? Is it regulatory issues or legal issues?
A. I think it is the various regulatory changes, particularly the regulator's pushback on Ulips (Unit-linked Insurance Policies) that helped LIC because private sector companies were strong in the Ulip market. I do applaud the work the regulator has done to improve things for customers. Anybody who has been in the business for a long time, like we have, knows customers are most important. So, customer safeguards are a good thing. But it is important for an industry like insurance to keep some balance. In fact, it is extraordinary that total insurance premiums in India fell last year and it is mainly because of the regulatory climate. I think this might be the only major country in the world where premiums have gone down. I don't think that is good for India because insurance is so important for investment in the economy.
"I can understand
the difference between 49 per cent and 50 per cent or 51 per cent, but not between 26 per cent and 49 per cent."
I also feel that restrictions on insurance companies'
investment should be removed. Insurers are used to making safe investments. This can benefit the economy as it will help garner people's savings through the intermediation of insurance companies.Q. Would you say it is a case of over-regulation in India as compared with other major markets?
A. I don't think it is over-regulated. But I think an awful lot was done very quickly. It is very important now that the industry settles down again. If we are looking forward to having IPOs (initial public offerings) in the industry, we need a steady regulatory regime.Q. Since you spoke of insurance IPOs, what are HDFC Life's plans for entering the capital market?
A. A number of things have to come together for there to be successful IPOs of insurance companies in India. We need appropriate market conditions, the companies have to be ready, the regulatory regime has to be consistent
and, most importantly, the limit on foreign investment must be raised. The last is important because, now, any IPO of an insurance company in India would have to be purely domestic (because foreign partners already hold 26 per cent in most companies).Q. Are you happy with the proposal to raise the foreign direct investment (FDI) limit to 49 per cent or do you think it should have been higher?
A. I think it is a matter of public policy. The Indian government and the Indian Parliament wish to keep insurance companies in majority control of Indians. I think it is perfectly fine as a policy decision. However, I have never understood the difference between 26 per cent and 49 per cent. I can understand the difference between 49 per cent and 50 per cent or 51 per cent, but not between 26 per cent and 49 per cent.Q. Are you saying this because 49 per cent does not give management control?
A. Of course, 49 per cent does not give management control. However, each company is different. More important, don't see this as only FDI. Equally important is foreign institutional investors (FII). Look at it as appropriate foreign investment in Indian
insurance companies. Indian insurers should stay in Indian control. It should be between partners what the level of investment is and investment should encompass both FDI and FII. Without FIIs, successful IPOs of insurance companies will not be possible. If you think about the size of the sector, half a dozen or 10 insurance companies will be coming to the market over the next five years. This will be a major new sector for the Indian stock market. We are talking about tens of billions of dollars worth IPOs and foreign investment will help make that successful.Q. Do you think there will be investor interest in insurance IPOs given that the business environment has not been very encouraging?
A. Good companies have done well. One of the best decisions Standard Life made was forming an alliance with HDFC, with my good friend Deepak Parekh (Chairman, HDFC). HDFC has been a very good partner. There are other good insurance companies as well.
In the present market condition, which has been tough, good companies have gained market share and are still performing strongly.Q. Would you seek management control of HDFC Life or would your stake be only an investment?
regulatory changes over the past two years have benefitted the Life Insurance Corporation."
A. We manage the company jointly with HDFC. Our senior management attends the board meetings. We don't want control of it. We are happy that HDFC are controlling it but we run it as a partnership and each partner knows the strengths of the other. I treat HDFC's Mr Parekh and his colleagues with huge respect. So there is no conspiracy that foreign companies wish to take over Indian insurance companies. Raising this limit (FDI cap) is about financing and what is the optimum capital structure for Indian insurers. I hope Parliament, if it gets to vote on the Bill this session, sees it in this light.Q. Of course, that is a very big 'if'...
A. Yes. For long-term savings there is no better route than insurance companies. So, there is a decision before Parliament. I think this is caught up with politics with symbolism and people need to take a step back and look at what is in India's best interest.Q. Standard Life is in areas other than insurance. So, do you see a larger engagement in India, especially with the pension sector opening up?
A. We are, basically, a savings and investment company. We don't see ourselves as a life insurance company. We have two businesses with HDFC; we have HDFC Life and HDFC Asset Management. Of course we are interested in developing the savings and the pensions market.Q. With so many insurers vying for business, do think there is a case of consolidation in the industry?
A. It will happen at some point because some companies are not doing well. However, market growth has to resume. The extraordinary thing is that the market has declined. That has to be reversed.Q. Coming back to the issue of IPO, do you have a time frame for HDFC Life?
A. As I told you, there are some factors that need to align. Until this happens, you cannot set a time-frame.Q. Are you happy with disclosure standards in India?
A. I think it is very clear. Companies like Standard Life and HDFC act on global standards. Standards are never an issue. We keep to the highest standards anyway.Q. You mentioned how the new Ulip guidelines are slowing the market down. What are your concerns on this issue?
A. I think the guidelines are fine. I think we need to settle down with a period of stability. The other important thing is, what is going to happen with the tax code (Direct Taxes Code) because, in every country, if you want to encourage long-term savings and pensions, DTC is important. I feel there are lots of moving parts here and it is important that those moving parts settle down at some point.Q. And all those moving parts are big factors in your future decisions, including timing of the IPO?
A. Oh yes, they will be big factors in the decisions that will eventually lead us to decide on the IPO.