Even as the life insurance industry has witnessed growth in premium collection, the broader economic growth may impact the growth. Tarun Chugh, CEO, Bajaj Allianz Insurance, however, said that things should improve over the next six-eight months. He also said that with companies failing despite AAA rating, his company is now going for a holistic management check of companies before debt investment. Excerpts:
Despite economic slowdown, the premium collection for the industry has increased in the September quarter. How do you explain this?
While people are saving for the long term, the real reason I think is the low rates on fixed deposits (FD). When FD rates come down and yield curve has settled somewhat, portfolio returns can go up with the help of some bond investments. So, in the saving part of life insurance, we are taking benefit of the yield curve and we are able to diversify with more AAA corporates where we are able to get better yields; so, as a result, we are able to give better net of tax return for a long term to the customers. While the last quarter was good, even the current quarter is also looking strong as of now.
While traditional insurance products have been giving between 5-6.5 per cent, now 6.5 is not possible but it is comfortably possible to give 5-6 per cent return, net of tax. So, tax arbitrage with FDs is playing out well for us.
When you lock-in with a bank for three-five years at 7 per cent, the post-tax return is 5.5 per cent. But if I can give you a 10-year product which gives you similar return, then suddenly we get competitive and you can play the yield curve.
You mentioned about AAA rated companies, but there are so many corporate and financial entities that once were AAA rated but now are in a bad shape and people have lost a lot of money. What is the sanctity of AAA rating then?
What we were doing is that we were relying on the AAA rating by credit rating agencies, but now we are very clear that we will do it the way we do for equities, where we do a management check which is a holistic check. Also, now we are only going for big companies.
How do you see the economic slowdown and revival?
While our industry has witnessed growth, I can’t say that life insurance can remain in its own microcosm for too long because ultimately consumers will stop spending. It is a concern, but I have a feeling that next year the base impact will kick-in.
I think that it is a six-eight month phenomenon but this year will be tough. The consumption may have been down but Diwali was not as bad as people expected. I also feel that the government will step in to provide income tax benefits.
There has been a shift in how consumers and markets are reacting to global, behavioural and GST changes. We normally say that if transportation does well, it is the first indicator of economic revival. But suddenly, you see that the truck that used to take six days to reach down south, now reaches in four days and the wear and tear has reduced.
So, that is the recalibration that is happening. That will impact the demand. These factors are also playing a role.
Government may hike FDI in insurance sector from 49 per cent to 74 per cent. Are you in favour of this and will you reduce your stake?
It’s a shareholder outlook, and we don’t need the money either. We are one of the highest capitalised life insurer, so, whichever way it goes, Bajaj Allianz is not impacted. Some companies where the Indian promoter is not able to fund any more, … they will gain out of it.
What is your view on life insurance companies getting into health insurance business?
Historically, in India, life and health have been separate, whereas globally, life, health and pension go as one package. I am looking forward to it and it needs to be looked from the customers’ perspective. Every company brings its own competence. I think from a customer perspective, possibly it is lot more under penetrated and so should new players be there? Of course there should be.
How do you see the Vodafone issue playing out?
Any sector which is touching the life of individuals on a daily basis — and telecom is one of those — a major player going down in that will of course impact sentiments. We will have to see how it plays out. A lot of finance entities have exposure to it as total liabilities stand at over Rs 1 lakh crore.
Do you see the government playing a role and helping the sector which is under stress?
It is a tricky situation and we can’t get socialist about it. Businesses will have to find their own viability. I, however, feel that the government may have to come in from a consumer perspective and see whether the consumer will gain or lose from all this.
The way I see it is, over the last four-five years, whether it is credit side or other businesses, it is a kind of clean-up happening. Of course the jury is out on whether it should have happened in such a big bang manner or should have happened gradually.
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