Deepak M Satwalekar, managing director, Housing Development Finance Corporation (HDFC), talks to Jayshree Bose of FE on HDFC’s proposed insurance joint venture with Standard Life, growth areas in life insurance, social sector norms and other related issues.

What did HDFC look for, while selecting a partner for its insurance joint venture?
DS: When we went in for a MoU with Standard Life, there were certain factors that dictated our choice. Apart from its financial strength (premium and investment income: 13.2 billion pounds and assets: over 65 billion pounds worldwide),insurance expertise and the fact that it was operating successfully in India till 1938, what went in its favour was that Standard Life was one of the few insurance companies worldwide to have received a AAA rating from Standard & Poor and Moody’s. Also, in terms of customer service — where we would naturally look for high levels of synergy — our JV partner has been rated the best by Independent Financial Advisors (IFA). Like us, they are conservative too, settling for lower returns, if necessary, to ensure return of principal.
As far as long term commitment is concerned , the fact that they have invested in India as an FII, not to speak of their stakes in HDFC, IDFC and our mutual fund, establishes it. What is very important is that like us, their value systems percolate down the line — and that is very important in a serious joint venture relationship. As far as we are concerned, our brand name, customer focus, distribution network, 42,000-strong agent network, and existing database — not to speak of earlier entries — of 1 million depositors and half a million borrowers would have gone in our favour.

What do HDFC and Standard Life feel about the 26 per cent cap on foreign equity?
DS: Our original MoU was for a 50:50 partnership — subject, of course, to the regulations that would have come into force subsequently. So, they would have done it even at 20 per cent. Twenty six per cent is the best we could have. However, it is a misconception that money can flow out through foreign insurers — there is precious little chance of that, because in life insurance, one makes no money for 5-6 years. Re-insurance is the only route through which this could happen — and that happens even today. It will continue unless we have strong domestic re-insurers.

Are you contemplating moving into the non life sector as well, later?
DS: As of now, there are no plans of getting into non life. But we will act as an agent or broker in that area, depending on the regulations that come in. We could offer fire, household, property, travel. Now auto loans, which we are offering require compulsory insurance. Right now, we are concentrating on life for the simple reason that there is synergy between life insurance and mortgage financing.
Mortgage finance requires long term funds and insurance long term investments — so, insurance funds could always be invested in mortgage backed securities. Also, today, we have only an amortising loan — but, if it is structured in a way where we offer a mortgage redemption policy, the borrower needs to pay back only interest today, with the loan being repaid from the policy proceeds on maturity.

Which are the specific areas you are looking at?
What are the growth levels expected there? DS: Pensions is one area which has not been tapped at all — with longevity now higher, the problem now is to ensure one’s income long after retirement. The self employed segment — where the potential is higher than the group superannuation scheme taken through employers — is another high potential area. Its difficult to quantify growth levels exactly, but one could go by certain statistics.
Life insurance premium as a percentage of gross domestic savings is 6 per cent in India, as against 24 per cent in the US, 41 per cent in the UK, 32 per cent in S Korea and 31 per cent in Japan — that is the scope for growth. Of course, growth would depend largely on the new products and tax benefits offered. One has to move towards savings-linked products as in other countries — but for this, investment norms will have to be relaxed.

Your database will be a major competitive advantage. Will the privacy laws relating to depositors and borrowers restrict the insurance JV’s access to this database ?
Access to a captive customer profile and statistical database seems to be imperative, considering the unavailability and unreliability of external statistical data. DS: Privacy laws restrict the sharing or selling of financial information, such as in the case of selling mailing lists of depositors and borrowers, or, of divulging that borrower X is a defaulter, or, that depositor Y has placed a certain amount as a fixed deposit with the parent company.
Since HDFC will itself be acting as an agent, they will not apply. As far as statistical data is concerned , there is some reliable data available with re-insurers. I should think that as industry moves forward after liberalisation, all insurance companies would necessarily have to file reports on the claims ratio with the regulator, as in the UK.

There is considerable debate about the social sector norms that should come into force after liberalisation. Your comments, please.
DS: Once one gets into something mandatory, the very purpose behind mandating it could get defeated. Take the Urban Land Ceiling Act—no one can find fault with it in theory, but, in practice, it froze the availability of land and prices went up. While there cannot be a rigid threshhold, servicing has to be considered—it is a high priority with us.
Its true that some requirement has to be specified, but there should be a corresponding flexibility in investment norms,too, to enable insurance companies to meet these targets. Life insurance is required to invest in infrastructure, which is itself largely in the social sector.

How do you see the market shaping, a few years after liberalisation?
DS: LIC, which has been laying a lot of emphasis on technology and training of agents, will continue to have a large market share of around 85 per cent, although this will be a larger market itself. In fact, getting trained agents would be a major challenge for the new players. The public sector will therefore continue to dominate after liberalisation, which is what happens everywhere — even in countries where 100 per cent equity holding is permitted.