The easy, almost languid way the sage of Omaha?Warren Buffett?has side-stepped the insurance firewall, which was crafted over almost 20 years by Parliament savants, is amazing.
For many years, successive finance ministers of India had been chastised at investor forums for first having failed to allow any foreign investment in the sector, and then capping this at 26%?a cap that is almost getting a halo as a sort of legendary barrier that one cannot change!
Breaking usual foreign office protocol, even President Obama had to expressly acknowledge the US discomfort with the cap.
In these circumstances, the business plan that Berkshire Hathaway has rolled out is simple, legal and, in the process, sharply whittles down the effectiveness of the cap.
Buffet has signed a deal with Bajaj Allianz that will make a subsidiary of his investment vehicle Berkshire Hathaway a corporate agent for the non-life insurance company. This is in sharp contrast to the way other foreign investors have approached tie-ups in the insurance sector. Where they have wrestled with ways to stick to the 26% cap on foreign investment, the Buffett plan takes advantage of the fact that the detailed restrictions written out by the government and the Insurance Regulatory and Development Authority (Irda) makes no mention of any foreign investment cap on corporate agents.
This means while Bajaj can offer its foreign partner Allianz only a 26% share in its equity, the downstream corporate agent suffers no restriction. So while the upstream company battles a tough route to raise only domestic equity, the Berkshire corporate agent can draw upon the cheque book of Buffett without any restriction.
What does a corporate agent for an insurance company do? Like other agents, it procures premium for the insurance company it is tied to. In this respect, it is similar to individual agents, except it is registered as a company under the Companies Act and also with Irda. But while it does not carry the risk of the claims on its book, it can certainly share in the non-insurance expenses of the mother company. An example is the marketing business. Ballpark figures for Indian insurance companies show that marketing accounts for about 10% of their total spend. The corporate agent can then therefore, short of writing the policies, spend massively to expand its reach across the country. In the process, it gives Bajaj Allianz the financial space to increase its solvency margins to underwrite more policies, when other non-life insurers will, at the same time, be funding both their capital adequacy requirements and financing their networks to service their clients. As an entity, the corporate agent can also access the public issue far more easily than the insurance companies.
Buffett has actually benefited from an Indian model in the non-life business. Since 2003, SBI has worked as a corporate agent for the New India Assurance Company, using its massive reach to give the public sector a huge national market. Making good use of its experience, SBI too floated an insurance subsidiary in 2010 in a joint venture with Insurance Australia Group. So, it is fair to presume that Berkshire Hathaway will also move in a similar direction. For the time being, as the corporate agent of India?s second largest private sector non-life insurance company, it will be able to make the brand widely noticed across the country. But the strength of the Buffett model is the surprise element he has brought to the sector. Few Indian insurers have explored the full benefit of the corporate agency model till now. So, at a stroke, Berkshire Hathaway has overturned an insurance company-led model into a corporate agency-led model.
Will this encourage the other non-life insurers to also use the Buffett plan to market their policies? It is too early for any company to spell out me-too plans but it won?t be surprising.
But that?s not all. The beauty of the model is also visible at the other end.
Insurance companies reinsure their business with the specialists to keep themselves solvent. This is standard industry practice and is the basis of the global reinsurance market. While Buffett?s AIG is a powerful presence in the reinsurance market globally and the Indian insurance market is expanding at the rate of 22.53% (April 2010-January 2011), the attraction for Bajaj to do more with AIG will obviously be considerable.
The foreign direct investment cap for the insurance sector in India applies for the reinsurance business, too. So, if Buffett wants to bring in his AIG to register in the Indian market as a reinsurer, the restrictions will apply. In fact, this has been one of the chief reasons why foreign reinsurance companies have been reluctant to set up shop in
India, as it is a high-capital-intensive business. Doing reinsurance business abroad again sidesteps that restriction. A related issue is that of transfer pricing rules. Since Berkshire Hathaway is not an investor in Bajaj, the business between it and entities like AIG will not come under the glare of the transfer pricing restrictions.
In effect, what Buffett has done is to catch the insurance business in India at the head and at the foot. This allows him to call the shots so strongly and yet play within the rules. In the process, the restrictions developed by the legislature has been made redundant. While the sage rewrites the rules of the insurance business in India, one therefore wonders what the long drawn out fight was all about.
?subhomoy.bhattacharjee@expressindia.com
