What would change with you as the CEO of HDFC Life? What is your mission?
It is to be an innovator. We will look at being among top three, most profitable. Our embedded value, or EV, has to be pristine. There will not be any skeletons, and if at all anything, it (the practices) will be conservative. We do say no to a lot of businesses and there is a reason for it. We are seen as a technology company and we want to continue on that path in the overall realm of innovation, whether it is technology innovation or reaching to market. This is a simple vision. In 5-7 years, our retirement business has to be Rs 1 lakh crore.
The last few quarters have been tough. How much could insurers grow after reporting huge growth in the run-up to listing of life insurers?
People cannot say insurance is maxed out, especially with the open architecture. In the pension market, today the rules say you have to buy annuity from the same company from where you buy pension product. He then goes to equity MF and says he will buy immediate annuity when he retires. Another one is management expenses. Ultimately, market economics will dominate. We are a two-decade-old company. Give us some freedom on expenses. Third one, is health insurance. It was pulled away from life insurance companies.
Why should health insurance be with life insurance companies?
There is more synergy between life and health than with motor. It is severely under-penetrated. A person dies only once but chances of health claims are many. We are not allowed to do indemnity. Someone might have bought an indemnity plan from a standalone health insurance company but because of medical inflation, which is running at 50-60%, he doesn’t realise there is a daily room cap of Rs 5,000. We can provide a top-up and pay the amount over the limit. Innovation hasn’t happened in health.
What is that the industry needs to expand compared with competing industry like mutual funds?
The worry is how to get whole life annuity which is not taxed. We have appealed to the government because taxing annuity is not equitable. Taxing the money when the person is retired is not fair.
There is belief that insurance companies inflict costs on savers while mutual funds do better. Can insurance match mutual funds?
If we compare MF products to our click2invest, ours is cheaper through innovation. My fund management charge is capped at 1.35%, while for MFs, it is 2.25%. Over a 7-year period, the returns are better. Second, it is completely tax-free as against 10% tax under long-term capital gains. Third, MF construct is such that there is a trust and a fund, so every time you switch between funds, there is tax on it. Here there is one entity and no tax on switching. The IRR is better in click2invest over 5 years versus mutual funds.
You talk about innovation. But this is an industry where it is easy to copy. How do you distinguish yourself?
We are beginning to be known as an innovator. People know who is the original. There may be many Picassos, but only one is original. In our annuity product, our entry age is 45 years, but some companies are offering it at 30 years.
One of the reasons why people are averse to insurance is huge charges when discontinued for whatever reasons. Just about half the policies are being renewed after five years. Why?
I feel that structurally there are a lot of exit barriers. On ULIPs, if there is a surrender, it goes and sits in discontinued funds. Companies have to give a guarantee of 4% on discontinued funds, which means we have to put money in G-sec or AAA-rated corporate bonds. We are asking the regulator to keep the money of discontinued policy holder with us and not to pay to the policyholder. He is surrendering, exhibiting bad behaviour. When we put money in PPF, we know the money is locked. In Insurance after one year, people want to withdraw.
Your solvency ratio is at 1.91 times. Will you need to raise capital?
Not for organic growth. Even if we were to grow at 50% and unit-linked which causes a lot of strain, we do not need to raise solvency capital. If you look at our profit streams, 2x of our profit is generated by back book (Back books consist of policies that are no longer sold but are still on the books as premium-paying policies.) As long as persistency is good and assumptions are not aggressive, it should churn out profit to add to my solvency.
You courted Max Life and pulled out. Where does it stand now?
That hasn’t changed. The problem is with the two-tier structure which does not work with the insurance regulator. They will have to collapse the structure. There is a tax impact. The relative valuation has widened even more now.
Life insurers were trading on stock exchanges at 5-7 times embedded value. Now they are off. With Chinese insurers at less than 2 times. What is real?
It is difficult to say. It has come down from heydays of 5-7 times to 4 times. When Ping An listed, which was an 18- year-old company in its life cycle, its multiple was in the range of 4-4.5 times. I do believe valuations should strengthen. First, the scarcity value. Second, unlike banks we do not require capital. Even with 50% growth, we do not require capital. If you are not here in life insurance, you are missing the opportunity. Why in banks some are at 6-7 times the book and others are at just one time?