New Delhi: Audit, tax and advisory service firm Mazars’ global head of insurance Gilles Magnan has an unusual take on the manner in which the Indian insurance market has evolved. In an interview, Magnan, a chartered accountant by training, identified likely trends in India and the lessons it could heed from developments in Central and Eastern Europe following the opening up of the financial markets. Edited excerpts:
It is almost 10 years since India opened the insurance market to private and foreign players. Compared with other markets at a similar stage of development, how do you think India has done in terms of opening, reforms and improving access to insurance?
Nurturing the market: Mazars’ Magnan says that in a developing market such as India, it is good to protect the insurance sector for some time so that the domestic firms are able to compete with global companies. Rajkumar / Mint.
The first important point is to place India in the global market. On a worldwide basis, you have two very big markets—the US and Europe. These markets are mature.
India is a new market. It is not mature. My feeling after a few days in India is very good. First, the people I met are very well trained and they know the business. Second, it is very important you have rules and you have a very strong regulator. When you sell insurance, you touch the people. It is very important to protect them and very important to protect the market. The fact that the regulator is strong in India is very good for the business and it will make a good environment for companies to develop. The last point, people here care about internal control, governance... India is not a mature market, that is clear. It is going to grow very fast in the future.
Is there any other market you can probably think of which went through a similar experience in the first 10 years after opening up?
I think it is not exactly similar, but Eastern Europe was a very specific market where everything was controlled by the state. Very simple, basic products sold by one company in each country. This market opened up in the beginning of the 1990s after the fall of the Berlin Wall. Nineteen years later, these markets are quite mature, or least some of them like Hungary and Poland. Some of them are still on the way to development like Bulgaria. What makes the difference? The difference is legal environment. I think you have a good legal environment in India which protects people and investors. And you must have the willing(ness) of the people to develop the business. This feeling you have in Poland, Czech Republic, Hungary and I am sure you have it here.
I think you (India) will have a comparable evolution. I am sure in 10 years the market will be very different in India.
What kind of differences do you think will come through?
First, you have got a lot of actors entering the market. We will go through some years— next three-five years—of very big competition in India. That will be quite difficult for insurance companies because it will be difficult to make good results. And then, you will have the phase of consolidation, after three-five years.
Normally, when a market opens up like the one in India, how many years pass before you see consolidation coming in?
At least 10-15 years for consolidation. First is market share.
What are things that strike you most about the Indian market. What are the strongest impressions you have had?
As soon as as you speak about volume and distribution channel, you are in huge scale. At the same time, it is very good and it is also dangerous. I think the most important challenge for companies in India is to choose the good distribution network and put in place good procedures and people.
You have in India lots of contracts between insurance company and banks... In this situation, the insurance company is under the power of banks because banks distribute the product. If it closes the distribution, you lose access to the market. I think every insurance company has to find a good balance between different insurance networks they can use.
In Europe, you are now moving towards a no-commission system. Could you tell us something more about it, as a debate on the subject has started here?
What is the most important point about that? It is transparency. Problem (is), I am a client, I don’t know how much commission I will be charged...
When you say no commission, it is nonsense. Why? You have to pay someone or something to distribute your products. So the question is not commission or no commission; the question is transparency of the system. In some countries, you had a problem because you had too high commissions.
Here the premium (paid by the insured) includes the commission. If you have the rate of commission on the product, it is okay... You make a job, you give money.
One approach to the issue is that commission should be decided between the agent and the client. The insurance company should not be a part of it.
It seems difficult for me. How will the client negotiate the commission? He will have no power. It is more risky to do that because you risk more abuse towards the client than if it is the insurance company paying the commission directly. What is important to understand about the insurance market is that a big part of the products are about mass products... Most of them do not understand exactly what is in the contract. So you have to have very simple rules and a very small regulator to protect the people.
Right now Parliament is debating a proposal to increase foreign ownership in Indian insurers from 26% to 49%. How many markets in the world allow complete foreign ownership?
What I would like to say first is, when you have a developing market like India, it is good to protect it for some time to allow the possibility for some Indian groups to compete for market share...
Central European countries are a very good example. When they opened the market, they were told, “You must liberalize and you must privatize everything.” Some of these countries did that. Now, if you go to Hungary, there is not any more any Hungarian bank or Hungarian insurance company. Do you think it is good? My answer is no. I think it is good to have local actors to compete with international actors. Now they feel a little disappointed with the situation because they have no more control on their banking system or their insurance system... If you want to control the situation in your country and monitor the economy, you have to have minimum control. I think that is the position in India. Even if it is not the best position for the foreign investor, it is a good position for India.