Distribution network is regulators’ concern4 min read . Updated: 09 Sep 2010, 09:43 PM IST
Distribution network is regulators’ concern
Distribution network is regulators’ concern
Mumbai: The clouds hanging over American International Group Inc (AIG) have passed, says Sunil Mehta, country head and chief executive of the Indian unit of the insurance firm that nearly collapsed during the slowdown in September 2008, before the US government bailed it out. In his first interview since the crisis, Mehta backs regulatory reforms in India that bring more transparency and argues for more foreign direct investment in the sector. Edited excerpts:
AIG is planning to list its Asian subsidiary American International Assurance Co. Ltd n Hong Kong.Will this include the India business too?
If that happens, the cloud hanging over AIG would pass…
These (bad times) are features of the way you do business. We have gone through the challenging period and we have emerged much stronger, much (more) confident and (a) more cohesive business entity. If you look at it constructively—what is the most importance piece of this difficult situation? Your people. I am proud of the way all our people emerged out (of) this. They put their heads, hearts and hands together to be able to come out of this crisis stronger.
With new norms, the insurance business requires more capital. Will AIG be ready?
We are growing with the industry in India. You can see from the way our businesses are growing, and they can’t grow if the 26% partner is not putting in money. We are committed to our business in India.
Companies such as Goldman Sachs are looking to increase their India business, starting a non-banking financial company (NBFC) and so on. What are your plans?
At this point of time, our focus is on the core insurance business. That’s really what has been articulated by AIG Inc. (It is) too early for me to sort of say anything. Historically and at this point of time, insurance is the focus.
What do you think about the reforms by the Insurance Regulatory and Development Authority and Securities and Exchange Board of India in insurance and mutual funds?
The recent regulatory reforms that we have seen coming out of Sebi and Irda—I’ve been very supportive as I believe they are steps in the right direction.
Ultimately, if you look at the intention of all the regulations, it is to build a high level of transparency and make it easier for retail investors to be long-term players in these markets.
And also attract more retail investors in the market.
The other important piece that is coming out is that the regulators (want) that the distribution of products is done in a manner that they fully understand. If we can build a distribution infrastructure and if we can do it effectively at a reasonable cost, then it will help in expanding the market.
Ulips (unit-linked investment plans) were not transparent. It needed a regulator to come in and fix those.
We always need a regulator. It is necessary. It is a partnership. (But) the important thing to understand is that there was a demand for those products. In the first few years it was not that they (private insurance) were selling Ulip products, it was more traditional products.
When they started introducing Ulips, the demand for those was growing, it was natural for the water to find its own level.
There was a distribution commission, everyone recalibrates the commission. Certain distortions take place. The important thing to ask is, is this market still underpenetrated or not? Then there is potential for growth (but) there will be some short-term realignment.
With the new regulations, break-evens are now stretched even longer.
It was not overnight that we figured it out. It was over a period of time that we saw that we were spending a lot of money on distribution infrastructure. We have to realize what is the benefit that the policy holders are able to get.
If you allow more FDI (foreign direct investment) in this sector, basically you are bringing in long-term domain capital into this segment and each one is playing a responsible role in entering into this market. Everyone recognizes that break-evens are longer. Now it is even longer. So only serious long-term players come into this market.
Historically, when you look at the Indian market, you are looking at them for the long run. The amount of investment it takes to get to the huge consumer base here—it is quite different, but the returns are also huge. There are not many countries which offer this opportunity.
Why was Lehman Brothers Holdings Inc. not saved, but AIG was?
I honestly...wish (I had) more insight into that. I read the same books and same blogs... I honestly don’t have any (more) insight than what is there possibly. All I can say is that we continue to do our core insurance businesses with a great degree of responsibility and manage them effectively. The testimony is right there. Our two insurance companies which are there in India continue to grow from strength to strength.
The Tatas and you have joint ventures in insurance, but are competing in the asset management business...
That’s been happening for many years. There is so much space in the market. They are large players, we are small. I don’t think there is an issue here.
There are reports that the insurance business is coming under Tata Capital. How do you look at it? Will AIG’s role change?
I have no idea. From our perspective, we are continuing to grow our insurance businesses.
There are talks about the Tatas buying out AIG stake.
It is a rumour. It’s been two years we have been hearing this. The companies are running.