Published in Mint on Jun 13 2016
In a board meeting held on 3 June, HDFC Ergo General Insurance Co. Ltd approved the acquisition of L&T General Insurance Co. Ltd. Pending approvals from the Insurance Regulatory and Development Authority of India (Irdai) and the Competition Commission of India, HDFC Ergo will buy 100% stake in L&T Insurance for Rs.551 crore and will subsequently merge the insurer with itself. L&T Insurance is a wholly-owned subsidiary of Larsen & Toubro Ltd; it had launched the insurance company in 2010.
HDFC Ergo, on the other hand, is a 51:49 joint venture between HDFC Ltd and Ergo International AG of the Munich Re group. With the buyout of L&T Insurance, HDFC Ergo will also acquire the insurer’s policyholders and distribution network.
So, what does this merger and acquisition (M&A) now mean for L&T Insurance policyholders in terms of policies they have or the premiums that they pay, and what should they lookout for? Before we answer these questions, let us look at what L&T Insurance offers retail customers.
What does L&T General Insurance offer?
For individuals, the insurer offers insurance for health, motor and home, in many variants. In health insurance, for instance, the insurer offers five kinds of plans. Its Medisure Prime Insurance is a premium health insurance plan with a sum insured ranging from Rs.3 lakh to Rs.10 lakh; Medisure Classic Insurance is more general in design and has sum insured ranging from Rs.1 lakh to Rs.5 lakh. Medisure Plus Insurance offers customisation through additional options apart from the basic cover. The sum insured ranges from Rs.2 lakh to Rs.25 lakh. L&T Insurance doesn’t offer a stand-alone critical illness plan; it is a part of its basic health insurance products.
Other than these, the insurer also offers a super top-up plan, which is a regular health insurance plan that covers hospitalisation but only after a threshold limit, known as deductible, is crossed. So, you can use your base health insurance policy to make a claim up till the deductible amount and any payments over that can be covered through a top-up plan. Being an aggregate top-up plan, it can be claimed, when on an aggregate level, the claim amount exceeds the sum insured of your base policy in a policy year.
It also offers a personal accident cover offering financial compensation if the policyholder dies in an accident, or is left permanently or temporarily disabled. L&T Insurance does not offer travel insurance. HDFC Ergo offers travel and stand-alone critical illness covers.
The M&A will take place in two phases. In the first phase, HDFC Ergo will acquire the company by buying a 100% stake. During this phase, L&T Insurance will continue to work as a separate entity, although as a subsidiary of HDFC Ergo. “Nothing changes for policyholders as they will continue to interact with the same insurer. However, since a name change (of L&T Insurance) is envisaged at this stage, we will inform all policyholders. The attempt will be to have a name closer to HDFC Ergo,” said Ritesh Kumar, managing director and chief executive officer, HDFC Ergo.
The second phase will involve a merger. “The merger of the two entities will happen subsequent to the high court approval and other regulatory approvals, which will take some time. This, again, will be suitably communicated to policyholders of both entities. During this time, all the business will fold into one entity under the HDFC Ergo brand name,” said Kumar.
Impact on products
The merger will also involve rationalisation of products as HDFC Ergo may want to do away with similar products. “In the non-life space, most products are fairly similar across insurers with minor differences, except in accident and health. We shall rationalise the products after the merger and after a thorough study and discussion with distribution channels,” said Kumar. “For add-on covers, we will keep the complete suite for the benefit of our customers,” he added.
A merger and subsequent rationalisation of products are bound to impact the premiums, though products will continue on existing terms till their renewal. “We will rationalise similar plans. So, ultimately, we will charge one set of premiums. It is too early to comment, but in the case of motor and fire insurance, the market does not have huge premium variation. We will also have to analyse the loss ratios of products,” said Kumar. “For health insurance, too, we will have to analyse the products and loss ratios. In fact, for similar plans, if the loss ratios of L&T Insurance are better, it may so happen that we retain that product and revise the premium downwards for our policyholders as well,” he added.
Keeping the policyholders interests in mind, Irdai is unlikely to allow for a steep hike in premium. “Policyholders can be sure of two things: on renewal of their policies, they will get the same or a similar plan; and any price change will be minimal,” said Kumar. But be sure to go through your policy carefully now and upon renewal after the merger. “Given that many products may get phased out or merged into one standard product, customers should make sure that in the case of motor and home insurance, where the contracts are renewed afresh every year, there are no new exclusions or caveats introduced,” said Kapil Mehta, co-founder, SecureNow Insurance Broker Pvt. Ltd.
Impact on claims
In terms of claims, too, the shift for policyholders will be gradual upon renewal. In terms of claims under motor and home insurance, policyholders need to contact the insurer. HDFC Ergo plans to integrate call centres so that policyholders can continue to dial the same number or if there is a new number the same will communicated.
In the case of health insurance claims, L&T Insurance currently processes claims through a third party administrator (TPA), whereas HDFC Ergo has an in-house process. “The TPA will continue to service the claims till renewal of the policy. On renewal, we will on-board policyholders with our in-house claims team,” said Kumar.
Impact on policyholders
Policyholders can expect operational and customer service efficiencies after the merger. “HDFC Ergo is one of the top four private insurers, so it will have a lot of operational and customer service efficiencies compared to a younger insurer,” said Anish Thacker, partner (tax and regulatory services), EY.
HDFC Ergo also has a wider network for cashless claims. It has tie-ups with more than 5,200 hospitals for health insurance and 3,200 workshops for motor insurance. L&T Insurance, on the other hand, has a network of more than 3,200 hospitals and 2,100 workshops.
“The merger will help us expand our size and reach as we will also acquire the distribution network of L&T Insurance. Our servicing network would also grow. For customers, this will translate into better servicing and a more comprehensive product suite,” said Kumar.
The other aspect in which HDFC Ergo is a step ahead is in its underwriting performance, which is measured by the combined ratio. This ratio is the sum of expense ratio and the loss ratio, and it indicates a product’s profitability. A ratio over 100% means it is not profitable. For financial year 2016, HDFC Ergo reported a combined ratio of 105.26% whereas L&T Insurance reported 136%.
“L&T Insurance has loss ratios better than the industry average. Its expense ratio is high on account of higher management expenses as it is still in a start-up phase and investing in building a presence. A higher combined ratio in such cases means that the insurer is not being able to realise the full potential,” said Kumar.
While for HDFC Ergo, a merger means an expansion by realising the potential of the infrastructure put in place by L&T Insurance and its distribution network, for you—the policyholder—it will translate into benefitting from better prospects of customer service, product range and a wider network.
Published in Mint on Jun 13 2016