21 Jun 2010, 0532 hrs IST,Mayur Shetty,ET Bureau

MUMBAI: Warren Buffett’s entry into the Indian insurance market is not happening through a big bang takeover of a company or acquisition of a strategic stake in a private firm. Instead Berkshire Hathaway, the company promoted by the world’s most famous investor, is making a modest entry into the Indian insurance market through a corporate agency. 

Berkshire Hathaway will set up a wholly-owned subsidiary in India, which will acquire a corporate agency licence from Irda to sell auto insurance policies from Bajaj Allianz General Insurance. The subsidiary will sell motor insurance online and make investments of close to Rs 50 crore to set up a support structure, including a call centre. Sources close to Irda confirmed the development. A spokesperson for Bajaj Allianz General Insurance refused to comment on the issue. 

The decision to get a corporate agency was taken by Ajit Jain who heads Berkshire Hathaway’s reinsurance businesses and is regarded as a possible successor to Warren Buffet. Mr Jain is a regular visitor to India and his company has been underwriting reinsurance contracts of Indian companies for years. Although Berkshire itself is a reinsurance company, it has significant interests in direct insurance. 

US direct insurer Geico (formerly Government Employees Insurance Company) is a wholly-owned subsidiary of Berkshire. Geico’s speciality is that it sells covers or insurance policies either through the internet or the telephone. Considering the high cost of distribution in retail, Geico is able to generate substantial savings by selling online and pass on the savings to buyers in the form of discounts. The company’s tagline in all its advertisement is — 15 minutes can save you 15%. 

According to sources, Berkshire is using this route because the low foreign direct investment limits in all other insurance business make it unattractive to the US giant. Whether it is life or general insurance or even insurance broking, current regulations do not permit foreign investors to hold more than 26% equity stake in the business. 
Corporate agency is, however, an exception. Under current regulations, any entity, including a foreign bank or any foreign-owned finance company can become an insurance agent by acquiring a corporate licence. 

A corporate agency, however, has its limitations. For one, every individual selling insurance in a corporate agency firm has to undergo training. Secondly, the agency can sell products for only one company. A corporate agency can, however, look forward to decent margins with commissions going up to 15% of the premium amount. 

In the past, Buffett has been extremely bullish about the direct marketing insurer. In his 2009 letter to shareholders, Buffet said: “As we view Geico’s current opportunities, Tony (Geico chief Tony Nicely) and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere.”