Sri Lanka is an important component in the German global insurance group’s Asia strategy for fast growth, says George Sartorel, Regional Chief Executive for Asia Pacific, which was why it paid a hefty premium to acquire Janashakthi’s non-life insurance business


“Sri Lanka’s importance to the Allianz group is evident in the fact that we are investing in a digital insurance platform in the country that will be deployed across the region,” said George Sartorel, Regional Chief Executive for Asia Pacific at Allianz.

For Sartorel, who has managed mergers and acquisitions globally, the future of insurance is in digital platforms, particularly because it allows companies to reach large swathes of uninsured populations across Asia. “We’ve been Euro-centric for too long, and as a result, growth has been slow,” he says. Allianz has a board-level technology committee and floated a separate business called Allianz X to drive the insurance group’s global digital strategy in its quest to increase market share, particularly in Asia where it expects faster growth. Insurance businesses in China and Asia are expected to annually grow 13% and 8.8% respectively over the next decade. Developed markets in Europe and North America lag behind at 2.8% and 3.7% respectively.

Allianz X’s investment includes $96.6 million in BIMA, a digital micro-insurer with operations in Asia, Africa and Latin America, and $35 million in Go-Jek, a ride hailing e-logistics company based in Indonesia. Allianz sold 33% in its China operations of to e-commerce firm for $85 million so it can access its 300 million active users to grow the insurance business.

For Allianz to develop a digital platform here, it needed to scale its business, which led to the acquisition of Janashakthi’s non-life insurance business for Rs16.4 billion in early 2018. “You need to reach a certain size so you can do all the other things, like lower your unit costs and invest in digital technology,” Sartorel said.

In 2016, the group’s Sri Lanka unit Allianz Insurance Lanka had a 5.3% market share in non-life insurance. It paid 2.2x net book value to acquire Janashakthi General, which boosted its market share to nearly 20%, on par with industry leaders Ceylinco Insurance and Sri Lanka Insurance Corporation.

“We first need to consolidate and stabilize the business after the acquisition; then, we will focus on developing a digital platform and introducing new products and services for this market and the region,” he added.

Excerpts from the interview are as follows:

Why did Allianz increase its investment in Sri Lanka, and why do this by acquiring Janashakthi’s general insurance business?
Sri Lanka is an important market in our Asian strategy, which we’re deploying right now. Allianz has exited markets like Japan and South Korea, and are investing to scale up operations in growth markets like Indonesia and Thailand. We’ve been Euro-centric for too long, and as a result, growth has been slow, which is why we decided to create an Asian growth engine. So now, we’re investing in countries like China and Malaysia for higher growth, which is why we increased our investment in Sri Lanka. We’ve been in Sri Lanka for quite some time with Allianz Lanka, which is the group’s best performing property and casualty insurance provider in the region. Our Sri Lanka unit has consistently outperformed every year, growing the business 30% annually over the last five years, against the industry average of 13%.

The team has been outperforming in terms of profitability as well. We were confident the management team in Sri Lanka could handle a bigger business and deliver results, so we decided to acquire Janashakthi’s general insurance business, which was growing at about 15% annually.

Sri Lanka is a growth market for us. Insurance penetration is low, the population is relatively young and there’s political stability that can translate into double-digit growth for our business. This is what we wanted to invest in. Sri Lanka’s insurance regulator has built a solid, disciplined environment that allows insurers to compete on product innovation. In many ways, Sri Lanka’s regulatory environment is ahead of many other Asian markets, which tend to be more restrictive and not allow insurers to differentiate on product, service or price. We believe Sri Lanka’s insurance regulatory environment allows us to innovate and grow through technical excellence. The acquisition of Janashakthi gives us scale to make better use of these favourable market conditions. I’ve admired Janashakthi for a long time. I’ve been watchingthe company for many years. The business was well-managed and they had reasonable growth. We felt the time was right to acquire its general insurance business to build a bigger, world-class insurance company in Sri Lanka. Sri Lanka’s importance to the Allianz group is evident by the fact that we are investing in a digital insurance platform here, which will be deployed across the region. We’re not building a digital platform for Sri Lanka, but Sri Lanka is building a platform for the region. Sri Lanka is a centre of excellence. We could have given the job to a bigger team, but we need to move fast and be agile. The management team in Sri Lanka is doing a great job setting up the centre of excellence, which will develop a core-insurance digital platform.

What can you tell us about the digital platform? What will it do?
Digital is the future. I’ve merged three Italian insurance companies into a single digital insurance company, and today it’s one of the most profitable insurers in the world. For me, digital is not about technology, but a way of doing business with customers, partners, agents, employees and other stakeholders. It’s a business model. Technology comes second, it’s only an enabler. The digital platform architecture consists of several layers. One of them is what we call a core insurance platform, which runs the processes. Another layer consists of APIs, which allow the platform to very quickly plug into external ecosystems like customers, business partners, agents and banks. It’s an important step in the growth journey. This will allow customers to access our services on their mobile phones without ever visiting a branch office, and in turn, we will be able to reach people who normally don’t get access to insurance.

For the past two years, we’ve been partnering Go-Jek Indonesia, a ride-hailing and logistics company providing its drivers online insurance covers for 17 cents a day. In other words, we made insurance accessible and affordable for many drivers and their families. We’ve issued hundreds of thousands of these policies and recently invested in the company. This is one example of how digital insurance can provide protection to families who otherwise can’t afford traditional insurance policies. This is what we call inclusion. We need to include people, so they can also buy protection for what they can afford. We also insured 212 million Uber rides in Indonesia in 2017, and generated 12 million policies online.

The digital architecture allows us to bring together different elements, so our customers can assemble for themselves the insurance cover they need at an affordable rate. People may want to cover their families, vehicles and homes from accidents, or want life insurance for a low premium of say $20 a month, and a digital platform can deliver this in an efficient and affordable way. That’s the paradigm shift that’s taking place in the insurance business. In Sri Lanka, we first need to consolidate and stabilize the business after the acquisition, then we will focus on developing the digital architecture; from there, we will develop new products and services for the market and the region.

You acquired Janashakthi’s general insurance business for over two-times net book value. What were the reasons that justified such a valuation?
Details of the transaction are publicly available, so we don’t comment on that as a policy. But let me say this: insurance is a scale game. You need to invest in scale to achieve a certain size, so you can do all the other things like lower your unit costs and invest in digital technology. Looking for opportunities to scale the business in Sri Lanka was important to us, and it’s the same in other growth markets like Indonesia and Thailand where the insurance industry is fragmented with lots of small companies. Scaling is important from a strategic point of view, which was one reason for the Janashakthi buyout, which immediately gave us 20% of the Sri Lankan non-life insurance market. Janashakthi had a strong sales culture, and its retail portfolio was interesting with over 60% in motor insurance. Allianz Lanka on the other hand did not have a large retail base, instead we mostly had large corporate clients. Growth will come from the retail segment, so that’s another reason why Janashakthi was important.

Can you give me a sense of China’s Belt and Road Initiative? Are you plugging into that initiative in any way to underwrite some of the large projects?
I’m in China almost every month. China is a complex environment, and you need to play what I call the long game. You need to take your time to understand the market. China’s Belt and Road Initiative is the biggest programme of work since the Marshall Plan after the Second World War. It’s an audacious plan to improve cross-border trade, and we are looking at ways to get involved. We’re also making inroads into China’s retail market. We sold a 30% stake in Allianz China to e-commerce giant, which will give us access to its over 300 million active customers. The deal is going through regulatory approvals, but we look forward to exciting opportunities with President Xi announcing plans to open up the financial services sector.

What will your Sri Lankan portfolio look like in three to five years from now?
Right now, we have a balanced portfolio of retail and corporate clients. We expect the retail segment to dominate the portfolio, with motor and non-motor retail products taking a larger share. Health insurance is another area with strong growth potential and we will look at accelerating that growth. Health insurance will be a dominant component of our portfolio five years from now.

What are the benefits you bring as a global company into a fragmented, highly competitive market like Sri Lanka?
Allianz is known for its technical expertise, pricing and underwriting discipline, and we have a huge resources pool that can be deployed in Sri Lanka. We have people who are experts in healthcare, cyber security and anything else you can imagine in the insurance world. Allianz invests €800 million annually, so we bring this buying power and digital expertise to the table as well. There are these enormous opportunities and scale to bring assets, people, knowledge and know-how to grow the Sri Lankan business.

Are you in a position to price your products lower because you’re able to reinsure globally, because you are a large group. Do you have that advantage?
Well, no. We don’t use pricing arbitrage, we never do that. It’s just not appropriate. We pay reinsurance rates according to the quality of our portfolio. If we build a lousy portfolio, we pay a high reinsurance rate. That has always been our policy, and there are rules against this kind of behaviour. If Sri Lanka has to run a business that’s successful, you can’t arbitrage. Allianz will not arbitrage and shift problems to make Sri Lanka look good. That will never happen. Risk management discipline, underwriting discipline and transfer pricing where we treat related parties at arm’s length are important regulations in most markets where we operate. We will offer lower prices only if we have a superior pricing insight or the technology allows it. We need to drive business growth with the technology and insights we get from data sciences, not by arbitraging reinsurance.

How much does Asia contribute right now?
Allianz’s premium per annum turnover is about €126 billion (approx. $150 billion), and Asia contributes around 6% of that, with Europe and North America accounting for most of the business. Our goal is to double topline, profits and shareholder value in Asia, while maintaining a combined ratio of over 90%. Our Asia-Pacific business grew 40% in 2017, and operating profit increased by 28%. The business has grown 30% in the first quarter of 2018. Asia Pacific is now the third-largest contributor of new business value to the group. The first is Germany, followed by the US. We’ve doubled our new business value over the last three years.

Coming back to the Janashakthi acquisition, what will you keep and what will you probably need to shed?
We’ve been discussing this as a management team. What we’re trying to do is retain the best of both companies to create one that’s much better. It’s not about winners and losers, it’s very philosophical and I’ve done M&A before. The key is to get people together, to build something better together. Allianz Lanka achieved some great things locally, and so has Janashakthi, so now we need to put them together to achieve something greater. That requires leadership, maturity and transparency. These are the things I’ve been talking about during my visit to Sri Lanka. Success requires trust and working together, and empowering the local team to achieve the goals we’ve set for them.

Are you looking at shedding staff?
That’s not the intention and we probably don’t have to; this is one reason why Sri Lanka is an attractive market. In mature markets, we would have to retrench staff, but here in Sri Lanka, with potential for double-digit business growth, we don’t see that happening. As we invest in technology, we can achieve a lot more with the same staff. We are chasing growth in the Sri Lanka market. We’ve achieved 30% annual growth over the last five years, so there is no reason why we can’t do better over the next five years, especially with two great teams now working together. We’ll make sure that, as we grow, we don’t grow our expenses as fast as we grow our premium income. That means investing in digital technology.