The Economic Times of India has reported that Berkshire Hathaway is making a modest entry into the Indian insurance market through a purchase of a corporate agency. Berkshire will set up a wholly owned subsidiary in India which will operate a corporate agency selling auto insurance policies issued by Bajaj Allianz General Insurance. The subsidiary will invest Rs 500 million, or US $10.9 million to set up the necessary infrastructure.
India has several restrictions regarding the level of foreign direct investment in the insurance industry. Current law prohibits foreign investors from owning more than a 26 percent equity stake in an insurance business. However, foreign owned companies can become an insurance agent by setting up a wholly owned subsidiary.
While this entry into the Indian market is a very modest move for Berkshire, Warren Buffett has indicated an interest in pursuing additional business in the country in the future. At the Berkshire Hathaway annual meeting in May, Mr. Buffett announced that he is planning a trip to India in early 2011. The Economic Times of India credits Ajit Jain with spearheading the decision to set up the corporate agency and it is likely that Mr. Jain will be heavily involved in future expansion of the business.
Auto insurance in India is certainly an area where growth can be anticipated. The number of vehicles on the road in major cities like Mumbai (pictured nearly) is already overwhelming the road system. A growing middle class is creating a higher level of demand for entry level vehicles like the Tata Nano. Cities are full of motorcycles and trucks as well. Middle income consumers will be interested in obtaining protection for their vehicles particularly given the dangerous traffic and risk of loss.
Disclosure: The author owns shares of Berkshire Hathaway.