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Insurance

The Indian insurance industry currently valued at US$ 10.2 billion is on anaccelerated growth trajectory. With the largest number of life insurance policies inforce in the world, Indias insurance sector accounted for 4.8 per cent of GDP in

2006-07, up from 3.14 per cent in 2005-06.

Indian insurance companies recorded a 19.9 per cent growth in premium in dollarterms (adjusted for inflation) in 2006-07, compared to the world market growthrate of 2.9 per cent. In fact, the growth in premium has pushed India to being the15th largest market from 19th in 2005.

This rate of growth of the industry looks particularly impressive when seenagainst the fact that the combined penetration of both life and non-life is less than2 per cent of the GDP compared to world average of 7.52 per cent. Clearly, thescope for growth is enormous.

Life Insurance

The life insurance industry posted a whopping 110 per cent growth in 2006-07,taking the total business to US$ 18.62 billion from the previous years US$ 8.87billion. As a result, Indias share in the world life insurance market rose from 1.02per cent to 1.68 per cent. Also, life insurance premium accounts for 1.8 per centof the GDP in India

A booming life insurance market has propelled Indian life insurance agents intothe top 10 country list in terms of membership to the Million Dollar Round Table

(MDRT) an exclusive club for the highest performing life insurance agents.India ranks sixth with 1,145 members in the elite club.

Life insurance penetration in India which was less than 1 per cent till 1990-91 increased to 2.53 per cent in 2005, and to 3 per cent in 2006-07. The impetus forgrowth has come from both public and private insurers. Also, the number ofplayers in this segment have increased to 16 (15 in private sector), with LifeInsurance Corporation (LIC) being the dominant player (market share of over 74per cent).

General Insurance

The domestic non-life insurance industry grew at the rate of 22.37 per cent in2006-07, with the total premium collection valued at US$ 6.17 billion as againstUS$ 5.04 billion the previous year. While the share of public sector was US$ 4.02billion (8.59 per cent growth rate over 2005-06), private player's share was US$2.15 billion (60.39 per cent growth rate over 2005-06).

Particularly impressive has been the performance of the private sector in this


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segment. Since the time it was allowed to enter the industry (in 1999), the privatesector has increased its presence from 9.33 per cent in 2004-05 to 35 per cent in2006-07 and further to 39 per cent in April- June, 2007. Currently, the number ofregistered private insurance players is 9, out of the total registered insurance

players of 15.

Insurance

Government Initiatives

The government has taken many proactive steps to give a boost to this sector:

Private insurance companies have been allowed back into the business ofinsurance.

FDI up to 26 per cent is permitted under the automatic route subject toobtaining a license from the Insurance Regulatory and DevelopmentAuthority (IRDA)

Insurance Regulatory Development Authority (IRDA) has been establishedas the regulator for the Insurance industry

IRDA has removed administered pricing mechanism, i.e. de-tariffing inrespect of fire and engineering along with motor insurance of generalinsurance for premium, effective from 1 January, 2007.

IRDA has also issued a circular stating that the control rates on fire,engineering and workmen's compensation insurance classes shall betotally removed from 1 September, 2007.

Some of the state governments have also taken a dynamic role in this sector. Forexample, the government of Andhra Pradesh after piloting the Arogya Sri healthinsurance scheme in three districts, plans to issue health cards to 18 million BPL(below the poverty line) families. As a result, about 60 million of the States 80million people will have insurance cover.

Foreign Companies

The booming domestic insurance market along with saturation of markets inmany developed economies has made the Indian market a very attractiveproposition for global insurance majors.

Tata have formed a joint venture with US based American Int. Group(AIG)

Max India has formed a joint venture with US based life insurance


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company, New York Life. Indian Farmers' Fertiliser Cooperative (IFFCO) has formed a joint venture

with Tokio Marine and Fire of Japan to form IFFCO Tokio GeneralInsurance Company.

State Bank of India has formed a joint venture with Cardiff SA of France

(the insurance arm of BNP Paribas Bank) as SBICardiff Life. ICICI has joined hands with UK based Prudential-- ICICI Prudential Life

Insurance.

Some of the other major joint venture companies in this industry are Bajaj Allianz,ING Vysya, AMP Sanmar Assurance Limited, HDFC Standard, Birla Sunlife,Aviva Life Insurance, Kotak Mahindra Old Mutual, Met Life, Royal Sundaram,ICICI-Lombard among others.

Simultaneously, some of the Indian companies are also venturing abroad todiversify and increase their global presence.

The Shriram group has picked up a 40 per cent stake in MonarchInsurance Company, a non-life insurance company based in Makati City,Philippines.

LIC along with general insurer New India Assurance and Saudi Arabia'sAl-Hokair Group has set up Saudi India Company for CooperativeInsurance (SICCI).

ICICI Prudential Life Insurance is already present in Bahrain and Dubai.

Insurance

New Trends and Targets

Insurance in India has been spurred by product innovation, streamlining of salesand distribution channels along with targeted advertising and marketingcampaigns.

Insurance companies in general and private insurance companies in particularare now tapping semi-urban and rural areas through innovative marketmechanisms (like tying-up with NGOs, ICT projects) and offering products thatmeet the specific needs of these markets.

The life insurance market in semi-urban and rural territories is expected to touchthe US$ 20 billion mark in the next four years from the existing value of less thanUS$ 5 billion. In fact, semi-urban areas are expected to garner about 60 per cent


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of the total insurance industry.

The fact that nearly 72 per cent of the total population resides in these areas,which also has low penetration of insurance cover, has been attracting many

companies to enter this segment. Some of these are: Tata-AIG, Bharti-AXA,Reliance, Aviva and Royal Sundaram.

Another segment witnessing increased activity are policies targeted at children.Be it ICICI Prudential Lifes SmartKid, Birla Sun Lifes Childrens Dream Plan,HDFC Standard Lifes Young Star Plus all the companies are drawingstrategies to enhance their presence in this growing segment. According toindustry estimates, currently, 20-30 per cent of business of many companiescomes from children-specific insurance policies alone.

Emerging lifestyle trends amid a changing fabric of the Indian society have also

modified the social and financial behaviour. For instance, an increase in thenumber of working women has lead to a demand for life insurance policies, whichin turn has helped women through a micro-entrepreneurship initiative (womenhave flexibility managing home and being financially independent asdistributors of insurance).

Innovations have come not only in terms of product benefits, but also in deliverymechanisms emanating from various marketing tie-ups both within the realm offinancial services and outside. These include tying-up with NGOs, ICT(Information and Communication Technology) projects, companies givingmobiles to their agents (like Tata-AIG), sale of policies through banks and post

offices, and bancassurance sales, among others.

The Future

Market penetration tends to rise as incomes increase, particularly in lifeinsurance. India, with its huge middle-class households and growing economyhas exhibited huge potential for this sector. Current estimates say that, for everyone per cent increase in the GDP, insurance premiums increase by at least 4 percent.

The domestic insurance industry in India is estimated to be around US$ 60.5

billion by 2010, of which US$ 35 billion will come from rural and semi-urbanareas. While the life insurance market is expected to grow to US$ 35 billion, non-life insurance market will touch an estimated US$ 25 billion.

Banking


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First, Standard and Poor's upgradedIndia's sovereign credit ratings. Next,the Boston Consulting Group (BCG), ina report on opportunities for foreignbanks, confirmed that with more than

US$ 180 billion in long-term fixeddeposits in banks and low penetration inthe pension market, the opportunity forsustained double-digit growth isattractive. Obviously, expectations offoreign investors and multinationalcompanies seeking to take advantageof the huge growth opportunities in Indiahave risen.

According to the Annual Statement on

Monetary Policy for the year 2007-08released by the Reserve Bank of India(RBI), the Indian economy haswitnessed robust growth during 2006-07for the fourth year in succession. TheCentral Statistical Organisation (CSO)estimates that the real Gross DomesticProduct (GDP) growth has acceleratedfrom 9.0 per cent in 2005-06 to 9.2 percent in 2006-07. The CSOs estimatesfor 2005-06 places gross domestic

savings (GDS) above 32 per cent ofGDP and gross domestic investment(GDI) close to 34 per cent.

Industrial output grew by 11.5 per cent in 2006-07 helped by robust exports andthe fastest growth in manufacturing in 10 years. The strong growth has putpressure on prices and annual inflation, measured by the wholesale price index,hit a two-year high of 6.69 per cent in January 2007. The RBI has raised short-term lending rates twice between January and June 2007, by a quarter of apercentage point each time to 7.75 per cent -- the highest level in more than fouryears -- to cool loan growth and tame inflation.

With buoyancy in credit growth and corresponding shortfall in deposit accretion,the credit to deposit ratio in the banking sector has shot up from 65 per cent inJanuary 2006 to 74 per cent in January 2007. To bridge the widening gapbetween incremental credit disbursal and deposit accretion, banks chose toincrease their benchmark prime lending rates (BPLR) to counter the hike infunding costs.

Economic Survey 2006-07 says:

The increasing trend in gross domesticsavings as a proportion of GDPobserved since 2001-02 has continuedwith the savings ratio rising from 26.4

per cent in 2002-03 to 29.7 per cent in2003-04, 31.1 per cent in 2004-05 and32.4 per cent in 2005-06. As thesavings rate has gone up, private finalconsumption expenditure (PFCE), atcurrent prices as a proportion of GDP,has shown a declining trend particularlyfrom 2001-02. PFCE as a proportion ofGDP declined from 63.1 per cent in2002-03 to 62.1 per cent in 2003-04,60.0 per cent in 2004-05, and further to

58.7 per cent in 2005-06. This declinehas also been accompanied bysubstantial changes in the consumptionbasket in terms of the shares ofdifferent commodity groups. In PFCE,the share of food, beverages andtobacco came down from 43.3 per centin 2002-03 to 39.4 per cent in 2005-06.The other major item of importance,namely, transport and communication,as a proportion of PFCE, rose from

15.8 per cent in 2002-03 to 19.1 percent in 2004-05.


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The RBI has attributed the high demand for non-food credit to the higher thanexpected economic growth in the manufacturing sector. In addition, theincremental disbursements to commercial real estate (which grew by 95 per centyear on year basis in the first half of 2007), home loans (which grew by 38 per

cent YoY) and capital market related activities (which grew by 39 per cent YoY)were higher than credit to industry (which grew 32 per cent YoY) and credit toagriculture (which grew by 39 per cent YoY).

Banking

Trends

India -- with its GDP approaching US$ 800 billion being viewed as one of thebiggest growth stories among emerging markets explains only part of theattraction for foreign banks. Households earning between US$ 2,250 to US$25,000 a year are expected to increase from 52 million in June 2007 to 103million in 2010. Household income is expected to rise at an average yearly paceof 6.4 percent in 2005-15, according to a forecast by consulting companyMcKinsey.

Consumption, which today accounts for 60 per cent of India's gross domesticproduct, is set to quadruple to US$1.5 trillion by 2025, overtaking Germany asthe fifth-largest consumer market, according to a forecast made by McKinsey.

According to a PricewaterhouseCoopers (PwC) report, the banking sector indeveloping economies led by China and India is likely to overtake banks in thecurrently richest countries of the world by 2050. China and India show thegreatest growth potential through organised growth and merger and acquisition(M&A) activities, PWC said. Driven by large capital and global liquidity, theM&As, including inbound and outbound deals, are expected to cross the US$100-billion figure in calendar 2007. By May 2007, M&A deals in India hadtouched the US$ 46.8-billion mark. Indias domestic banking market could beatChinas in the long-run, the report said, noting that the country has seen majorfinancial sector reforms since 1991 with private and foreign banks gaining market

share.

The Government is set to liberalise norms for mutual funds investing in overseasdebt/equity instruments. The individual cap of US$ 200 million for fund houses forinvestments abroad is likely to be hiked. At present, a single fund house caninvest up to 10 per cent of its assets under management (AUM) across schemesin overseas equities/debt as on March 31 of the relevant year, subject to amaximum of US$ 200 million. This, in turn, is subject to an overall ceiling of US$


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4 billion for all mutual fund investments abroad. Both caps are being reviewed.

The credit outgo from public sector banks is expected to grow by 25 per cent for2007-08 while deposits are set to grow by around 22 per cent. In 2005-06, the

banking industry registered a credit growth of over 30 per cent while depositsgrew at less than 20 per cent.

Investment banks operating in India have earned nearly as much in the first halfof 2007 as they made throughout fiscal 2006-07 from underwriting stock offeringsand advising on takeovers.

Global banks are banking on India

The Government has allowed Morgan Stanley, Mauritius to invest up toUS$ 465 million in shares and convertible preference shares to be issued

by Morgan Stanley, India, to undertake stock broking, merchant bankingand other NBFC activities. French financial services company Societe Generale (SG) Group is

aiming at close to US$ 1 billion disbursals from its consumer financebusiness in India in three to five years. The company is also looking atentering the insurance sector.

CIT Group Inc, the US financial company with US$ 80 billion in managedassets has announced its decision to enter the Indian market to tapbooming demand for commercial and consumer loans.

First Financial Bank, one of the six oldest banks in the US, is setting up acaptive operation in India.

Banking

The banking industry earned an estimated US$ 288 million from a record surgein share sales and mergers and acquisitions in the six months ending June 2007,only 12 per cent short of their full-year takings for 2006.

Indian banks are scaling up their overseas operations

State-owned Bank of India (BoI) announced the acquisition of a controlling 76 percent stake in Indonesian bank PT Bank Swadesi, a mid-sized bank operating inIndonesia for the last 38 years, at an estimated cost of US$ 20-25 million. Whilethis is its first overseas acquisition, other Indian banks are also aiming atboosting their share of total income from international operations. Last year StateBank of India had acquired a 76 per cent stake in PT Bank IndoMonex of


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Indonesia.

Indian banks in loan markets abroad

With the best of India Inc. flocking to overseas loan markets for funds, Indianbanks have started following their top customers. For the first time, two Indianlenders -- ICICI Bank and SBI -- figure among the top five in the league tables forloan syndication. The role of Indian banks in loan syndication has grown, alongwith their growing global presence. Plus, they have the advantage of a closerrelationship with the Indian corporate borrower vis-a-vis foreign banks.

Banks and Consumer Finance

Indians are on a spending -- and borrowing -- spree. According to a 2005 studyby McKinsey, about 40 million households--or 215 million people--have an

annual income of US$ 4,000-10,000. They can afford to rent an apartment, havea bank account and own a refrigerator, television and a small car or motorcycle.By 2010, this figure will be 65 million households or 350 million people. India'sentire stock of financial assets--equity, corporate and government debt and bankdeposits--is valued at US$ 1.1 trillion, the report adds.

Consumer demand strengthened in 2007 as bank loans climbed 26.3 per cent inthe 12 months through May 2007, compared with 30.9 per cent in the sameperiod in the previous year, according to RBI data. Salaries in India are expectedto grow an average 14.5 per cent in 2007, the largest increase among Asiancountries for a second year in a row, Hewitt Associates Inc. mentioned. The loan

market has grown at an annual rate of almost 30 per cent in the past five years,undeterred by rising borrowing costs.

Lifestyle funds, being floated by asset management companies, are expected toincrease in number and size in the coming days owing to the rising income andconsumption levels of people in India. UTI is looking at a corpus of US$ 494million for the UTI-India Lifestyle Fund. Reliance Capital, which is present in themutual fund, insurance, stock broking and private equity space, is planning tostart its consumer finance business.

Managed assets to rise 6-fold by 2015

The total assets managed by all funds in the country -- mutual funds,international funds, private banking, including portfolio management services,unit-linked insurance and pension funds -- is likely to grow more than six-fold toUS$ 1,300 billion by 2015, from US$ 170 billion, says the Boston ConsultingGroup. The potential of the Indian market is attracting many new entrants andthis is likely to continue over the next five years. The opportunity for various fundcategories to invest in India will grow exponentially; managed assets, excluding


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pension, are expected to grow at least 10 times over the next 10 years.

Financial Services

Bolstered by the continuing rally of the rupee against the US dollar (reflected inthe accumulation of over US$ 200 billion foreign exchange reserves), India joinsthe elite club of 12 countries which have a trillion dollar economy.

The continuing appetite and growing strength of the rupee could lead to a new,lower sovereign benchmark. This in turn will not only help the exchequer raise

cheap funds, but also help Indian companies raise debt at lower interest rates.

Also, with an increase in India's sovereign credit rating to investment grade(BBB-) from speculative grade (BB+), by global rating agency Standard & Poor'sin January 2007, the country has become attractive to a range of globalinvestors. This is likely to enable the government to raise debt at highlycompetitive rates.

Reflecting India's emergence as a popular investment destination, the WorldBank's Global Development Finance (GDF) 2007 reports India cornering a majorportion of US$ 40.1 billion net capital inflows to South Asia in 2006. India also

became the world's eighth largest market for mergers and acquisitions in the firstquarter of 2007.

Thanks to the current rupee appreciation, many Indian companies, whoseexternal loans have matured in the last three months, would be a happier lottoday. Back of the envelope calculations indicate that these companies wouldhave saved almost US $ 9.77 million on account of the rising rupee which hasreduced their payout liability. Some of the companies that will get to ride therupee hike bonanza include Convergys, Cargill India, Nicholas Piramal andWatson Wyatt among others.

Stock Markets

While the value of total business conducted at the Bombay Stock Exchange hascrossed the US$ 200 billion milestone, the National Stock Exchange is set torecord an annual turnover of well above US$ 400 billion for the first time in itshistory in FY07.

The current financial year (2006-07) saw a record amount (US$ 5.80 billion)


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mobilised by initial public offerings (IPOs) which was more than double the IPOsin 2005-06. Refinery, construction, engineering and media & entertainment areamong the major sectors that led the way into the primary market.

With the government approving the purchase of 6 per cent stake in the NationalStock Exchange by Morgan Stanley, Citigroup and private equity firm Actis, US-based Depository Trust & Clearing Corporation (DTCC) is planning to pick up 5per cent stake in the Bombay Stock Exchange.

Foreign institutional investors (FIIs) continue to be bullish on India. They havepumped in a hefty US$ 6 billion in equities to date in calendar 2007.

Also, reflecting confidence in the stock market, many leading domestic financialinstitutions, led by LIC, UTI, SBI and the Bank of India (BoI), are buying a majorchunk of the broker shareholders' combined stake of 41 per cent being offered by

the Bombay Stock Exchange (BSE) as part of its demutualisation process.

The general market buoyancy and the rupee appreciation have resulted in takingthe number of US$ 1 billion m-cap stocks to 149, which account for 81 per centof m-cap of BSE. Also, the number of companies with over US$ 20 billion m-caprose to 8.

The value of participatory notes in the stock market grew 70 per cent in just oneyear between January 2006 and January 2007, accounting for over one-third oftotal foreign portfolio investments in the Indian stock markets, according togovernment estimates.

Financial Services

Mutual Funds

Mutual fund assets grew by 41.23 per cent in 2006-07 following a stellar stockmarket during the year. The industry ended the financial year with assets under

management (AUM) of US$ 79.709 billion, a growth of 41.23 per cent over US$56.435 billion in 2005-06. With this, the industry has grown around 142 per centsince March 2004, when its AUM was US$ 32.935 billion.

Reliance topped the AUM chart, followed by ICICI Prudential and UTI MF. HDFCcontinued to be at the fourth position

Also, Reliance Mutual Fund cemented its position as the country's largest fund


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house with its assets crossing the US $12.213 billion level. The Anil DhirubhaiAmbani Group firm, which owns Reliance Mutual Fund, has also been accordedISO 9001:2000 certificate, making it the second asset management company inthe country to get this quality standard, covering all functional areas.

Indian investors now have a wider choice for investing abroad, either in foreignstocks or mutual funds with two fund houses - Fidelity and Sundaram BNPParibas Mutual Fund - in the queue to offering products for investments abroad.The Government is also set to liberalise norms for mutual funds investing inoverseas debt/equity instruments. The individual cap of US$ 200 million for fundhouses for investment abroad is likely to be hiked.

Indian mutual funds have also bagged as many as 22 awards for bestperformance across various categories in the Gulf region, with the Anil AmbaniGroup entity Reliance MF stealing the show with highest number of accolades,

followed by Franklin Templeton, HDFC, UTI, DSP Merrill Lynch and Birla SunlifeMF.

Realty Funds

Global realtors, banks and bond houses are finding the opportunity to invest inIndia irresistible, with more than 35 big-ticket foreign funds having alreadychecked into the real estate sector. and many more like the Philippines-basedAyala, and Signature group, Och-Ziff Capital, EurIndia and Old Lane from Dubaiamong others have shown a interest to make an entry into India..

Financial Services

Last Updated: June 15, 2007

Merrill Lynch forecasts that the Indian realty sector will grow from US$ 12 billionin 2005 to US$ 90 billion by 2015. Prominent global funds, including Carlyle,

Blackstone, Morgan Stanley, Trikona and Warbus Pincus have a total corpus ofUS$ 12-15 billion earmarked for India. Other foreign investors with a presence inthe Indian real estate sector are HSBC Financial Services, Americorp Ventures,Barclays and Citigroup.

Banking

The booming consumer finance space and the growing opportunities in corporate


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finance are forcing foreign players to set shop in India. While some have directlyset-up their branches/subsidiaries in the country, others are tying up with existingbanks in the country. For example, after Australian bank Macquire, another bankfrom the southern continent, Westpac Institutional Bank, has entered an alliance

with Standard Chartered Bank, India, and has opened a representative office inMumbai after securing a license.

While UK-based bank, Barclays PLC, has launched its Indian retail operations,state-owned institutions in the Middle East are looking at picking up stakes in theindustry. Temasek and Government of Singapore Investment Corporation (GIC)have been allowed to acquire 10 per cent equity each in the country's largestprivate sector lender ICICI Bank.

Also, many banks are drawing their plans in anticipation of a step change'growth in the economy. As the chief of ICICI bank Kamath says, If economy

grows 8 per cent the banking sector should grow 24 per cent. Within this growththere will be outliers at both ends. Some will lead and some will lag behind. Ourendeavour will be to lead. Accordingly, ICICI plans to mobilise US$ 5 billion inthe largest follow-on issue in India. Similarly, global financial services majorMerrill Lynch is planning to double its private banking business in the country.

Insurance

With the economy liberalising the rules for the entry of domestic and foreignplayers, this sector is favourably placed to experience rapid growth. In fact, thesector is expected to reach US$ 60 billion in the next four years a growth rate

of 500 per cent in four years.

While, the country already has 27 direct players in the sector (out of which 15 areprivate life insurance players), there are many others who are planning to makean entry. For example, Principal PNB Life Insurance Company and IDBI FortisLife Insurance Company have already announced launches. HSBC is alsoentering the India's fast-expanding life insurance market, in a partnership withpublic sector banks Canara Bank and Oriental Bank of Commerce (OBC).

While most of the new foreign players have been concentrating in urban andsemi-urban areas, there is ample scope to grow in the rural areas too where

insurance penetration as low as 2 per cent. Accordingly, many players (like SBI)are making forays into this segment too, leveraging its spread, through existingand new channels.

insurance 22

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