Lloyd's Report on General Insurance in India

INDIA2010ALLOYD’SVIEW

June 2007www.lloyds.com/marketintelligence

This document is intended for general information purposes only.Whilst all care has been taken to ensure the accuracy of the information,Lloyd’s does not accept any responsibility for any errors or omissions.Lloyd’s does not accept any responsibility or liability for any loss to anyperson acting or refraining from action as a result of, but not limited to,any statement, fact, figure, expression of opinion or belief contained inthis document.

For enquiries relating to this report, please contact:

James SutherlandHead of OperationsLloyd’s Business Development DirectorateOne Lime StreetLondon EC3M 7HAUnited KingdomTelephone: +44 (0)20 7327 6883Email: [email protected]

Filip WuebbelerManager, Market IntelligenceLloyd’s Business Development DirectorateOne Lime StreetLondon EC3M 7HAUnited KingdomTelephone: +44 (0)20 7327 6209Email: [email protected]

For information regarding Market Intelligence publications,please contact:[email protected]

DISCLAIMER

QUESTIONS?

Executive summary 5The insurance environment in 2007 6Looking forward to the market in 2010 7Lloyd’s seeks to capitalise on Indian opportunities 7

Introduction 8Purpose 8Methodology 8Structure 8

Business environment 9Politics 9Economy 12

The Indian Non-life Market 2007 18Products 21Market players 24Distribution 30Reinsurance 33Class-by-class analysis 38

The Indian Non-life Market 2010 44Regulatory drivers 44Growth drivers 45Risk factors 47Structural changes 47Growth projection: scenario I – “simple extrapolation” 50Growth projection: scenario II – “accounting for price wars” 51

Conclusion 55Lloyd’s Indian liaison office 55

Bibliography 56

Glossary 59

CONTENTS

KEY INFORMATIONOfficial Name Republic of India

Capital New Delhi

Population 1.10 billion (2006 est.) World Rank: 2

Languages English (official), Hindi 30% and 14 other languages

Area 3.29m sq km World Rank: 7

Climate Varies from tropical monsoon in south to temperate in north

business environmentGDP (2006) USD 4,042bn World Rank: 4

Real GDP growth rate (2006) 8.5%

GDP per capita (2006) USD 3,700 World Rank: 155

GDP (by sector) (2006) Agriculture: 20%Industry: 19%Services: 61%

Unemployment rate (2005) 7.8%

Public debt (% of GDP) (2005) 52.8%

Budget (2005) Revenues: USD 109.4bnExpenditures: USD 143.8bn

Industries Textiles, chemicals, food processing, steel, transportationequipment, cement, mining, software

insurance environmentPremium levels (2006) USD 6.0bn in 2006

Nominal annualpremium growth 13% (during 2006)

Premium density (2005) India: USD 4.4 per capita(= premiums per capita) South & East Asia: USD 21.4 per capita

OECD Average: USD 1,106.2 per capita

Regulator Insurance Regulatory and Development Authority:www.irdaindia.org

Main non-life industryassociation General Insurance Council

Main life industry association Life Insurance Council

LLOYD’S BUSINESSPremium levels (2006)* USD 94m Growth in 2006: 35%

Lloyd’s status Direct risks cannot be written, except in circumstances where there is no local market.Reinsurance is permitted with an obligatory cession of currently 15% for all classes of business.

Lloyd’s agency network www.lloydsagency.com

CurrenciesCurrency abbreviations: USD = US Dollar, GBP = British Pound, INR = Indian Rupee, 1 Crore = INR 10m, 1 Lakh = INR 100k

Exchange rates: USD 1 = INR 44.1 (2005);USD 1 = GBP 0.55 (2005)For consistency, data is taken from the CIA World Factbook 2006, Sigma, Axco,www.oanda.com and Lloyd’s

For compliance guidance, visit www.lloyds.com or contact Lloyd’s International Trading Advice on +44 (0)20 7327 6677

Miscellaneous 11%PA & Health 14%

Fire 20%

Motor OD 28%

Engineering 6%

Marine Cargo 4%

Marine Hull 3%

Liability 2%

Aviation 1%

Motor TP 11%

India 2006:USD 6.0bn*

*Lloyd’s Business Development estimate

Business Mix (2006)

* Gross written global premiums based on figures processed by Xchanging by processing year and country oforigin; based on Business Development calculations from Source: Lloyd’s, “REG 258 Premiums Database”,(2007); average exchange used for the period of 2005-2006

Executive summary 5

Despite political uncertainties, India’s economy is thriving.Assisted by this growth, significant progress has been made inthe non-life insurance market since liberalisation, and the paceof change has stepped up in 2007 as a result of detariffication.

1 Economic growthdespite politicaluncertaintyWhilst India prides itself on being the world’s largest democracy, thecountry is beset by political uncertainty. On the domestic front, India’sUnited Progressive Alliance coalition is considered to be inherentlyunstable. From an international perspective, relations with Pakistan areviewed as a risk, due to ongoing tensions in Kashmir. Following theimplementation of reforms, India’s economy has been outperformingother economic blocks with the notable exceptions of China and Russia,and strong growth is predicted to continue over the medium term.Factors that have enabled this strong performance include India’sdemographics, human capital, global integration, macroeconomic andfiscal stability, and its diversifying industries. However, inefficiencies suchas infrastructure bottlenecks, the evolving regulatory environment and theoverburdened legal system hinder India’s economy in performing as wellas those of China and Russia.

2 Substantial reform progress in non-lifeReform of the Indian non-life insurance market has progressedsubstantially since market liberalisation began in 2001. Whilstdetariffication occurred in early 2007, the market remains heavilyregulated, and its growth is hindered by the 26% cap on foreignownership of insurers. Private insurers are relatively new entrants into theIndian market, but they already share over one-third of the market and areexpected to increase their market share further as liberalisation continues.

3 Growth projections point towardshigh growthThe extent of the insurance market liberalisation process is the subject ofongoing debate. Detariffication is likely to be associated with a period ofadjustment and predatory pricing. Already a sharp decrease in rates hasbeen seen as a result of the January 2007 detariffication process. Whileit is difficult to project the behaviour of market players and responses ofthe IRDA, in the medium to long term, these reforms are expected tolead to more dynamic growth.

4 Lloyd’s is seeking to capitalise on IndianopportunitiesThe opportunities presented by the Indian market are deemed to be toosignificant for Lloyd’s to overlook. As such, Lloyd’s will be setting up aliaison office in Mumbai in 2007. The objectives of the office will be toinform potential clients about the benefits of Lloyd’s offering to the Indianeconomy. Additionally, the office will help to raise Lloyd’s profile withbrokers, cedants, insureds and the media. Ultimately, Lloyd’s wants togain access to the direct insurance market in India.

Executive summary

Executive summary 6

The insurance environment in 2007

The Indian insurance market cannot be understood except in the contextof its history of nationalisation and liberalisation. Reform of the Indian non-life insurance market, which was nationalised in 1972, has progressedsubstantially since the turn of the century, and received an additionalboost in 2007 with the detariffication of key classes of business.

Non-life premium income has increased by 106% since initialliberalisation in 2000, consistently outstripping global growth, assummarised by the indexed premium chart below. However, growth inIndia’s non-life market appears to have slowed to 13% in 2006 – downfrom 18% in 2005.

Despite the welcome reforms between 2000 and 2006, the Indian non-lifemarket remains heavily regulated. Nonetheless, 2007 has so far beenone of the most exciting years for the Indian insurance industry, withsignificant reforms taking place. Some key characteristics of the marketare listed overleaf.

• Tariffs: Up until the end of 2006, tariffs remained in place across 70% ofthe market.3 Rates for property and motor were detariffed at thebeginning of 2007. However, insurers will not be allowed to change theterms and conditions for existing products for up to 15 months post-detariffication in an effort to avoid confusion during the initial stages.

• Public Sector Undertakings (PSUs): PSUs remain dominant with anestimated market share of over 60%. However, this share is reducing asa result of private sector competition.

• 26% FDI cap: Foreign entities must partner with an Indian entity in orderto form an insurer and are limited to a maximum 26% stake in the jointventure. While the current government has suggested increasing the FDIcap to 49%, the timing of this change remains unclear as it is likely totrigger further policy discussions within the centre-left governmentcoalition.

• Agents: Around 80% of premiums are still distributed through thetraditional medium of the direct sales (or ‘marketing’) agent. Brokers havefailed to gain a significant market share largely due to regulations thathave put them in a disadvantaged situation.

• Compulsory cessions: There is only one local reinsurer, the 100%government-owned GIC. In April 2007, the proportion of compulsorycession to the GIC was reduced from 20% to 15%.

despite liberalisationin 2000, the indianmarket remainsheavy regulated

Non-life premiumincome increasedby 106% between 2000and 2005

2006 figures are based on gross premium underwritten; figures are provisional and unaudited;amalgamated through Lloyd’s Business Development calculations based on IRDA publications1 “Swiss Re sigma database, Non-Life Insurance Premiums – 1980-2005”, (2006); IRDA,various publications, (2007)2 Ibid3 NB: measured in terms of premiums transacted

CHART 1: Premium levels( (in billion USD) 1 CHART 2: Indexed premium levels (2000 = 100)2

0

1

2

3

4

5

6

7

1.9 2.1 2.2 2.2 2.3 2.4 2.63.1

3.74.1

4.8

6.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

No

min

alm

arke

tp

rem

ium

s(in

bill

ion

sU

SD

)

Average annual growth (1995-1999): +5% Average annual growth (2000-2006): +15%

Point of liberalisation

50

100

150

200

250

200520042003200220012000

India: +106%

World: +55%

World India

Ind

exed

no

n-li

fed

irec

tp

rem

ium

leve

ls(2

000

+10

0)

Executive summary 7

Looking forward to the market in 2010

The Indian insurance market is likely to change significantly over the nextthree years largely due to regulatory changes. In addition, premium growthis being driven by other factors such as the growing consumer class,increased foreign direct investment, infrastructure development, and anincreased awareness of catastrophe exposure. Despite singificant positivechanges, the insurance market must still face the challenge of poorcustomer perceptions and the danger that the pace of reform will slow.

Several significant structural changes are expected in the market as aresult of the drivers discussed above:

• Price competition has already begun to increase and is likely to continueto do so for the next 18 to 24 months.

• The practice of cross-subsidisation is likely to be phased out as risk-based pricing is used increasingly for all products.

• As Indian insurers build a profitable portfolio, they are likely to haveincreased access to the international reinsurance markets.

• Finally, rising demand for insurance is likely to be met by increasedcapacity as foreign insurers look to access this growing market.

One conclusion is certain – the Indian non-life market is set to growdramatically over the next few years. The simplest forecasts suggest thatpremium income could double in five years to reach USD 11.6bn in 2010.When the structural changes above are taken into consideration, thisgrowth becomes exponential, with relatively slow growth in 2007 rising torapid growth by 2010.

Lloyd’s seeks to capitalise on Indianopportunities

In order to be best placed to take advantage of the forecast rise incommercial non-tariff business, Lloyd’s is lobbying for improved accessto the Indian direct market.

Moreover, Lloyd’s is establishing a liaison office in Mumbai. From thisplatform, Lloyd’s will seek to build relationships within the Indian market,to promote collaborations between Lloyd’s and other market players,and to act as a communication channel between Lloyd’s in London andIndian companies.

the extent of futureliberalisation is thesubject of anongoing debate

Introduction 8

Purpose

This report, which serves as a market intelligence piece, provides adetailed background on the Indian non-life insurance sector. In addition toanalysing the key components driving today’s market conditions, thereport takes account of changes likely to occur within the regulatoryenvironment in the next three years.

Methodology

The information upon which this report is based has been derived from awide range of both primary and secondary sources. Most of the facts andfigures originate from extensive desk research of an array of publiclyavailable information. This research is mainly quantitative in nature andforms the backbone of this report.

In order to gain further insight into the findings highlighted by secondaryresearch, a series of interviews were held with industry professionals inLondon, Delhi and Mumbai. These discussions provided soft, qualitativeintelligence that helped develop an understanding of the key dynamicsthat are likely to impact future developments in the Indian market andenabled assessment of the likely level of future use of the London marketby Indian firms.

Structure

This report is structured into three interdependent sections:

1 BUSINESS ENVIRONMENTThe opening section provides an overview of the dynamic growthcurrently being experienced in India. In particular, it highlights the mostimportant political and economic factors that are likely to influence thecountry’s economic progress between 2007 and 2010.

2 the indian non-life market 2007This section provides information and analysis on the key components ofthe Indian non-life market today. These components include: premiumincome, products, competitors, reinsurance and regulation.

3 the indian non-life market 2010Premium growth projections are particularly challenging to compile due tothe large number of unknowns – such as company strategy and policyresponse. As such, this paper aims to simplify such growth projections byoffering two scenarios. Scenario I gives a simple constant growthprojection based on recent growth experience and Scenario II takes intoaccount the impact of detariffication.

Finally, this report then demonstrates how Lloyd’s has utilised itsresearch into the Indian insurance market by giving an overview ofLloyd’s current two-pronged approach to capitalising on opportunitiesarising from the Indian market.INTRODUCTION

Business environment

9


Politics The efficiency of India’s regulatory environment is questionable

India prides itself on being the world's largest democracy modelled on the British parliamentary model. India is a large country, not only with regard to its size but also in terms of culture, languages, religions and contrasting convictions. Much of the complexity of India’s politics and regulatory environment is dictated by the difficulties of these competing interests.

Regulatory environment Despite its reputation, India performs well in terms of control of corruption, rule of law, and voice and accountability, when compared to the regional average. However, this does not disguise the fact that the country is often beset by political volatility, manifest by comparatively low levels of political stability.

CHART 3: Governance indicators4 versus regional average

(2005)5

0

25

50

75Voice and Accountability

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

India Regional Average

Compared to regional peers, India scores highin terms of rule of la

w

and accountability

Notwithstanding the country’s heterogeneous society, there is an established and bindinstitutional framework, which includes a legal system, capital market regulators abanking supervisors. However, the efficiency and efficacy of these institutions is questionable, and there are significant gaps within the Indian regulatory environment such as the lack of data protection legislation.

ing nd

ption,

r and

like corporate citizenship, market opportunities and

Narayana Murthy, Infosys Technologies, India, WEF Summit, (2004)

6 In addition to relatively high levels of corruthere is a labyrinth of regulation caused by relations between the central and state governments, which must be simplified if initiatives such as reform of the power sectothe development of special economic zones are to succeed. A major effect of these challenges is to hinder the speed of legislative change, resulting in very slow legislature.

"We have to make our economic systems as transparent and as open as possible. We must focus on vital issuesintellectual property rights."7

4 NB: The above chart depicts the percentile rank on each governance indicator. Percentile rank indicates the percentage of countries worldwide that rate below the selected country 5 Kaufmann, A., et al., “Governance Matters V: Governance Indicators for 1996-2005”, (2006) 6 KPMG, “Indian Pharma Industry to Look Beyond the Generics Market”, (June 2006) 7 World Economic Forum, “Assessing India’s Potential for Accelerated Growth”, (2004), page 9

Business environment 10

Legal environment India has an independent judicial system that resembles those of Anglo-Saxon countries

India has an independent judicial system, with its concepts and procedures resembling those of Anglo-Saxon countries. The Indian judicial system is a single integrated system of courts, which administer both Indian and individual state laws. While the judicial process is considered fair, a large backlog of cases and frequent adjournments can result in considerable delay before a case is closed. However, matters of priority and public interest may be dealt with expeditiously, and interim relief may be allowed in other cases, where appropriate.

Although there is evidence to suggest that Indians are becoming more aware of litigation, especially in motor third-party cases, the general level of liability claims awareness amongst India’s population is low. Consequently, the demand for corresponding insurance protection remains modest.

There is a large backlog of cases clogging India’s judicial process

Domestic politics In a dramatic turnaround in its fortunes, the Indian National Congress emerged as the largest party following 2004’s elections. This party formed a governing alliance, the United Progressive Alliance (UPA), with a number of smaller regional parties, as well as utilising the support of a large bloc of communist parties known collectively as the Left Front. The surprise result was attributed to the alignment of the incumbent government with the country’s burgeoning middle classes and their interests rather than those of the mass rural poor. Though unstable, India’s

current government is expected to remain in office

India’s turbulent politics are complex and often lead to short-lived administrations at national and state level. There is also often a wide gulf between the commitments made by governments and the measures that the legislature and bureaucracy can actually implement. The UPA coalition is expected to remain in office even though the coalition is viewed as inherently unstable and progress on economic reform is predicted to be erratic.

The pace of India’s economic liberalisation will be determined by the leadership’s ability to pursue the country’s social agenda. Legislative changes, however, tend to be passed very slowly in India due to the bureaucratic and leadership hurdles that need to be overcome. Moreover, India’s pluralist political system can complicate and thus further hinder the reform process.

Foreign relations India’s foreign relations have in the past been dominated by its difficult relationship with Pakistan and, more recently, with Bangladesh. India’s relations with both the US and China have, however, improved over the past few years.

Pakistan Relations between India and Pakistan have always been viewed as poor, with the two countries fighting three wars since partition in 1947 and narrowly avoiding a fourth in 2002. Relations, however, improved noticeably during the premiership of the Bharatiya Janata Party’s (BJP’s) Atal Behari Vajpayee, who initiated peace talks with Islamabad.

Tensions have eased between India and Pakistan over Kashmir

India and Pakistan are now several years into a peace process that has made huge strides in reducing tension, but it is based on a bargain both sides suspect the other of breaking: that Pakistan will rein in the terrorists operating from its soil and that India will negotiate in good faith over the future of Kashmir.8 Thus significant tensions still exist and the core issue of Kashmir’s status remains unresolved. It is argued, however, that until India is fully reconciled to Pakistan, and until Pakistan has wrestled its own particular ‘demons’ to the ground, India will never achieve its full potential, either economically or geopolitically.

India will never achieve its full potential without a durable solution in Kashmir

8 The Economist, “Terror in Mumbai: Call this Peace?”, (15 July 2006), pages 63-64


11

Moreover, it is argued that neither of these two things can happen without a durable solution in Kashmir.9

Bangladesh Relations with India’s other large Muslim neighbour, Bangladesh, although largely warm, started to deteriorate in 2001 when the BJP took power. Although not fully restored, relations have somewhat improved under the current Congress Party-led government. An issue of contention is that Bangladeshis feel that India plays the role of a ‘big brother’ towards its smaller neighbours. Nonetheless, both nations have co-operated on a number of issues, such as flood warnings and preparedness.

China Despite lingering suspicions remaining from the 1962 Sino-Indian War and continuing territorial/boundary disputes in Kashmir and Arunachal Pradesh, Sino-Indian relations have improved gradually. Both countries have sought to reduce tensions along the frontier, expand trade and cultural ties, and normalise relations. In 2003, India formally recognised Tibet as a part of China and, in 2004, China recognised Sikkim as a part of India.

The US sees its relationship with India as a counterbalance to China’s expanding power

US India’s link with the US is improving. The US administration led by president George Bush is concerned that the fast-expanding economic power of China poses a threat to the US global strategic dominance and, as a consequence, welcomes a closer relationship with India as a counterbalance. In upgrading ties with India, it is significant that Mr Bush has avoided an endorsement of India’s ambitions to gain a permanent seat on the United Nations (UN) Security Council.10

UN Security Council The question of India’s permanent membership on the UN Security Council is a high and pressing priority for New Delhi. All elements along the Indian political spectrum are united in the belief that their country’s flourishing transition from colonialism, its successful incubation of democracy amid incredible cultural and linguistic diversity, its large population and growing economic prowess justify global recognition through membership in the most important institution of international governance, the UN Security Council. Germany, India, Japan and Brazil, known as the G4, and the African Union are amongst those lobbying for coveted permanent member status. A working group on reform set up under the UN General Assembly in 1993 has made little progress on the matter, with a lack of consensus over potential candidates for such membership, despite warnings from the previous Secretary-General Kofi Annan that the lack of reform could weaken the council’s standing in the world.11

A permanent membership on the UN Security Council is a high priority for India

India belongs to all the major international organisations, including the UN, International Bank for Reconstruction and Development, International Labour Organization, International Monetary Fund, World Health Organization, World Trade Organization (WTO) and the Commonwealth.

9 The Economist, “Bombs in Mumbai: India’s Horror”, (15 July 2006), page 10 10 Ibid 11 BBC News, “Profile: The UN Security Council”, (3 January 2006)

http://en.wikipedia.org/wiki/1962

http://en.wikipedia.org/wiki/Sino-Indian_War

http://en.wikipedia.org/wiki/Kashmir

http://en.wikipedia.org/wiki/Arunachal_Pradesh

http://en.wikipedia.org/wiki/Sikkim


Economy For decades, India's economy underperformed relative to its potential. Socialist policies and a powerful bureaucratic apparatus led to red tape that stifled entrepreneur-led development. With the collapse of the Soviet Union, a major reorientation of trade was needed. This, in combination with additional external factors, led to a balance-of-payments crisis at the start of the 1990s, which provided further stimulus for a wave of economic reforms.

For decades, India’s economy underperformed relative to its potential

Following the implementation of these reforms, for which today’s Prime Minister Manmohan Singh is widely regarded as the ‘architect’, growth surged through to the mid-1990s and the beginning of this decade – with India outperforming other large economic blocks, with the notable exceptions of China, throughout the whole decade and Russia in 2005.

CHART 4: Indexed nominal GDPs of major economies (1997 – 2006)12

100

150

200

250

300

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Inde

xed

Nom

inal

GD

P (1

997

= 10

0)

India China US Euroland

The 2003 growth spurt in India was led by the services sector; the fastest-growing components of this sector include trade, tourism, transport, communications, and financial and business services.

Following reforms, growth surged and made a step change upwards in 2002

In addition to the change in its economic development policies, India’s business environment and the country’s growth prospects are influenced by a number of characteristics. These characteristics demonstrate that whilst the economy is growing and developing, it is still held back by inefficiencies and bureaucracy. These challenges will need to be tackled if India’s economy is to continue to perform well in the future.

TABLE 1: Factors affecting India’s growth prospects

Favourable factors Unfavourable factors

• Favourable demographics

• Improving human capital

• Globally integrating economy

• Challenging but improving macroeconomic and fiscal stability

• A mix of sheltered manufacturing and some competitive services sectors

• Infrastructure bottlenecks

• Evolving regulatory environment

• Transparent but overburdened legal system

12 Deutsche Bank Research, “Country Infobase”, (2007)


13

Demographics India’s working population is projected to grow significantly

Economic growth depends on, amongst other factors, having large pools of high-quality labour supply. India has a young population of approximately 1.1 billion, the second-largest in the world after China, increasing at roughly 1.5% per year.13 Latest figures from the UN Population Division reveal that India’s working population is projected to grow significantly over the next 15 years as highlighted by the chart below. This signifies that there will be a significant growth in labour supply over the next 15 years.

CHART 5: Age group projections (2000 – 2020)14

34% 35% 36% 37% 38%

0%

25%

50%

75%

100%

2000 2005 2010 2015 2020

Age

gro

up o

f pop

ulat

ion

(in %

of t

otal

)

Age group 0 - 4 Age group 5 - 15 Age group 15 - 24

Age group 25 - 59 Percentage aged 60+

Research by the Boston Consulting Group reveals that India is set to have the largest surplus working population (15 to 59 years of age) by 2020 when compared to all other major economies as shown by the chart below. Whilst this may lead to new job creation, this could also lead to greater unemployment and/or lower wages.

CHART 6: Surplus working population by country in 202015

India is set to have the World’s largest surplus working population by 2020

-10.0 -9.0

-3.0 -3.0 -3.0 -2.0 -2.0 -0.5

3.0

19.0

47.0

5.0

-17.0

-6.0

-30

-20

-10

0

10

20

30

40

50

60

US ChinaJapan

Russia Germany

France Spain

UK Italy Australia

BrazilMexico

PakistanIndia

Surp

lus

Wor

king

Pop

ulat

ion

(in m

illio

ns)

An estimated 210 million Indians have been lifted above the poverty line

Further research indicates that, between 1980 and 2000, an estimated 210 million Indians were lifted above the poverty line (the threshold of which is USD 1.5 in earnings per day), which is an impressive feat given that, during the preceding 20 years, the number of poor in

13 Deutsche Bank Research, “India Rising: A Medium-term Perspective India Special”, (2005), page 3 14 United Nations Populations Statistics, “World Population Prospects – 2004 Revision”, (2004) 15 The Boston Consulting Group, “India’s New Opportunity – 2020”, (2005), page 11


India increased by about 93 million.16 As such, in 2000, 28% of the Indian population was below the poverty line, as compared to 36% in 1994.17 This suggests that the outcomes of India’s surplus population are likely to be positive.

Human capital India possesses a large pool of scientists, IT specialists, technicians and engineers

Nevertheless, economic growth does not merely depend on the quantity of labour available, but increasingly on the quality of labour input. In this light, India still has a long way to go, not least if compared with its regional peers. Even though India has comparatively low levels of overall adult literacy of around 61%,18 the country produces a large number of skilled workers in various fields. It possesses a large pool of scientists, trained Information Technology (IT) specialists, technicians and engineers, many of whom speak English fluently. There are roughly 380 universities and 1,500 research institutions around the country, from which 200,000 engineers, 300,000 non-engineering technicians and 9,000 PhD students graduate annually.19 In other words, while there is yet to emerge a broad class of highly skilled workers, there are ‘islands’ of depth in particular sectors.

The Indian government is fully aware of the role that science and technology can play in developing the country’s economy.

"You cannot be industrially and economically advanced unless you are technologically advanced, and you cannot be technologically advanced unless you are scientifically advanced." 20 C. N. R. Rao, the Prime Minister's Science Advisor, (2004)

More than 100 IT and science-based firms have opened R&D Labs in India during the last five years

Tier one Indian IT providers such as Infosys, Wipro and TCS have continued to thrive (reporting revenue growth of around 40% for the second quarter of 2006).21 Over the past five years alone, more than 100 IT and science-based firms have opened research and development (R&D) laboratories in India. 22 India is also reported to be set to become the regional hub for pharmaceutical R&D, manufacturing and exporting.23

Globally integrating economy India’s trade volume as a share of GDP is low in contrast to other major Asian countries

India has made significant inroads in opening its economy since it joined the WTO in 1995. There are, however, still remnants of its inward-looking development strategy. Indeed, India’s trade volume as a share of GDP is low in contrast to other major Asian countries, and its import tariffs remain comparably high. Moreover, capital account restrictions, in particular, those applying to foreign direct investment (FDI), are still numerous, although recent policy directives are laying the ground for greater FDI.

“With the debate about India’s emergence as a global leader in service exports dominating the news, it may sometimes be overlooked that India remains a relatively closed economy.”24 Rodrigo de Rato, Managing Director of the International Monetary Fund, (2005)

However, the prospects for greater world integration are promising, since there is a political consensus on the need to further liberalise trade and capital account restrictions. Moreover, the size and potential for growth of the domestic market is one of the more important factors

16 World Economic Forum, “Assessing India’s Potential for Accelerated Growth”, (2004), page 1 17 The Boston Consulting Group, “India’s New Opportunity – 2020”, (2005), page 11 18 World Bank, “Education Profile – India”, (2005) 19 Chaudhry, H., “Trade in Higher Education”, City University of Hong Kong 20 New Scientist, “India Special: The Next Knowledge Superpower”, (2005) 21 DNA, “Indian IT Majors Outsmart Global Peers”, (3 August 2006) 22 New Scientist, “India Special: The Next Knowledge Superpower”, (2005) 23 KPMG, “Indian Pharma Industry to Look Beyond the Generics Market”, (June 2006) 24 De Rato, R., “Prospering in a Globalized Economy”, (2005)


15

responsible for the strong interest of foreign investors in India. Recent discussions on expanding trade agreements, with China, Singapore and Thailand for example, attest to India’s resolve to gain further access to world trade. The recent lowering of duties for non-agriculture products from 20% to 15% and the proposed further reduction in duties to 12.5% for the 2006-2007 budget are steps towards opening the economy further.25

As India becomes a key part of the global supply chain, some of its companies will emerge as strong performers in the international market. Those that succeed will likely retain elements of their traditional business cultures (such as low cost advantages) while also adopting a more international outlook, exporting their best goods and services while absorbing global best practice.

Challenging but improving monetary and fiscal stability Inflation has declined in recent years, but increased fiscal discipline is vital

Inflation has declined significantly in recent years, stabilising at a level of roughly 5% after consistent double-digit inflation prior to the 1990s.26 But the monetary authority’s success in maintaining relative price stability going forward will require improvements in fiscal policies. India’s large fiscal deficit, a legacy of the expansionary fiscal policies pursued by the government in the late 1980s, is acknowledged to be its ongoing weakness. Public deficits since then have been very high at around 10% of GDP. 27

India’s poor public finances28 have placed significant constraints on growth. The so-called ‘development expenditure’, ie capital expenditure on areas such as infrastructure, has fallen constantly as a percentage of GDP since the early 1990s. At the same time, non-development expenditure, particularly interest on government debt, has risen continuously.

The government has taken some initial steps toward fiscal consolidation. Indeed, the Fiscal Responsibility and Budget Management Act was passed in 2002, with a goal of bringing down total deficit and revenue deficit8 to 3% and 0% of GDP, respectively, by 2008-2009.29 The introduction of the national value added tax (VAT) system in April 2005 is also expected to contribute to fiscal consolidation.

Infrastructure bottlenecks There are severe infrastructure bottlenecks in India

As a consequence of persistent shortfalls in public revenues, public investment has fallen continuously over the years, leading to severe infrastructure bottlenecks. Indeed, despite having one of the most extensive transport systems in the world, this sector continues to suffer from acute capacity and quality constraints. As such, growth is expected to hit severe infrastructure constraints in the near future.30

“China spent USD 260 billion – or 20% of its GDP – on power, construction, transportation, telecommunications and real estate in 2002. In comparison, India spent just USD 31 billion or 6% of GDP.”31 Chetan Ahya, Chief Economist, Morgan Stanley, (2004)

India requires a total of USD 150bn to finance its infrastructure development

The government is faced with tough choices in allocating investment resources. According to Prime Minister Manmohan Singh, India requires a total of USD 150bn in the short term to finance its infrastructure development (rail, airport and seaport). Given this resource requirement, it is not possible to fully fund infrastructure development from the government’s

25 India PR Wire, “Customs Duty Reduced on Non-Agricultural Products: General Budget 2006-07”, (February 2006) 26 Deutsche Bank Research, “India Rising: A Medium-term Perspective India Special”, (2005), pages 6-7 27 Ibid 28 For detail see APPENDIX Macroeconomic Imbalances 29 Deutsche Bank Research, “India Rising: A medium-term Perspective India Special”, (2005), page 6 30 FICCI, “Infrastructure Transformations”, (2005), slide 5 31 Hiscock, G., “Infrastructure the Missing Link”, (2004)


budgetary resources. Accordingly, the Indian government has introduced the facility of viability gap funding to support public-private partnership initiatives in infrastructure sectors.

Infrastructure is one of three strategic high-priority areas for India (the others being the public sector and agriculture). Lack of infrastructure is a key reason why India’s poorest regions remain impoverished, and this has impeded the rapid expansion of manufacturing.

Service sector bias India’s service sector accounts for over 50% of the economy and, in recent years, has been responsible for the majority of economic growth. There are a number of key characteristics of the Indian economy that contribute to higher growth in its service sector compared to its industry.

• Firstly, highly restrictive labour laws have prompted industry to outsource activities so a significant proportion of industrial growth is counted as service sector growth.

• More profoundly, intrusive levels of market regulation and relatively high tariff structures have deterred both domestic and foreign investment into industrial sectors, hindering the growth of large-scale manufacturing companies geared towards exporting.

• FDI growth has significantly lagged in comparison with other emerging markets such as China, while growth in trade volumes relative to GDP has remained muted.

• Finally, the financing demands exerted by recurring, large fiscal deficits have crowded out private investment. As a result, India’s growth model has been unique, with declines in the primary agricultural share of GDP absorbed by growth in services, while the manufacturing sector has remained largely static.

Industrial sector India has built up a diverse industrial sector with major industries

India has built up a diverse industrial sector with major industries, including automobiles and auto ancillaries, iron and steel, aluminium, textiles and garments, pharmaceuticals, chemicals and petrochemicals, oil and gas and other hydrocarbons, electricity, telecommunications, IT and business process outsourcing (BPO) services, healthcare and biotechnology. Today, the country is emerging as a leading sourcing base for global players in auto and auto ancillaries, pharmaceuticals, IT and BPO services, research and development, and engineering services.

However, the picture is far from uniform and is best understood when juxtaposing three distinct sectors:

Global leader – competitive IT and outsourcing sector India’s Technology, software and outsourcing sector is highly competitive

At the high end of India’s productivity spectrum is the IT, software and BPO sector. Initially starting with back office services such as call centres and tax work, India’s outsourcing platform has risen up the value chain and now includes research and development in high-tech sectors such as biotechnology and pharmaceuticals. It is a big success story, having created hundreds of thousands of jobs and billions of dollars’ worth of exports. As a new sector – and one whose potential the government failed to recognise early on – it has avoided stifling regulation. IT, software and outsourcing companies are exempt from India’s labour regulations that govern working hours and overtime in other sectors. FDI has been allowed to flow into the IT industry, whereas foreign investment is prohibited and/or restricted in most other sectors. By 2002, it already accounted for 15% of all FDI in India.32 Without this foreign money, it is debatable whether the sector could have taken off.

Fast improving – transforming but still sheltered automotive industry In the middle of the spectrum is the auto industry, which has seen dramatic change since the government began to liberalise it in the 1980s. FDI, which has been permitted since

32 Farrell, D., “China and India: The Race to Growth - Sector by Sector”, (2004)


17

1994, has made it possible for output and labour productivity to soar. Indeed, the industry has been growing at a rate of approximately 30% and the industry exported USD 1bn in 2003-2004 compared to USD 760m in 2002-2003.33 Prices have fallen and, even as the industry has consolidated, employment levels have held steady due to robust demand. However, the continued tariff structure for finished cars continues to shelter domestic automakers from global competition – making the sector less efficient than it would otherwise be.

Laggard – burdened consumer goods markets India’s consumer electronic sector is still burdened by tariffs, making it uncompetitive

At the low end of the spectrum is the consumer electronics sector, which, despite the lifting of FDI restrictions in the early 1990s, is still burdened by tariffs, taxes and regulations, with the result that Indian consumer electronics goods can neither compete on price nor on quality with international competitors. As a result of a total ban on FDI and extremely low labour productivity and performance, India’s food retailing industry is considered to be the least competitive sector in the subcontinent.

33 IndianAuto.com, “Information on the Indian Automobile Industry”, (2006)

The Indian Non-Life Market 2007 18

The Indian Non-life Market 2007

The Indian non-life market is ranked 27th largest in the world

USD 4.85bn worth of premiums were written in the Indian non-life insurance market in 2005, making India the 27th largest market in the world in terms of non-life premium.34

The Indian non-life market currently lags behind that of its main economic rival, China, predominantly as a result of the Chinese economy’s greater urbanisation, number of automobiles and emphasis on manufacturing. China also began its insurance liberalisation process earlier. Nonetheless, India’s growth performance is very strong relative to that of the world as a whole.

CHART 7: Indexed premium levels (2000 = 100)35

50

100

150

200

250

2000 2001 2002 2003 2004 2005

Inde

xed

non-

life

dire

ct p

rem

ium

leve

ls (2

000

= 10

0)

World India

India: + 106%

World: +55%

India is growing at roughly twice the rate of the total global insurance market

Worldwide non-life premiums have grown significantly over the past few years; a key contributory factor to this was the 9/11 attack on the World Trade Center. However, the growth of non-life premiums in India has outstripped average global rates every year for the past decade and has demonstrated a surge since market liberalisation in 2000.

CHART 8: Premium levels∗ (in billion USD)36

1.9 2.1 2.2 2.2 2.3 2.42.6

3.74.1

4.8

3.1

6.0

0

1

2

3

4

5

6

7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

Nom

inal

mar

ket p

rem

ium

s (in

bill

ion

USD

)

Point of liberalisation

Average annual growth (1995-1999): +5% Average annual growth (2000-2006): +15%

Liberalisation has led to a marked increase in India’s premium levels

34 “Swiss Re sigma database, Non-Life Insurance Premiums - 1980-2005", (2006) 35 Ibid ∗ Estimate: 2006 figures are based on gross premium underwritten in 1H 2006, which are provisional and unaudited; growth factor has been applied by company growth of PSU vs Private comparing 1H 2005 vs 1H 2006; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications 36 “Swiss Re sigma database, Non-Life Insurance Premiums – 1980-2005", (2006); IRDA, various publications, (2007)

The Indian non-life market 2007

19

Despite outgrowing the global non-life market over the past decade, non-life penetration levels in India remain extremely low at just 0.6%.37 Whilst low penetration in a developing economy is to be expected, the Indian position falls well below that expected by Sigma’s ‘S-Curve’, which links non-life penetration to income per capita.

High regulation may be a major reason for the low level of insurance penetration

A significant contributing factor in the disparity between India’s actual penetration / GDP per capita and that expected by Sigma’s research (‘The S-Curve Gap’) is the highly protectionist regulatory position adopted by the government until reforms were adopted in 2000.38

CHART 9: Penetration vs. GDP per capita – “The S-Curve” (2003)39

0

1

2

3

4

5

6

1,000 10,000 100,000Logarithmic scale of GDP per capita (in PPP USD)

Non

-life

pre

miu

ms

(in %

of G

DP)

India

China

UK

US

Russia

Brazil

indonesiaS-Curve Gap

Non-life penetration levels are lower in India than would be expected

Current insurance market reforms and continued high economic growth would appear to provide a strong platform from which to drive premium development in the Indian market and, thereby, to close the country’s S-Curve Gap in the short to medium term.

Analysing the market today The current state of the Indian insurance market is so heavily influenced by the history of nationalisation and liberalisation, that it cannot be understood outside of that context.

The remainder of this section will initially consider the historical development of the market and then analyse the process of liberalisation in four main categories: products, market players, distribution and reinsurance.

Finally, the impact of these liberalisation dynamics will be analysed on a class-by-class basis. This will set the scene for looking forward to 2010 in the following section.

37 NB: Non-life Penetration = Non-life insurance premiums / GDP (expressed as a percentage) 38 See section on Regulation and Proposed Reform below 39 Non-life premiums in % of GDP from Swiss Re sigma database, WWM Calculation

The Indian Non-Life Market 2007 20

Historical context Colonial era

The first insurer in the Indian market was established in 1850

India’s first general insurance company, Triton, was established in 1950 and was owned and operated by the British. In 1938, the Insurance Act was passed. This was the first legislation specifically dealing with the supervision of insurance companies. Prior to this, general insurance firms had fallen under the broad auspices of the Companies Act (1866).

CHART 10: History of the Indian insurance market (1850 – 2007)

1850 2007

1999: Insurance Regulatory and Development Authority Act

1938: Insurance Act passed

1850: 1st insurance company created

Colonial era Nationalisation Liberalisation

1972: Insurance market fully nationalised

1947

1947: Economic nationalisation begins

1991

1991: Economic liberalisation begins

2000: 1st private companies licensed

2007: Remaining tariffs abolished

1994: Marine tariffs removed

18501850 2007

1999: Insurance Regulatory and Development Authority Act

1938: Insurance Act passed

1850: 1st insurance company created

Colonial era Nationalisation Liberalisation

1972: Insurance market fully nationalised

1947

1947: Economic nationalisation begins

1991

1991: Economic liberalisation begins

2000: 1st private companies licensed

2007: Remaining tariffs abolished

1994: Marine tariffs removed

Nationalisation Following independence in 1947, the Indian government implemented an economic model based on the Soviet system of national planning. Insurance was not seen as strategically important and so was not initially nationalised. In 1950, the Insurance Act of 1938 was amended to set up a Tariff Committee, which fell under the control of the General Insurance Council of the Insurance Association of India – the Tariff Committee was so influential that it soon became known as the “Rate Maker”.

The non-life industry was not initially nationalised following independence

The Tariff Advisory Committee (TAC) replaced the Tariff Committee by statute in 1968. The new body was designed to be independent and scientifically driven in its rating approach. However, post nationalisation in 1972, the independence of the TAC came into question – observers described the TAC as the “handmaiden of the nationalised companies” (senior management of these companies took the most senior positions on the TAC) – as rates did not necessarily reflect “market price”.

The non-life market was eventually nationalised in 1972 following many years of tariff-setting

By 1972, general insurance in India was fully nationalised. Each of the 107 general insurance companies in India was assigned to one of the four subsidiaries of the General Insurance Corporation of India (GIC): National; Oriental; United India; and New India.

Liberalisation In 1991, economic liberalisation began under Manmaohan Singh. Three years later, the Malhotra Committee Report on the state of the Indian insurance industry was released. It recommended sweeping changes that would reactivate competition in Indian insurance. The market was

reopened to competition in 2000 following an influential report

These recommendations were put into practice via the Insurance Regulatory and Development Authority Act (IRDA 1999). In particular, the monopoly previously enjoyed by the GIC was removed. The act effectively reinstated the 1938 legislation. The following year, the first licences were granted to private companies.

Detariffication began in 2005 with marine insurance, with rates for property and motor being detariffed in January 2007. Rates for property and motor were scheduled to be detariffed at the beginning of the year. However, insurers are not allowed to change the terms and conditions for existing products until 2008 in an effort to avoid confusion during the initial stages. The GIC reduced its compulsory session from 20% to 15% in April 2007.


21

Products The subsequent section aims to give a brief overview of product dynamics, recent growth experience, detariffication and potential future growth areas.

Detariffication will change the dynamics of the market The progress towards full detariffication of the non-life sector began in 1994 when insurance tariffs on personal accident and bankers’ indemnity were dismantled. Between 1994 and 2006, some progress was made towards detariffication in marine insurance. Nevertheless, motor, fire, workmen’s compensation and engineering risks remained tariffed – accounting for around two-thirds of premium. As of January 2007, all classes of business except for motor third-party liability are no longer under price tariffs.

Motor third-party liability has not yet been detariffed as it was thought that the poor pricing could be addressed separately. It is suggested that this final tariffed product will be liberalised in 2008, although that has not yet been confirmed.

CHART 11: Detariffication roadmap (1994 – 2007)

♣ Large properties with a total insured value of > USD 500m are freely priced, but must still go through a qualifying process before placement can be made outside India;

‡ Workmen’s compensation and Public Liability (Act) only to be detariffed in January 2007* Some observers anticipate that some product controls, including price controls for Motor TP,

will remain in place but will be eventually withdrawn in April 2008

1994

Motor TP

Motor OD

Aviation

Liability‡

Engineering

Fire♣

Marine Hull

PA & Health

Marine Cargo

Aviation

Liability‡

Motor TP

Motor OD

Engineering

Fire♣

Marine Hull

PA & Health

Marine Cargo

Aviation

Liability‡

Motor TP

Motor OD

Engineering

Fire♣

Marine Hull

PA & Health

Marine cargo

April 2005 January 2007*

Tariffed

Detariffed

♣ Large properties with a total insured value of > USD 500m are freely priced, but must still go through a qualifying process before placement can be made outside India;

‡ Workmen’s compensation and Public Liability (Act) only to be detariffed in January 2007* Some observers anticipate that some product controls, including price controls for Motor TP,

will remain in place but will be eventually withdrawn in April 2008

1994

Motor TP

Motor OD

Aviation

Liability‡Liability‡

Engineering

Fire♣

Marine Hull

PA & Health

Marine Cargo

Aviation

Liability‡

Motor TP

Motor OD

Engineering

Fire♣

Marine Hull

PA & Health

Marine Cargo

AviationAviation


Motor TP

Motor OD

Engineering

Fire♣

Marine Hull

PA & Health

Marine Cargo

Aviation

Liability‡

Motor TP

Motor OD

Engineering

Fire♣

Marine Hull

PA & Health

Marine cargo

AviationAviation


Motor TP

Motor OD

Engineering

Fire♣

Marine Hull

PA & Health

Marine cargo

April 2005 January 2007*

Tariffed

DetariffedAll classes of business, except for motor third-party liability, are no longer under price tariffs

With the exception of insurance for large properties, the newly detariffed classes of business are still subject to some product restrictions, and the terms and conditions of existing products may not be altered. The regulator has argued that this is to prevent confusion in the market and has indicated that all product restrictions will be removed by April 2008. It is thought that insurers may be able to customise insurance products as early as October 2007, although these would still be subject to IRDA approval.40

In addition to product restrictions, insurers are not permitted to drop the price of a product by more than 49% in the case of fire risks and 20% in the case of motor own damage without the approval of the regulator.41 While this may not prevent a rise in price competition, it will certainly create an administrative barrier to rapidly falling prices.

40 DNA, “Made-to-order insurance by October”, (2007) 41 Lloyd’s Business Development, (2007)

The Indian non-life market 2007 22

Legacies of a tariffed product market The latest round of detariffication is more significant than it may appear at first. Although the Indian insurance regulator (the IRDA) has been pursuing a policy of detariffication since 1994, around two-thirds of all non-life premiums in the Indian non-life market remained tariffed until the beginning of 2007.

CHART 12: Tariffed vs. non-tariffed market by class (2006)42

India 2006: USD 6.0bn

Liability 2%Aviation 1%

Marine Hull 3%

Marine Cargo 4%

Miscellaneous 11%

PA & Health 14%

Engineering 6%Motor TP 11%

Fire 20%

Motor OD 28%

Around two-thirds of the Indian market remained tariffed up until the end of 2006

Until the end of 2006, only specialist commercial classes such as marine, aviation and professional liability had been fully detariffed – leaving the large mainstream classes such as motor, fire and engineering tariffed. As the tariffs covered most of the market until very recently, their effects dominated the market, influencing the pricing of even non-tariffed products.

Sophisticated insurance buyers are aware that insurers profit from hitherto tariffed lines such as fire and place demands on insurers to cut their rates in other ways. Cross-subsidisation and

product bundling were used to cope with the tariffed market

One method used by insurers to attract fire premiums has been the use of ‘product bundling’. This activity sees insurers bundling together tariffed products with non-tariffed products, with the insurer offering customers exceptional rates for their non-tariffed cover (eg marine cargo cover for USD 1) in the hope that this loss-making line is cross-subsidised by the tariff business and that they make a profit over the account as a whole.

Considerable growth despite tariffed market A strategy of bundling and cross-subsidisation has enabled the Indian insurance market to grow significantly in both tariffed (13%) and non-tariffed (15%) business when comparing half year figures for 2005 vs. 2006.

42 Lloyd’s Business Development calculation


23

CHART 13: Tariff vs non-tariff growth∗ (1H 2005 vs 1H 2006) 43

231

144

15%

13%

0

50

100

150

200

250

Tariff Non-Tariff

Abs

olut

e pr

emiu

m g

row

th (i

n m

illio

n U

SD)

12.0%

13.0%

14.0%

15.0%R

elative premium

growth (in %

)

India’s non-tariffed market in the 1H 2006 expanded by USD 144m (15%) when compared to 1H 2005

It is significant that the non-tariffed products grew at a faster rate than tariffed products between 2005 and 2006. In particular, the non-tariffed classes of PA & healthcare, marine hull and liability experienced high growth rates as summarised by the chart below.

CHART 14: Business classes’ premium and growth∗ (1H 2006)44

17%

11%

28%

6%

10%

28%

10%

27%25%

2%0

200

400

600

800

Motor O

D

Fire

PA & Health

Miscellaneous

Motor TP

Engineering

Marine C

argo

Marine H

ull

Liability

Aviation

1H 2

006

prem

ium

by

busi

ness

cla

ss (i

n m

illio

n U

SD)

0%

10%

20%

30%

40%

1H 2

006

annu

al g

row

th in

pre

miu

ms

(%)

43 Lloyd’s, Business Development calculation based on: IRDA, “Journal”, (2006 - 2007) ∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications 44 IRDA, “Journal”, (2006 - 2007)


Market players Competition was reintroduced in 2000 with the licensing of the first private companies. Foreign investment was also allowed at the same time, but limited to 26% ownership.

There were several reasons that prompted the Indian government to bring reform and competition to the insurance sector.

1. Firstly, while the public sector insurance companies made an enormous contribution in the spread of awareness about insurance and expanded the market, it was recognised that their reach was still limited, the range of products restricted and the service to the consumer inadequate.

Competition is seen as a vital component in the success of the Indian non-life market

2. Secondly, it was felt that the rapid economic growth witnessed in the 1990s could not be sustained without a thriving insurance sector.

3. Thirdly, it was recognised that the vast potential of India could only be achieved if sufficient competition was generated and the Indian insurance sector was exposed to global economic developments. The insurance sector was therefore opened to private sector participation with provision for limited foreign equity participation in 2000.

The Indian general insurance market can be divided into three types of organisation: PSUs private companies and special institutions. There are four PSUs, eight new private sector companies, most of which are joint ventures with foreign insurers and two special institutions (one of which, the Export Credit Guarantee Corporation of India Ltd, is solely concerned with export guarantee products while the other is Chennai-based Star Health, which is a standalone health insurance company.)

CHART 15: Premium levels vs. market share by segment∗ (2006)45

19.4%

15.0% 14.6%13.9%

12.3%

4.8%

3.3% 3.0%

1.2%0.8%

2.4%

0.1%

2.3%

6.9%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

New

India

Oriental

National

United India

ICIC

I-Lombard

Bajaj Allianz

IFFCO

-Tokio

Reliance

General

Tata-AIG

Royal

Sundaram

Cholam

andalam

HD

FC C

hubb

EC

GC

Star Health &

Allied Insurance

1H 2

006

Writ

ten

prem

ium

(in

billi

on U

SD)

0%

5%

10%

15%

20%

25%

Market share (in %

of total)

Special

Institutions:

2.5%

Private

Companies:

34.6%

Public

Sector:

62.9%

Since liberalisation, private companies have gained a 34.6% market share

The PSUs remain dominant in the general insurance sector, with a combined market share of 62.9%, while private companies had a combined market share of 34.6% in 1H 2006.

The special institutions segment only accounts for 2.5% of total market share and, as result, will be disregarded in the analysis below. The subsequent section is aimed at giving a high-level overview of both PSUs and private companies, with a focus on comparative strengths and weaknesses.

∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and thus they are not included in the premium development bubble chart 45 IRDA, “Journal”, (2006 - 2007)


25

Public sector undertakings (PSUs) The four public sector insurers are located in the major cities

The four major PSUs currently operating in the Indian general insurance market: National (Calcutta); Oriental (Delhi); United India (Madras); New India (Bombay). In practice, the PSUs tend to focus their efforts on maintaining a strong status and market position within their local region rather than competing with one another. Although New India is generally regarded as the most successful of the PSUs, the PSUs have the following common challenges:

• Sales focus (rather than underwriting): The tariff system, which has existed for a generation, has resulted in the lack of a need for insurance companies to underwrite. Additionally, PSUs have their own in-house sales agents for whom sales targets rather than underwriting are at the forefront of their activities. This position is now no longer sustainable, due to the phasing out of the tariff system during 2007.

• Poor systems: The lack of competition in the Indian market, and the backing that the PSUs receive from government, has meant that these insurers had hitherto faced lower incentives to improve their levels of efficiency. Accordingly, sophisticated IT systems are currently lacking in this environment – most PSUs continue to operate at a paper-based level. This is indicative of the inefficiency inherent within the Indian insurance market and provides a reason for generally poor customer satisfaction.

• Poor claims-paying record: There is a general perception within the Indian market that the PSUs either fail to pay claims or take far too long to do so. This reinforces the general public’s perception of insurance as a tax rather than being of any economic value.

Poor systems and the loss of staff to private insurers are key reasons for the decline of PSUs

• Staff leakage: The gradual loss of market share and competitiveness that the PSUs are currently experiencing, in conjunction with the higher monetary rewards on offer from private sector players, is leading to significant levels of high-quality staff leaving the PSU companies to join private competitors.

• Exposure to motor business: A further issue for the PSUs to consider is their substantial exposure to the poorly performing motor third-party liability sector.

CHART 16: PSUs business class breakdown∗ (1H 2006)46

1H 2006 Public Sector:USD 1.7bn

Aviation 2%Liability 2%

Marine Hull 3%

Marine Cargo 4%

Engineering 5%

Miscellaneous 10%

PA & Health 14%Motor TP 14%

Fire 19%

Motor OD 27%

The public companies’ high exposure to motor risks is A Cause for Concern



Private companies The eight new private companies are growing fast. They are generally run by experienced Indian managers and are strongly supported by foreign expertise. They are steadily building their customer base and, over time, they are expected to acquire an ever larger share of the market – their share currently stands at 34.6%. Interviews in both London and India revealed that the new private insurers collectively exhibited a number of strengths, these included:

The eight private companies have been established since 2000

• Small and flexible: The private firms have smaller and less disparate workforces than the PSUs and are therefore able to respond quickly to changes in market conditions. Private companies have

been able to choose the highest-calibre staff from the PSUs

• Good staff, systems, processes and data: Due mainly to their ability to pay higher salaries, the private companies have been able to choose the highest-calibre staff from the government-owned PSUs. The foreign partners involved in the new privately owned Indian insurance ventures have ensured that high-quality systems and processes have been implemented from the very beginning of their enterprise. This ensures that the companies are run using international industry best practice standards to provide a higher quality of data.

• Greater focus on underwriting: Although the sales function of the private companies is still extremely important to them, more emphasis is placed on maintaining sound underwriting procedures and high-quality back office processes than is seen in the PSUs. The business models,

Customer service and staff are stronger in private companies

• Strong claims-paying reputation: As a result of their greater efficiency and information capture, the privately owned insurers operating in the Indian market have developed a far better reputation than the PSUs for paying claims quickly and efficiently.

• Product focus: Aside from outperforming PSUs in terms of overall business growth, private companies have been able to build up a more favourable business mix. This is due to the fact that PSUs are not allowed to decline certain unprofitable business such as motor third-party.

CHART 17: Private company’s business class breakdown∗ (1H 2006)47

1H 2006 Private Companies:

USD 1.0bnMarine Hull 3%

Aviation 1%

Liability 3%

Marine Cargo 4%

Motor TP 5%

Engineering 7%

Miscellaneous 8%PA & Health 16%

Fire 23%

Motor OD 30%

Motor OD appears to have been chosen as an avenue for gaining market share for private companies



27

Foreign players The ability of foreign insurers to participate in the Indian non-life insurance market is currently restricted to a 26% stake in a joint-venture vehicle with an Indian company. Even with this relatively low level of foreign participation, many of the world’s largest insurers (such as AIG, Allianz and RSA) have already entered the market. Despite their disadvantaged position, foreign capital providers have been able to influence strategy, product focus and speed of growth. As a result of this influence, there are growing differences between private companies.

Tata AIG is a joint venture (JV) between the multinational Indian conglomerate Tata and American insurance giant AIG. The Mumbai-based Tata AIG intends to develop its retail book but has stated that it is looking for quality of business rather than quantity – it is not prepared to compete on extremely low deductible business. It is estimated that Tata AIG has employed 1,500 direct sales agents specifically to target this business. Additionally, Tata AIG has embraced alternative channels that include bancassurance, corporate agency, brokers and direct marketing, which contribute significantly to premium growth. Tata is said to be a virtually silent partner in its venture with AIG.

ICICI-Lombard and IFFCO-Tokio are aggressively targeting personal lines business

ICICI, on the other hand, is the main driver in its operation with Lombard. ICICI-Lombard and IFFCO-Tokio are aggressively targeting personal lines business, the intention being to grow market share quickly. Conversely, HDFC-Chubb announced that it intended to scale back its personal lines business and focus instead on commercial business and liability lines, particularly D&O. Since then, Chubb has exited from its Indian joint venture with HDFC.

Bajaj Allianz has formed a strategic alliance with Karnataka Bank to launch two co-branded over-the-counter insurance products covering the health and home insurance sectors exclusively for the bank’s customers. Bajaj Allianz’s success is due to its extensive branch network of more than 550 branches and more than 110,000 agents, which are estimated to contribute around 70% of total premiums.

Cholamandalam-Mitsui is based in Madras and continues to focus on the mid-market small and medium-sized enterprise (SME) business from Southern India.

Royal Sundaram is also based out of Madras and is said to maintain a stable book of business as well as strong brand recognition in financial lines.

New JVs in the pipeline The IRDA approved in principle three new joint ventures in May 2007, DKV Apollo Insurance, Future Generali Life, and Future General.48 The first is a joint venture between Munich Re’s health insurance subsidiary and Apollo, a major Indian healthcare provider. The others see Generali’s successful entrance into both the life and non-life markets. There are a further two stages of the application process before any of these companies are considered operational. According to an article in Asia Insurance Post, Bharti Enterprises and AXA announced that they have signed a Memorandum of Understanding to establish a joint venture company to launch general insurance business in India.49 The joint venture, which will be headquartered in Bangalore, is expected to commence operation in the second half of 2007, subject to IRDA, FIPB and other statutory approvals.

Sompo Japan signed a joint venture agreement to establish a non-life insurance company with state-owned banks, Allahabad Bank and the Indian Overseas Bank, as well as the privately owned Karnataka Bank and the Dabur Investment Corporation in New Delhi.

Finally, Munich Re is looking to establish a joint venture through its primary insurance arm, Ergo Versicherungsgruppe AG. Most recently, it has approached Larsen & Toubro and HDFC after failing to secure a joint venture with Bank of Baroda.50

48 Asia Insurance Review, “IRDA Approves Three More Insurers”, (2007) 49 Asia Insurance Post, “AXA joins forces with Bharti Enterprises for general insurance”, (2007) 50 Forbes, “Munich re’s Ergo in talks with India L&T on insurance venture – report”, (2007)


Significant premium growth for private companies When total figures are aggregated, the picture emerging is that IFFCO-Tokio, in particular, recorded spectacular growth figures of USD 148m (79%) during 1H 2006 vis-à-vis 1H 2005. Furthermore, the jump in premium growth for Reliance General of USD 66m almost quadrupled its premium underwritten when comparing the same periods. This was largely due to the fact that the company is now driving its retail business – having previously mainly concentrated on commercial lines. Conversely, HDFC Chubb’s premium declined over the same time period as summarised by the chart below.

CHART 18: Absolute vs. percentage growth∗ (1H 2005 vs 1H 2006)51

79%

379%

48%30% 32% 24% 21%

-5%

-40

0

40

80

120

160

ICIC

I-Lombard

Reliance

General

IFFCO

-Tokio

Bajaj Allianz

Tata AIG

Royal

Sundaram

Cholam

andalam

HD

FC C

hubb

1H 2

005

vs

1H 2

006

prem

ium

gro

wth

-100%

0%

100%

200%

300%

400% 1H 2005 vs 1H

2006 percentage premium

growth

Absolute premium growth (in million USD) Premium growth (in %)

Recent premium grhas shown significant variations

owth Absolute premium growth has been lead by ICICI Lombard

Private companies are emerging as serious competitors Despite the continued overall dominance of PSUs, private companies such as IFFCO Tokio, are emerging as serious competition not only in quality of products and services but also in terms of relative market size, which is illustrated best in the chart below.

CHART 19: Premium development∗ by company (1H 2005 vs. 1H 2006)52

-200%

-100%

0%

100%

200%

300%

400%

500%

-100m -50m 0m 50m 100m 150m 200m

1H 2005 vs. 1H 2006 absolute premium growth (in USD)

1H 2

005

vs. 1

H 2

006

prem

ium

gro

wth

(in

%)

Bajaj AllianzNew INdia National

ICICI-LombardIFFCOTokio

Tata AIG

Royal Sundaram

HDFC Chubb

Reliance General

Cholamandalam

Oriental

UnitedINdia

PSU Private companies

Legend Size of bubble is equivalent to 1H 2006 premium levels

≈ USD 75m

∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications; the IRDA classes ECGC and Star Health & Allied Insurance as specialised institutions and thus they are not included in the premium development bubble chart. 51 IRDA, “Journal”, (2006 - 2007) 52 Ibid


29

Overall, private companies have therefore been building a book with significant focus on the more profitable fire, engineering and, lately, PA & health business.

CHART 20: PSUs vs. private companies class breakdown∗ (1H 2006)53

0%

10%

20%

30%

40%

Motor O

D

Fire

PA & H

ealth

Motor TP

Miscellaneous

Engineering

Marine C

argo

Marine H

ull

Liability

Aviation

1H 2

006

busi

ness

cla

ss b

reak

dow

n (in

% o

f tot

al)

PSU Private companies

Private companies are focusing on the more profitable lines such as Fire, Motor OD and PA & Health

Potential growth areas for foreign companies A small but significant portion of Indian business is also placed internationally. Some of the key areas of growth for foreign companies writing Indian (re)insurance are discussed below.

• Aerospace and Space: Aviation insurance demand is being driven by the opening up of the local aviation market to private competitors. Space premium will continue to benefit from the use of India as an alternative launch pad for space programmes.

• Catastrophe reinsurance: The huge discrepancy between economic losses vs. insured losses in recent tragedies has highlighted the need for catastrophe cover. As people and business grow richer, it is expected that demand for this cover will increase. According to the IRDA, India is said to be ranked among the top 50 countries suffering economic losses due to natural disasters. Most of the losses are uninsured. In India, the penetration of Catastrophe Insurance is under 0.5%, whereas in Turkey, it is to the tune of 17%.54 Foreign reinsurers are in demand because the GIC does not want to take on 100% of the risk.

• Mega and project risks: Risks with a total insured value above INR 15bn (USD 350m) are outside the scope of the tariff market and are generally placed internationally. The mega risk policy is a policy designed for big buyers of insurance, such as refineries and other plants with heavy concentrations of risk. Due to limited capacity in India, these risks are typically insured only after reinsurance support is finalised. Under the mega risk policy, these plant owners, instead of purchasing insurance at the tariff rates, could shop around for the best deals in the reinsurance market. After striking the deal with the reinsurer, the buyer would then strike a deal with a local insurance company that would underwrite the risk on the back of reinsurance support.55

53 IRDA, “Journal”, (2006 - 2007) 54 IRDA, “Journal – April 2007”, (2007), page 12 55 The Economic Times, “Companies may Share Higher Risk for Engg, Fire cover”, (2003)


Distribution India has a full range of distribution channels; however, the direct agent remains dominant

With the passage of a series of legislative reforms in recent years, the Indian insurance market now has a full range of distribution channels. However, most of them still have some way to go before they start to make an impact in those market sectors in which they have chosen to work. At present, the vast majority (around 70% to 75%) of all Indian non-life premiums are still distributed through the legions of on-the-ground direct sales agents (or ‘marketing’ agents) who are largely employed by the PSUs.

The vertically integrated structure of distribution in the Indian non-life sector is often compared with the system found in Japan. This comparison holds true to the extent that both countries’ policyholders buy the majority of their coverage directly from insurers via an employee of the insurance organisation. However, a key difference between India and Japan is that Indian insurance buyers are more price-sensitive than their Japanese counterparts; Indian buyers are far more concerned with obtaining the ‘best’ deal.

The dominance of the direct marketing agent in India is expected to prevail over the medium term. While bancassurance is gradually picking up as an alternative channel of distribution to the traditional agency model, other low-cost direct channels – such as telephone and internet – have yet to make a significant impact on the market.

Bancassurance has witnessed some growth since IRDA’s notification on Corporate Agency regulations in October 2002, which allowed banks to act as an agent of only one life and one non-life insurer. Overall, India is set to follow other Asian markets such as Singapore, South Korea or Indonesia in which bancassurance partnerships are beginning to bear positive results.

The challenges facing brokers Brokerage in India is still in its infancy

Brokerage in India is still in its infancy. In December 2006, there were 222 licensed brokers (193 direct brokers, 4 reinsurance brokers and 25 composite brokers).56 However, the role of an insurance broker does not seem to have been properly understood or appreciated because non-life market has hitherto largely been tariffed.

Brokers currently account for a small percentage of all premiums distributed in India and are finding it difficult to grow and attract new business. This position is a concern for entities such as Lloyd’s and is mainly caused by structural elements within the Indian market; the following discussion outlines the main challenges facing brokers:

1. High set-up costs: The IRDA has made it mandatory for the insurance brokers to pay a registration fee of INR 50 lakhs (USD 110k) in order to show commitment to the market and their clients. In contrast, registration costs for insurance agents are just INR 250 (USD 6) per annum.57 Brokers are also required to have professional indemnity cover of three times their brokerage income, subject to a minimum of INR 50 lakhs (USD 110k).

Brokers face significant cost disadvantages compared to Agents

2. Sole trader competition: The vast majority of the 222 or so brokers currently operating in the Indian market are extremely small operations targeting small and medium-sized enterprises. These brokers currently have two distinct advantages over their corporate competitors in the Indian market. Firstly, their relatively small fixed cost base enables them to intermediate business for commission levels that are as low as 1%. Secondly, as insurance is not currently perceived to be a product of economic value, the deep relationships that these brokers hold with their clients are deemed to be more important than insurance expertise. So while internationally, the top ten brokers tend to be Fortune 500 companies, in India the top ten brokers are currently either chartered accountants or surveyor firms.

The Indian broker market is dominated by small operations targeting SME business

56 IRDA, “Report of the Expert Committee (on Brokers and Broker related issues)”, (2006), page 11 57 Kumar, S., “Changing scenario of Insurance Industry”, (2004), page 2


31

Clients have yet to be made aware of the benefits that brokers can bring to them

3. Legacies of the tariff market: The fact that 70% of all Indian premium income has hitherto emanated from tariffed products means that brokers have so far been unable to demonstrate real value to clients. First of all, the tariff market did not enable brokers to demonstrate their value in ‘shopping around’ for the best deal. Clients have therefore understandably questioned the value of an ‘expert’ intermediary when the product that they are purchasing is basically a commodity. While detariffication is changing these dynamics of the broking community, it is likely to take significant time and resources to ensure that clients understand the full benefits brokers can bring to them.

4. Activity restrictions: In addition to the above challenges for brokers, brokers are currently unable to accept business or settle claims on behalf of insurers. The lack of these value-added back office services is yet another barrier to clients purchasing their insurance through brokers.

Brokers have so far had to focus their efforts on niche segments

As a result of high set-up costs, sole trade competition, a long history of tariffs and certain activity restrictions, brokers have had to focus their attention on niche sectors of the Indian market namely: non-tariff business, so-called mega risks and risks where a company’s paid-up capital is below USD 3.5m.

Future developments Over the medium term, conditions are expected to improve for brokers

Detariffication is likely to have two medium-term effects on distribution in the Indian market:

Gradual demise of the ‘marketing’ agent: The PSUs will need to readjust their business models to deal with the underwriting challenges posed by a detariffed market. In order to maintain competitiveness, it is likely that their huge sales forces will need to be reduced. Voluntary Retirement Schemes (VRS) have already been set up by the PSUs to cater for the loss of sales jobs that detariffication is expected to cause.

In the short term, however, local private insurers do not appear to be prepared to wait for brokers to gain a foothold in the market. Furthermore, the take-up of the VRS offered by the PSUs is reported to have been disappointing. Some private insurers have adopted direct distribution strategies. ICICI-Lombard is utilising the extensive retail bank branch network of its Indian partner to sell products via the Bancassurance channel, and Tata AIG has recently employed 1,500 direct marketing agents of its own. This situation may prove difficult for organisations reliant on the broker channel because if these direct strategies prove successful, the extent to which the private companies are prepared to support the cause of brokers may reduce substantially.

However, there is a Chance that insurers will have created other distributors by then

Brokers will have to demonstrate value to clients: While the value of brokers lies to a great extent in their skills in structuring a customised solution for their client, it will take some time until this value proposition filters down to end customers. On the whole, the market will take some time to allow brokers to establish a name.


MAP 1: Geographic broker concentration (2007)

Total number of brokers:

225

Eastern Zone 8%

Western Zone 36%

Northern Zone 35% Southern Zone

21%

TURKM.

PAKISTAN

CHINAAFGHANISTAN

TAJIKISTANUZB.

BANGLADESH

Dhaka

Bhopal

Jaipur

Ahmedabad

Lucknow

New Delhi

Islamabad

KabulChinese

control

Indian claimLine of

ThimphuKathmandu

NEPALBHUTAN

Delhi

line ofControl

BURMA

LANKA

Rangoon

Chennai

Hyderabad

Mumbai

Bangalore

Colombo

Bayof

Bengal

SRI

Kolkata

ArabianSea

0

0

200

200 400 Miles

400 Kilometers

Pune

Number of Brokers by zone (Estimate)

Total number of brokers:

225

Eastern Zone 8%

Western Zone 36%

Northern Zone 35% Southern Zone

21%

TURKM.

PAKISTAN

CHINAAFGHANISTAN

TAJIKISTANUZB.

BANGLADESH

Dhaka

Bhopal

Jaipur

Ahmedabad

Lucknow

New Delhi

Islamabad

KabulChinese

control

Indian claimLine of

ThimphuKathmandu

NEPALBHUTAN

Delhi

line ofControl

BURMA

LANKA

Rangoon

Chennai

Hyderabad

Mumbai

Bangalore

Colombo

Bayof

Bengal

SRI

Kolkata

ArabianSea

0

0

200

200 400 Miles

400 Kilometers

Pune

Number of Brokers by zone (Estimate)


33

Reinsurance The basic position of reinsurance in India is relatively clear:

There is only one local reinsurer – the gic

• Single local provider: There is a single local provider of reinsurance capacity, the GIC, which is wholly owned by the Indian government. Reinsurance is not subject to a tariff.

• 15% compulsory session: Direct insurance companies operating in India were statutorily compelled to cede 20% of their book to the GIC. Since April 2007, this has been reduced to 15%, after which companies are free to make a commercial decision on how much more of their business they are prepared to cede.

• GIC has right of first refusal: By law, companies should offer any additional reinsurance to the GIC before seeking alternative markets, but in practice, this rarely takes place.

• International reinsurance limited to a maximum of 10%: Surplus over and above the domestic reinsurance arrangements class-wise can be placed by Indian insurers, subject to a limit of 10% of the total reinsurance premium ceded, outside India.58 However, where it is necessary in respect of specialised insurance to cede a share exceeding such limit to any particular reinsurer, the insurer may seek the specific approval of the Authority.

Reinsurance buyers Hardening rates have caused Indian buyers to purchase non-proportional cover

Following the hardening of international rates and the growing sophistication of the Indian reinsurance buyer, there had been a trend towards the purchase of non-proportional programmes in India until mid-2004.

However, a combination of general rate-softening in the international markets and extensive price-driven competition from the continental reinsurers in the local market has made proportional treaties attractive once again across the market. Reinsurance buyers in India fall into two broad categories: the public companies (including the GIC on a retrocession basis) and the private companies. The perceptions that international reinsurers have of these two groups of buyers are significantly different.

Public companies: GIC and the PSUs The GIC is the largest and most important reinsurance account in India and, due to their continued dominance of Indian direct market, the PSUs also continue to be important reinsurance buyers.

According to the 2005-2006 IRDA Report, the retention ratio – a measure of the companies’ ability to bear risks – differs markedly between PSUs. Traditionally, PSUs have retained a significant component of their portfolio, although the net retention is driven by the respective segment in which the premium has been underwritten. Overall, the net retention ratio of PSUs for the period of 2005-2006 declined, with United India and Oriental retaining considerably less than both New India and National, which both increased their retention. As expected, across segments, the retention ratios also have varied significantly as summarised by the chart overleaf.

58 IRDA, “General Insurance Regulations”, (2000)


CHART 21: Retention ratios of PSUs59 CHART 22: Range of PSU retention ratios 60

74%74%

72%

77%76%

71%

69%

76%

64%

66%

68%

70%

72%

74%

76%

78%

New India National United India Oriental

Ret

entio

n ra

tio (%

)

2004-2005 2005-2006

0%

25%

50%

75%

100%

Miscellaneous Fire Marine

Ran

ge o

f ret

entio

n ra

tios

(%)

However, despite the size of the PSU accounts, leading international underwriters expressed certain reservations about dealing with this business.

The public companies are said to maintain poor-quality data and to focus heavily on cost

• Poor data: The data provided by the Indian public companies is routinely described by underwriters as “very poor”. This is mainly a result of the inadequacy of the IT systems employed by the public sector companies. This situation adversely affects the ability of both brokers, who are less able to add value by means of actuarial capabilities, and underwriters, who find it difficult to fully comprehend their exposure to risk. It should be noted that gradual improvements are being made as clients and counterparties demand quality, and an Indian risk management solutions model was launched in December 2006 by RMS. However, even with this progression, it is unlikely that the standards of public sector data will reach ‘satisfactory’ levels in the near future.

• Cost focus: As found elsewhere in Indian insurance, there is an unrelenting focus on low cost rather than economic value in the reinsurance purchasing practices of the public companies. This focus is structurally supported by an annual tender process in which a range of companies are invited to place their bids for a reinsurance programme. Buyers speak of the “value placed on long-term relationships”, but in practice, a reinsurance partner is highly likely to be dropped if it is not prepared to match the lowest price on a tender. Many practitioners referred to the main policy used in assessing these tenders as ‘L1’ (or lowest one). This focus on cost is only likely to be changed over the medium to long term. Clients will first need to be educated and accept that quality insurance cover is a key part of a successful business enterprise.

However, The PSUs still remain the largest reinsurance buyers in the market

However, despite these ongoing issues, there are good reasons for international reinsurers to continue to focus on the public company’s portfolios. These accounts are expected to continue to be India’s largest for a considerable time and their data provision is expected to improve with the increasing international competition in the direct market. Moreover, leading international brokers are extensively used for the placement of Indian reinsurance premiums. Guy Carpenter and Willis are said to be the largest producers for Lloyd’s.

Private companies The reinsurance position of private sector companies operating in the Indian market differs from that of their public sector competitors in three key ways.

• Smaller market but higher reinsurance utilisation: Firstly, the accounts are far smaller but retention ratios tend to be lower. Again, depending on portfolios; for instance, HDFC Chubb’s retained a higher portion than any other private insurers – largely due to a significant component of its portfolio being motor.

59 IRDA, “Annual Report 2005-2006”, (2006) 60 IRDA, “Annual Report 2005-2006”, (2006)


35

CHART 23: Retention ratios of private companies61

0%

20%

40%

60%

80%

HDFC Chubb Royal Sundaram TAT AIG Bajaj Allianz IFFCO Tokio ICICI Lombard Cholamadalam Reliance

Ret

entio

n ra

tio (i

n %

)

2004-2005 2005-2006

While the overall size of the reinsurance is smaller for private companies, they tend to have a higher utilisation

• Better quality of data: Secondly, the quality of data provided to reinsurers is of a far higher quality than that provided by the publics.

• Less focus on insurance costs: Finally, there is slightly less focus on cost (and more focus on relationship) in the reinsurance purchasing process.

London underwriters are not yet heavily involved in working on the reinsurance programmes of the private companies despite their greater degree of quality and professionalism. This is mainly due to the size and stage of development of the private insurers in India. The small size of the private insurers means that only low levels of premiums are available from these organisations and, therefore, there is little margin from which to pay for the relatively costly process of purchasing protection from London. The fact that the organisations are young is also an important barrier to London purchasing as they have tended to opt for proportional treaty coverage, which is the stronghold of the GIC and the continental European reinsurers. However, as these private insurers grow and develop their business in India – which they are expected to do over the medium term – the reinsurance premiums available from them will grow ever larger, and it is likely that their balance sheets will reach a point where the purchase of non-proportional cover will become more of a realistic option.

The private companies are still young and thus use proportional treaty arrangements

Reinsurance sellers The GIC

The GIC is 100% government-owned and has an ‘A’ rating from a.m. best

The GIC, the national reinsurance carrier, is backed 100% by the Indian government. The GIC’s exceptionally strong position in the Indian market is further underpinned by the links it maintains as a holding company for the PSUs. The GIC currently has a ‘BB’ rating (Marginal)62 from Standard & Poor’s and was downgraded from an ‘A’ to an ‘A-’ by A.M. Best at the end of 2006.63

Its monopoly position has enabled the GIC to build up a huge amount of capital and the organisation is currently seeking opportunities to efficiently employ its assets. There is current evidence of this activity as the GIC has recently built on its strength at home and developed its presence across Asia, Africa and the Middle East. Sources suggest that the GIC has ambitions to become the leading reinsurer in the region. In terms of products, the GIC is seeking to develop into lines outside of its traditional proportional treaty arrangements, which are being eroded by heavy competition from the large continental reinsurers.

61 IRDA, “Annual Report 2005-2006”, (2006) 62 NB: An insurer rated ‘BB’ has MARGINAL financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments 63 The Insurance Insider, “Best downgrades Indian state reinsurer”, (2 January 2007)


Primary insurers in the Indian market are obliged to cede 15% of their risk to the GIC from April 2007 onwards

The compulsory cession rule does not always work in the GIC’s favour as the government-run reinsurer has no choice but to accept the poorly performing motor liability cessions. Given its dominant position, the GIC is confident that it will remain competitive in a freer market than currently exists in India, and has stated that it is in favour of both detariffing the Indian primary market and a gradual removal of the compulsory cessions.

Although cedants express confidence in the GIC, they also have a desire to spread their reinsurance exposure across more than one provider. Apart from the GIC, several foreign reinsurers are involved in the Indian market.

Major continental reinsurers Outside of the GIC, the continental reinsurers are the main markets used for the placement of proportional treaty business. However, over the past five years, the position taken by the major continental providers has changed substantially. Following major losses in the late 1990s, the continentals appeared to have turned their backs on India and focused their attention elsewhere; however, during the last two to three years, they have shown a significant interest in redeveloping their position in India. Swiss Re (Mumbai), Munich Re (Kolkata) and SCOR all now have ‘representative’ offices in India. They all continue to seek opportunities to bolster their share of the Indian market and are cutting prices heavily to do so. Growth in India appears to be of strategic importance to the large continental reinsurers and, therefore, their parent companies are likely to absorb any losses made in the market over the short to medium term.

Swiss Re and Munich Re are strong in India due to the high use of proportional treaties

All of the continental reinsurers are now aggressively targeting India

Munich Re had sought to form an onshore reinsurance venture with Indian partner Reliance; this deal fell through in late 2004 as Reliance moved through a corporate restructuring and Munich Re discovered that Reliance wished to be more than a simple ‘silent’ partner in the proposed operation. To counteract the requirement of a local partner, both Munich Re and Swiss Re are lobbying for full branch status for their local offices. This would enable them to utilise the huge capacity of their head offices rather than putting up the USD 44m in capital required to be a local reinsurer. However, this proposal has been pushed back strongly by the IRDA and is unlikely to be implemented in the short to medium term. So for the time being, Munich Re appears to be concentrating its activities in India on tapping into the fast-growing life insurance markets. Munich Re’s Ergo has already established its presence in India through a health insurance partnership with Apollo. Apollo has joined hands with DKV International Health Holdings (part of Ergo group), which is Ergo’s health care brand.64

London market The London market is an important provider of non-proportional coverage to India

The London market, and in particular Lloyd’s, still continues to play an important role in Indian reinsurance. London tends to be perceived as the leader for the following categories of business:

• Specific and high-limit reinsurance coverage (facultative and excess of loss).

• Sophisticated and tailored products such as jeweller’s block, financial institutions, professional liability (D&O / E&O).

London and Lloyd’s retain strong positions in the Indian reinsurance market despite not having a local presence for several reasons: firstly, the common language shared by the two countries; secondly, the legal systems are aligned and based on Anglo-Saxon common law principles; and thirdly, education. Indian insurers are keen to work with their London counterparts as London and Lloyd’s underwriters are perceived to be world leaders in insurance, and deals made with London enable Indian companies to benefit from market-leading knowledge. Finally, Indian buyers are said to enjoy the culture of the ‘deal-making’ environment of the London market.

64 The Economic Times, “Munich Re looks at Indian insurance segments”, (2007)


37

Other international markets

Regional markets, such as Singapore, are considered tier 2 reinsurance providers

Regional markets, such as Singapore, absorb some Indian reinsurance business, but these players are generally considered to be tier 2 options behind the continental markets and London. This competition tends to occur once London has set up and underwritten an account for one or two years; there have been reports of significant price competition stemming from Western insurance companies operating out of Singapore. This cost focus is certainly attractive to Indian buyers, but significant amounts of premium are not currently being lost to regional centres. Bermuda is not a natural or traditional home for Indian reinsurance and is not used much; however, it was noted that Bermuda would certainly be considered if the rates were attractive.


Class-by-class analysis The remainder of this section will consider each of the major classes in the light of the liberalisation dynamics discussed above. This will be used as the basis of the forecasting in the following section.

Motor Sales of automobiles tend to have a significant influence on the level of non-life insurance premiums in a developing country. The main reason for this situation is that motor insurance is generally a compulsory product in most countries. The relationship between automobile growth and non-life premium income is illustrated by the Chinese market. Between 1998 and 2002, automobile registrations in China grew by 141%; during the same time period, non-life premiums increased by 68%. India is just entering a period in which car sales are likely to grow exponentially; market leader Maruti Udyog reported a 22% increase in domestic sales at 56,606 vehicles during September 2006 compared with 46,393 vehicles in the same period the previous year.65

The premium breakdown shows that the compulsory motor class plays a less significant role in the Indian market than in other developing territories. By comparison, the Chinese market consists of 61% motor premium.66 The difference in contribution is reflected in the number of new car registrations in each of the countries. In 2005, China recorded 3.8 million new car registrations67 whereas India recorded 1.3 million in the same year.68

The compulsory motor class plays a less significant role in the Indian market

Motor third-party (TP) liability has been a famously loss-making business due to fixed, very low pricing and to galloping, very high claims payouts. During 2003-2004, the motor TP portfolio was estimated to have a claims ratio of 200% to 250%.69

CHART 24: Motor TP∗ absolute growth and market share – top five players (1H 2005 vs 1H 2006) 70

8

7

4

32

0

3

6

9

12

15

Oriental ICICI Lombard IFFCO Tokio Bajaj Allianz United India

Prem

ium

gro

wth

(1H

200

5 vs

1H

200

6)

1H 2006 PA & Health: USD 294m

Bajaj Allianz 7%

United India 17%

Oriental 19%

National 21%

New India 27%

Others 9%

It has been common practice for this segment to be cross-subsidised by the motor own damage (OD) premiums (which business is estimated to have a better claims ratio of about 80%). In particular, ICICI Lombard has been making significant progress in gaining market share in motor OD business, growing by USD 60m between 1H 2005 and 1H 2006.

65 The Hindu Business Line, “Passenger car sales see robust growth in Sept”, (2006) 66 CIRC, “Yearbook of China’s Insurance 2005”, (2005) 67 US Department of Energy, “China’s new Car Registrations”, (21 August 2006) 68 Paul Tan’s Raves and Rants on the Automobile Industry, “Naza plans to set up CKD plant in India”, (18 August 2006) 69 IRDA, “Journal – March 2005”, (2005), page 11 ∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and thus they are not included in the premium development bubble chart 70 Ibid.


39

On the other hand, Baja Allianz is a significant player in the much less desirable motor TP business. Yet even in this segment, ICICI Lombard has grown its business more in absolute terms as summarised by the charts below.

CHART 25: Motor OD∗ absolute growth and market share – top five players (1H 2005 vs 1H 2006) 71

60

23

16

12 10

0

10

20

30

40

50

60

70

ICICI Lombard Reliance Bajaj Allianz Oriental IFFCO Tokio

Prem

ium

gro

wth

(1H

200

5 vs

1H

200

6)

1H 2006 Motor OD: USD 770mUnited

India 10%

ICICI Lombard

12%

Oriental 16%

National 18%

New India 19%Others 25%

ICICI Lombard has grown its motor business significantly – revealing an aggressive strategy for market share

Property The IRDA splits the property class into fire and engineering. Fire has traditionally been the breadwinner of the Indian insurance market with claims accounting for approximately 30% in 2004.72 The typical customers for fire insurance are mainly large corporate customers, which demand successfully that their unprofitable risks such as health and marine cargo get a most favoured pricing status, the subsidy being hidden by the fact that the latter have for some time been non-tariff classes of business.

Fire has traditionally been the breadwinner of the Indian insurance market

CHART 26: Fire∗ absolute growth and market share – top five players (1H 2005 vs 1H 2006) 73

17

7 6 66

0

5

10

15

20

Reliance IFFCO Tokio Bajaj Allianz ICICI Lombard New India

Prem

ium

gro

wth

(1H

200

5 vs

1H

200

6)

1H 2006 Fire: USD 556m

ICICI Lombard

10%

National 12%

Oriental 13%

United India 17%

New India 18%

Others 30%

71 Ibid. 72 IRDA, “Journal – March 2005”, (2005), page 11 ∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and thus they are not included in the premium development bubble chart 73 Ibid.


Similar to motor, ICICI Lombard is the clear market leader among private companies for fire insurance. However, Reliance has witnessed a major growth in this class of business over the last year – making it the clear market leader in terms of absolute premium growth as summarised by the chart above.

Reliance has witnessed a major growth in Fire insurance during 1H 2006

For engineering insurance, which typically covers all types of risk associated with erection, testing, machinery, plant and equipment, ICICI Lombard is the clear private company leader – closely followed by Bajaj Allianz.

CHART 27: Engineering∗ absolute growth and market share – top five players (1H 2005 vs 1H 2006) 74

8

7 7

6

4

0

3

6

9

12

15

ICICI Lombard Bajaj Allianz New India Reliance United India

Prem

ium

gro

wth

(1H

200

5 vs

1H

200

6)

1H 2006 Engineering: USD 154m

Bajaj Allianz

13%

Oriental 14%

New India 15%

ICICI Lombard

15%

United India 16%

Others 27%

PA & health While corporate business until recently was largely about the manufacturing sector, the economy is now shifting from manufacturing sector to services sector. This means that group health and liability insurance are becoming increasingly important for insurance companies.

Group health and liability insurance are becoming increasingly important for the Indian economy CHART 28: PA & health∗ absolute growth and market share – top five

players (1H 2005 vs 1H 2006) 75

42

98 7

6

0

10

20

30

40

50

ICICI Lombard New India Reliance Oriental Bajaj Allianz

Prem

ium

gro

wth

(1H

200

5 vs

1H

200

6)

1H 2006 PA & Health: USD 397m

National 12%

Oriental 14%

United India 14%

ICICI Lombard

21%

New India 21%

Others 18%

∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and thus they are not included in the premium development bubble chart 74 Ibid. 75 Ibid.


41

The fundamental causes of upward pressure on health care costs include the rapid progress of medical technology and the fact that patients are becoming more demanding about health care services and ‘wants’ are expanding in relation to ‘needs’.

Rising health costs lie behind considerable growth in health insurance premiums While it is difficult to measure the extent of rising medical costs, observers suggest that

health care costs are typically increasing at three to five times the rate of general price inflation.

Even though health insurance is seen as becoming increasingly unprofitable for PSUs, due to escalating healthcare costs, adverse selection, moral hazard and a low premium structure, ICICI Lombard has clearly targeted this segment of the market as summarised by current market share and growth figures above.

Marine So far, Private companies have made little impact on the marine cargo market

Private companies have so far made little impact on the marine cargo markets as customers continue to prefer dealing with PSUs.

CHART 29: Marine cargo∗ absolute growth and market share – top five players (1H 2005 vs 1H 2006) 76

2.42.1

1.71.5

1.2

0

1

2

3

4

5

Bajaj Allianz Tata AIG IFFCO Tokio Oriental ICICI Lombard

Prem

ium

gro

wth

(1H

200

5 vs

1H

200

6)

1H 2006 Marine Cargo: USD 97m

Tata AIG 8%

National 14%

United India 16%

New India 17%

Oriental 19%

Others 26%

However, recent growth performance indicates that private companies are gaining market share

While the market penetration for private companies in the marine cargo segment has been comparatively low, some significant growth has been witnessed in the marine hull business for private companies.

The entry of private companies is expected to benefit shipping companies as they will then be in a position to obtain cheaper war risk cover from the international market compared with the current rates being offered by PSUs.

As summarised by the chart below, IFFCO Tokio has recently gained a significant portion of the market – controlling one-fifth of the total Indian marine hull market in 1H 2006.

∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and thus they are not included in the premium development bubble chart 76 Ibid.


CHART 30: Marine hull∗ absolute growth and market share – top four players (1H 2005 vs 1H 2006) 77

15.7

3.3

1.40.5

0

5

10

15

20

IFFCO Tokio Oriental ICICI Lombard United India

Prem

ium

gro

wth

(1H

200

5 vs

1H

200

6)

1H 2006 Marine Hull: USD 84m

ICICI Lombard

14%

New India 14%

United India 18% IFFCO Tokio

20%

Oriental 23%

Others 11%

IFFCO Tokio gained a significant share of the Marine Hull Market with major growth in 1H 2006

Liability Liability represents a small proportion of the total Indian market. However, private companies such as ICICI Lombard and Tata AIG are well positioned to take advantage of this fast-growing segment of the market.

Liability is a small portion of the market…

CHART 31: Liability∗ absolute growth and market share – top five players (1H 2005 vs 1H 2006) 78

3.8

2.3

1.6

1.2

0.9

0

1

2

3

4

5

ICICI Lombard Oriental Tata AIG United India Bajaj Allianz

Prem

ium

gro

wth

(1H

200

5 vs

1H

200

6)

1H 2006 Liability: USD 58m

Oriental 12%

New India 13%

United India 14%

Tata AIG 15%

ICICI Lombard

23%Others 23%

…but growth rates are significant and estimated to be around 25% per annum

Claims in this segment are believed to be very low compared to developed markets, with no known claims exceeding USD 1m. India’s rapid economic development and, in particular, its focus on trade is likely to drive growth in niche liability classes. For example, areas such as professional liability, D&O and E&O are estimated to grow by 25% per annum over the next five years, driven by the growth of professionals. In addition, the continued growth of Indian exports, especially in the pharmaceutical and chemical industries, will drive demand for product liability coverage.

∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and thus they are not included in the premium development bubble chart 77 Ibid. 78 Ibid.


43

The Indian Non-life Market 2010

Over the next three years, the Indian insurance market is likely to see its development accelerate

The Indian non-life market has experienced significant changes that are likely to influence the country’s development of its insurance market in the medium to long term.

So far, the entry of a large number of Indian and foreign private companies has led to greater choice in terms of products and services for Indian consumers. A growing realisation of the benefits and importance of sophisticated insurance and reinsurance tools has broadened the pool of potential buyers of insurance.

Given this backdrop, the Indian insurance market has experienced considerable growth since its liberalisation in 2000. Over the next three years, the Indian insurance market is likely to see its process of maturation accelerate.

Regulatory drivers Regulatory changes in the four areas discussed in the previous section – products, market players, distribution and reinsurance – will drive change in the Indian insurance market in the medium term. In some areas, such as detariffication, the majority of reform has already taken place, although the consequences are yet to be seen. In other areas, while the reform is promised, it is difficult to anticipate when it will occur. As a result, there is a lot of uncertainty in the Indian insurance market. The four main areas of change are now considered in turn.

Detariffication The process of detariffication, first begun in 1994, has gradually moved the Indian market to a position where the overwhelming majority of insurance is transacted without a tariff. As of 1 January 2007, tariff rates have been withdrawn from all lines of business except for motor third-party (TP) liability. While hitherto, insurance professionals had limited exposure to sophisticated technical pricing based on actuarial data analysis, in a detariffed market, this is increasingly a necessity for businesses in order for them to remain profitable.

Foreign ownership As discussed earlier, foreign ownership is currently restricted to 26%, although there are plans to increase this limit. The typical structure adopted by the Indian government for the phasing in of foreign-owned entities across other industries (such as construction and pharma) has been as follows:

1. Phase I: Allow foreign entity to have 26% stake in joint venture.

2. Phase II: Increase foreign entity maximum stake from 26% to 49%.

3. Phase III: Increase foreign entity maximum stake from 49% to 74%.

4. Phase IV: Allow 100% foreign-owned entity to operate in market.

In January 2007, the Indian government reiterated its claim to increase the cap from 26% to 49%

In January 2007, the Indian government reiterated that it would introduce legislation to hike the FDI cap in the insurance sector to 49%. No time limit has been set for taking a decision on it although consultations with the industry and stakeholders are underway. There is ample opposition from the left, but analysts expect that this change will be made effective in the next one to two years.

The effect of this change will be twofold. Firstly, it will increase the focus of the existing private insurers operating within the Indian market. As discussed in the previous section, the private companies are increasingly diverging on strategy as they are influenced by their foreign partners. It is likely that increased foreign ownership will lead to differentiated strategy, more niche players and a wider product range.


Secondly, it is expected to increase the supply of capacity in the market as new investors will decide to enter the market. Indeed, a number of insurers have commented that, as soon as foreign companies are allowed more than 26% ownership, they would move as quickly as possible to participate in the market.

Broker distribution The broker channel was recognised in 2002; again, foreign capital providers can take up to a 26% stake in an Indian brokerage operation.

There is also no indication at the time of writing as to whether the constraints placed on brokers, such as high set-up costs and activity restrictions will eventually be removed.

What remains clear, however, is the fact that in a detariffed market, the broker has more opportunity to demonstrate value to both the customer as well as the insurer. Value-added services can be in the form of consulting regarding risk management responsibilities as well as more traditional insurance-related roles.

Compulsory cessions In line with detariffication, there has been some progress in reducing the compulsory cession to the GIC from 20% to 15%.

The 20% compulsory cession has been reduced to 10% in 2007

However, a complete abolishment of the remaining 15% compulsory cession to the GIC is unlikely to occur in the medium term. Although it would seem natural to liberalise this position as the broader non-life market begins to open up, the Indian government and legislator reiterated their desire to retain insurance premium in India in the central legislation of 2000, and there is no reason to believe that this position has since changed. In addition, many local companies are happy with the automatic reinsurance support that they receive from the GIC.

The PSUs are pleased that they are able to cede 15% of their poorly performing motor book onto their parent whereas the growing number of private insurers are grateful for the additional capacity that they receive from the GIC’s de facto proportional treaty coverage. While a further reduction to 10% is expected in 2008, abolishing compulsory cessions altogether is not at the top of the legislator’s agenda.

Growth drivers Overall, sales of both commercial and retail products are expected to benefit from India’s surging economic output over the medium term. Economists expect India’s output to grow by around 6% per annum over the next ten to 15 years, and the political and business environments are expected to stabilise further.79 The combination of this economic growth, increased stability and the liberalisation of the non-life sector is expected to provide premium growth in the range of 10% to 15% per annum over the short to medium term.

Personal lines insurance premium growth drivers: Personal lines products are expected to develop quickly as Indians grow wealthier

Although probably not of immediate interest to Lloyd’s underwriters, a developing economy’s initial growth in insurance penetration is often driven by personal lines products, especially motor cover as this tends to be compulsory. Indeed, India’s fast-developing private insurers expect retail products to provide them with their main source of premium growth over the medium term.

79 Deutsche Bank Research, “India Rising: A Medium-term Perspective India Special”, (2005), page 3


45

The reason for their focus is as follows:

• Growing consumer class: The Indian consumer class is currently estimated to be around 200 million and growing. However, even amongst this class of consumers, non-life penetration remains extremely low. The reasons for the low penetration are twofold. Firstly, most members of the consumer class have gained their wealth recently and, therefore, have had little time to consolidate and protect their assets. Secondly, lack of competition in the insurance market has led to mundane products and poor customer service. These limiting factors are likely to decrease over the medium term.

Commercial insurance premium growth drivers: Foreign investment and infrastructure development will drive commercial premium

The widely acknowledged dynamism of the Indian economy is currently attracting global attention. Commercial enterprise is likely to benefit from this, and the success of commercial enterprise is likely to filter down to the general insurance sector. Reasons for this include:

• FDI: Foreign direct investment in industry is often made with several requirements that generally include adequate insurance cover. Sectors most likely to benefit from investment in the medium term are IT, pharmaceuticals and manufacturing. Product demand is likely include product liability (for exporters) and directors’ and officers’ liability (D&O) cover.

• PPP infrastructure development: The quality of India’s ports, airports and railways leaves much to be desired, and infrastructure development in the next few years is likely to cost USD 150bn. Given the need for speedy infrastructure development and the shaky state of its public finances, the Indian government appears to have embraced the concept of Public Private Partnerships (PPP). Examples of PPP projects underway are the Western Freeway Sealink project in Mumbai, which will cost around USD 560m; development of a metro system in the cities of Ahmedabad and Gandhinagar in Gujarat at a cost of USD 711m; and a series of gas-based power plants across Gujurat at a cost of USD 800m per plant. Many more projects of this type are being scoped across India over the medium term, and the support of specialist commercial insurers will be required to ensure their success.

• Insurer quality and client education: Market-leading companies will expect market-leading insurance cover. Household name insurers have already recognised this and have entered the non-life sector with Indian partners. Direct investment in the non-life sector by foreign entities is expected to drive growth in insurance premium through increased quality of product, higher-quality customer service and increased customer awareness of the economic benefits of purchasing sound insurance coverage.

Quality of service and the high exposure to catastrophic loss will maintain demand

• Catastrophe exposure: India is heavily exposed to natural catastrophe loss but is poorly insured against such risks. For example, in 1999, India accounted for approximately 25% of the world’s fatalities due to natural catastrophes; in 2001, this figure stood at 80%.80 Events in recent years, such as the 2005 Kashmir earthquake (more than 87,000 dead in India and Pakistan), the 2005 Mumbai floods (1,000 dead) and the 2004 Boxing Day tsunami (18,045 dead), have proved that India remains one of the catastrophe centres of the world. However, less than 15% of the damage caused is thought to have been insured. According to government estimates quoted by the Times of India, economic damage from the Tsunami has been estimated at INR 100bn (GBP 1.3bn). To date, the four Indian public sector insurers have received 13,000 claims worth just INR 14bn (GBP 178m). In contrast, insured losses in the US following Hurricane Ivan (2004) totalled 55% and insured losses following Hurricane Katrina (2005) are estimated to be up to 48% of the total economic damage suffered.81

80 Swiss Re, “No. 5, 2004: Exploiting the Growth Potential of Emerging Insurance Markets - China and India in the Spotlight”, (2004) 81 USA Today, “Katrina Damage Estimate Hits $125B”, (September 2005)


The Mumbai flood has taken insurance companies by surprise, leading to two insurance companies exhausting their reinsurance protection. In 2006, all insurance companies had purchased more catastrophe reinsurance cover. With the increased reinsurance cover purchased, Mumbai flood loss would be only 30% of the reinsurance cover purchased by all the insurance companies put together in 2006-2007; as against 52% of the reinsurance cover in 2005-2006.82 One of the short-comings of the Indian insurance industry is the lack of credible data to simulate potential loss from a natural catastrophe of a high severity. At best, insurance companies are following an aggregate loss model whereby they assess the impact of a natural catastrophe by analysing the severity of a single event applied to their portfolio.

Risk factors Insurance analysts are excited about the prospects of the Indian market. However, there are risks that may adversely affect the levels of growth in the Indian non-life market:

However, lack of reform and negative customer perception may act as a drag on growth

• Slow reform: Much of this growth prediction is based upon the liberalisation agenda set out by the government and the regulator, the IRDA. Due to a number of competing interests, it should be noted that there is significant potential for delay in this liberalisation programme.83

• Poor customer perception: Due to the poor levels of customer service provided by PSU insurers and their failure to pay claims promptly, Indian assureds tend to perceive insurance to be a tax (ie with no returns) rather than a product of genuine economic value.

Structural changes Combining the regulatory and growth drivers, there are a number of structural changes that are likely to occur if risk factors such as a slow reforms and poor customer perception are overcome.

Price competition is set to increase While it is yet too early to verify the impact of the detariffed environment, competition is expected to manifest itself in prices, products, underwriting criteria, sales methods and creditworthiness. As experience with other markets has shown, insurance companies are expected to vie with each other to capture market share through better pricing and client segmentation. Industry observers estimate that there is likely to be a significant price war, which is expected to last for 18 to 36 months.

A significant price war is expected over the next few years

When marine hull insurance was completely detariffed, the stiff competition that followed led to rates falling by 40 to 50%. Marine hull insurance premiums are, however, now expected to rise back to the levels prevailing before detariffication occurred. Moreover, Indian shipping companies are expecting to see strong demarcation and differentiation between fleets of different ship owners. Factors such as claims history, maintenance condition and average age of vessel are expected to strongly influence premium rates. General insurers have predicted that premiums for older ships will increase by as much as 40% at renewal this year, but that good shipping fleets with a no loss record, of which there are few in India, are likely to get a 10% to 20% reduction in new premiums.84

82 IRDA, “IRDA Journal”, (2007) 83 See section on Regulation and Proposed Reform below for greater detail 84 Insurance Day, “Hull Rates in India are Expected to Rise”, (27 April 2006)


47

Cross-subsidisation is expected to cease In the initial phase of detariffication, the free pricing regime is expected to result in a decline in growth. Other markets in which detariffication has occurred on a similar scale, such as Japan, South Korea and Ireland, have shown that the first few years can witness a decline of 20% in premiums for detariffed classes – leading to growth resuming only three years after the lifting of pricing restrictions.

The fire class will no longer serve as a source of cross-subsidy for motor business

The issue of fire detariffication is of particular interest to insurers as they have hitherto used the fire portion of an account to cross-subsidise the losses that they frequently experience in motor and non-tariffed business classes. To put it differently, in the loss-making areas, the premium rates are expected to increase to meet the losses, while premium rates are expected to come down in profitable portfolios such as fire and engineering.

As fire premiums are being detariffed, there is most likely going to be a competitive struggle between the PSUs and the private insurers. It is believed that this is the reason why the IRDA has placed an administrative burden on insurers wishing to reduce rates by more than 20%. Some commentators believe this will limit price competition, while others think it will merely cause confusion in the market.85

The public sector insurers in India have continued to push for motor detariffication as, for many years, they have incurred losses in this mandatory insurance sector. State-owned insurers have argued that since they handle more than 40% of the country’s motor business, any delays in implementing the detariffication of this segment would hit the companies’ profitability.

Risk-based pricing will increase Rationalisation of premium structures is expected

Detariffication is expected to result in risk-based pricing of portfolios and therefore a rationalisation of premium structures. While we can expect some level of unpredictability in the market initially, experience from other countries that have gone through detariffication shows that prices will stabilise to reflect the underlying risks and cost of capital, whereas insurers’ underwriting efficiency will increase. For detariffication to be successful, stronger solvency supervision will also be required as, without fixed tariffs, insurers’ results will become more volatile. This will force out badly performing insurers that have hitherto placed little emphasis on quality underwriting.

Building of profitable portfolios could help access to reinsurance support Currently, the Indian market has ample capacity for even the largest risks, due to inter-company cessions of the PSUs, the market surplus treaties and facultative support from the GIC. With detariffication, some reinsurers have expressed concern over the possible impact of the ensuing ‘price war’, which could result in the revenues of primary insurers shrinking. This, in turn, could lead to a deterioration in underwriting losses and a consequent weakening of domestic retention capacities.

Some international reinsurers looking at the Indian market believe that it could take some time for cedants to gather experience with the new situation and to find their minimum rates. This is due to the fact that the primary reflex for reinsurers is to compete via price for new or renewal business. Insufficient ratings, in turn, take at least a year to have an impact on the companies’ results, since losses do not occur instantly. Accordingly, one ‘bad’ year is not sufficient to change market behaviour. Market behaviour with respect to companies’ rating approach is only likely to change after two or three years of negative results.

Yet, the consensus is that detariffication is a move that should ultimately benefit all stakeholders. Even though tariffs help reduce volatility in the insurance industry and avoid

85 Willis, “International Alert: Indian Insurance Tariff Rates Withdrawn”, (January 2007)


irrational price competition, detariffication benefits policyholders and allows insurance companies to better differentiate products and price risks appropriately.

The comfort of an anchor tariff rate has made the industry more transaction-focused. From a reinsurer’s perspective, the transition toward a business-driven and profit-and-loss-driven approach should be seen as a positive step. Those insurers that are able to demonstrate their commitment to building profitable portfolios will enjoy positive reinsurance support.

Growing insurance demand will be met by increased capacity Growth in insurance demand will need to be matched by increased supply of insurance capacity. There is unlikely to be a shortage of capacity due to the global interest in India from leading insurers. The three candidates for this capacity provision are as follows:

Growth in demand is expected to be more than met by increased capacity 1. Existing insurers (PSUs or privates) either by receiving additional capital from their

parent companies or via a capital-raising exercise, eg a PSU doing an initial public offering (IPO).

2. New insurers that choose to join the market.

3. Heavier reliance on the global reinsurance market.

The most likely scenario is that all three of these groups will be involved in the evolution and growth of the Indian non-life market to the extent that the government allows them to be. The growth prospects in India are very real and understandably attractive to Western insurance groups that are searching for growth outside of saturated, developed markets. However, increased capital supply may depress prices to unrealistic levels in the short term.


49

Growth projection: scenario I – “simple extrapolation” Having looked at the regulatory and growth drivers, we are now in a better position to project premium levels for the Indian non-life direct market up to 2010.

We can build up a successively more complex scenario by starting with the most basic:

Constant premium growth Scenario I: All Classes

ANNUAL AVERAGE GROWTH

2000 - 2006

+ 17% CAGR

Actual

Forecast

2007 - 2010

+ 17% CAGR

Forecast

Scenario I: All ClassesANNUAL AVERAGE GROWTH

2000 - 2006

+ 17% CAGR

Actual

2000 - 2006

+ 17% CAGR

2000 - 20062000 - 2006

+ 17% CAGR

Actual

Forecast

2007 - 2010

+ 17% CAGR

Forecast

2007 - 2010

+ 17% CAGR

2007 - 20102007 - 2010

+ 17% CAGR

Forecast

The most basic growth scenario that we can start with is a mere projection based upon the compound annual growth rate for the period of 2000 to 2006, which stood at 17%.

This is a useful exercise in understanding the recent growth dynamics of the Indian insurance market and its potential up until 2010. To put it into context, the Indian insurance market in this scenario could expand by almost 100% to overtake today’s markets of Ireland or Taiwan.

CHART 32: Scenario I – premium levels∗ projection (in billion USD)86

6.0

4.8

11.2

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006* 2007** 2008** 2009** 2010**

Non

-life

dire

ct p

rem

ium

s (in

bill

ion

USD

)

If premium growth continues according to its historical average, the Indian market is set to nearly double by 2010

However, the scenario fails to take into consideration the considerable structural changes in the market following detariffication of virtually all classes of business since January 2007.

∗ Estimate: 2006 figures are based on gross premium underwritten in 1H 2006, which are provisional and unaudited; growth factor has been applied by company growth of PSU vs private comparing 1H 2005 vs 1H 2006; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA publications ** Projection based on CAGR growth figure for 2000 to 2006 (17%) 86 “Swiss Re sigma database, Non-Life Insurance Premiums – 1980-2005", (2006); IRDA, various publications, (2007)


Growth projection: scenario II – “accounting for price wars”

Adjusting for detariffication In order to be prepared for a virtually complete detariffed market, Indian insurers have had to pursue detailed analyses of risks based on occupation, sum insured and geographic area to prepare for the new regime starting in January 2007.

Detariffication is likely to be associated with a period of adjustment

The new regime is helping to eliminate the frictional costs associated with administering the tariff and to allow market forces to determine individual risk appetite.

However, as in any market, this is likely to be associated with a period of adjustment and predatory pricing, and it may even include what some have termed a ‘blood bath’ for some lines of business that have hitherto been excluded from the competitive pressures of market forces.

Experience of other markets, and the marine cargo detariffing in India, suggests that the initial period of detariffing will result in a considerable erosion of the premium base as competition for good risks drives down rates. Having realised the potential for large rate reductions, the IRDA has limited the level of rate changes for various classes.

Fire and engineering rates may be reduced by up to 49% and motor rates by 20%. If an insurer wishes to adopt rates lower than these ceilings, they will be required to file their rates and wait the IRDA’s consideration.87 While this may not prevent the predicted ‘blood bath’, it does create administrative costs associated with lowering rates substantially.

IRDA:DISCOUNT LIMITS

Fire

- 49%

Engineering

- 49%

Motor

- 20%

IRDA:DISCOUNT LIMITS

FireFire

- 49%

EngineeringEngineering

- 49%

MotorMotor

- 20%

However, this is merely an interim dispensation, which stands to be withdrawn with the approval of the rates filed by the insurers under the “File and Use” system. Once new products that have been filed for approval are cleared, IRDA limits for discounts are likely to go up, but it remains unclear by how much this is likely to be. Even with a set limit for discounts, some insurers are circumventing this directive by offering discounts that allow premiums to drop. For instance, installation of fire extinguishing aids allowed for discounts of anywhere between 2.5% and 15%.88

The section below aims to give a reasonable overview of potential scenarios.

Motor Fundamentally, in a detariffed environment, the motor insurance is priced on the risk factor rating system (RFRS) model, which is widely used around the world. The premiums are based on factors such as vehicle, driver, location and extent of use, occupation, accident repair cost, liability, etc. With detariffing, the rating of the products should be based on the risk profile of the customer. In the motor classes, the private cars segment is expected to witness a premium reduction, while commercial vehicles are likely to see an increase in premium. Motor third-party (TP) is traditionally considered an unprofitable sector and according to the Times of India, rates would rise anywhere between 34% and 257% if the product was detariffed.89 In 2007, the IRDA decided against a full detariffication of motor TP with the hope that premiums for this class of business could be adequately increased. The IRDA has proposed an initial increase of 150% in TP premium rates, which were later brought down to 70% once the transporters threatened to go on strike. For our scenario, we have used the latest 70% rate increase for 2007 but have assumed that rates will rise again by a further 10% in 2008. This is likely to be the minimum rate increase if the product is detariffed and the transport sector can no longer exert political pressure. Once markets have adjusted for this 10%, discussions have revealed that there may still be room for a further 20% in both 2009 and 2010 in order to converge to the initially proposed increase of 150%.

Scenario II: Motor TPRATE CHANGE

2007

+ 70%

2008

+ 10%

2009

+ 20%

2010

+ 20%

Scenario II: Motor TPRATE CHANGE

20072007

+ 70%

20082008

+ 10%

2009

+ 20%

20092009

+ 20%

2010

+ 20%

20102010

+ 20%

87 IRDA Press Release, (2007) 88 Business Line, “Fire cover tariffs drop as free pricing kicks in”, (2007) 89 The Times of India, “Insurers free to fix premium”, (2007)


51

Motor own damage (OD) in contrast is profitable and being targeted by the private companies. In addition, the decision to pool all commercial TP premium could further provide an incentive for private companies to target the more profitable OD sector. It is likely that this will put downwards pressure on motor OD rates and the Times of India has predicted a 20% to 25% rate reduction in 2007.90

Scenario II: Motor ODRATE CHANGE

2007

- 20%

2008

- 15%

2009

+ 5%

2010

+ 15%

Scenario II: Motor ODRATE CHANGE

2007

- 20%

20072007

- 20%

2008

- 15%

20082008

- 15%

2009

+ 5%

20092009

+ 5%

2010

+ 15%

20102010

+ 15%

For the first quarter of 2007, however, motor OD rates remained stable,91 although commentators have suggested that they will be continually reviewed. As a result for our scenario, we have used a relatively small rate reduction of 20% in 2007, followed by a further smaller reduction in 2008. Rates are expected to rise again in 2009 and 2010.

Property The local press has reported that insurers expected rate declines of between 15% and 30% for both fire and engineering products due to the generally profitable nature of the business. 92

Scenario II: FireRATE CHANGE

2007

- 49%

2008

- 20%

2009

+ 5%

2010

+ 15%

Scenario II: FireRATE CHANGE

2007

- 49%

20072007

- 49%

2008

- 20%

20082008

- 20%

2009

+ 5%

20092009

+ 5%

2010

+ 15%

20102010

+ 15% In the case of fire and engineering covers purchased by companies (ie excluding personal home insurance), the IRDA has capped discounts in January at 49%. In addition, property rates may be constrained by the price of catastrophe reinsurance purchased on the international markets. It is likely that catastrophe business will become more differentiated and location-specific – as opposed to zonal or country-wide rates under the tariff.

The drop in premium for the first quarter of 2007 – reputably as much as 50% – surpassed insurers’ expectations.93 It is also anticipated that the rates will not recover for at least 18 to 24 months. For our scenario, we have assumed that rate for both fire and engineering will decline by 49% in 2007 and by a more modest 20% in 2008, but will stabilise in 2009. However, given that this sector has been massively underinsured to the tune of approximately 35%, figures in the actual scenario will be adjusted for fire accordingly. In addition, a buoyant economy is expected to result in considerable asset building and price inflation, which is expected to mute and to some degree hide significant price adjustments for fire following detariffication.

Scenario II: EngineeringRATE CHANGE

2007

- 49%

2008

- 20%

2009

+ 5%

2010

+ 15%

Scenario II: EngineeringRATE CHANGE

2007

- 49%

20072007

- 49%

2008

- 20%

20082008

- 20%

2009

+ 5%

20092009

+ 5%

2010

+ 15%

20102010

+ 15%

Health Health insurance should shoot up 100% if insurers try to cover the current losses with the same coverage, according to an article published by the National Insurance Academy.94 However, the regulatory situation may allow only a moderate rise, and competition is likely to push down prices in an effort to gain market share in one of the fastest-growing business classes. Accordingly, our conservative estimate is that premiums may rise by a mere 5% in 2007 and a further 5% in 2008.

Scenario II: HealthRATE CHANGE

20072007

+ 5%

20082008

+ 5%

20092009

+/- 0%

2010

+/- 0%

Marine Scenario II: Marine

RATE CHANGE

20072007

+ 7%

20082008

+ 5%

20092009

+/- 0%

2010

+/- 0%

Being fully detariffed, marine and aviation lines have made extensive use of overseas capacity. Insurance professionals believe that premium may go up in the marine segment has they have hitherto been subsidised to some extent by fire business. At the beginning of the year, the Times of India estimated that clients are expected to pay 10% more for goods in transit under marine insurance cover.95 Other classes of business, including liability, are not expected to have significant rate movements as their pricing has been unaffected by the tariff system.

90 The Times of India, “Insurers free to fix premium”, (2007) 91 The Economics Times, “Detariffing drives down fire, engineering premia by 50%”, (2007) 92 The Times of India, “Insurers free to fix premium”, (2007) 93 The Economics Times, “Detariffing drives down fire, engineering premia by 50%”, (2007) 94 The Indian Express, “Detariffing will push up insurers’ costs”, (2006) 95 The Times of India, “Insurers free to fix premium”, (2007)


Forecasting growth by class Using the assumptions detailed above, class-by-class growth has been forecast for 2007 to 2010.

In the first chart below, the 2006 growth rate per class has been used to extrapolate to 2010 premium levels. In the second chart, the same growth rate has been applied, but thereafter adjusted for expected premium rate changes as summarised in the previous section.

CHART 33: Constant growth rates96 CHART 34: Growth with rate changes♣ 97

0

2

4

6

8

10

12

14

16

2006 2007* 2008* 2009* 2010*

Non

-life

dire

ct p

rem

ium

(in

billi

on U

SD)

Aviation

Liability

Marine Cargo

Marine Hull

Motor TP

Miscellaneous

Engineering

Fire

PA & Health

Motor OD

0

2

4

6

8

10

12

14

16

2006 2007* 2008* 2009* 2010*

Non

-life

dire

ct p

rem

ium

(in

billi

on U

SD)

Aviation

Liability

Marine Cargo

Marine Hull

Motor TP

Miscellaneous

Engineering

Fire

PA & Health

Motor OD

While this forecast is fairly crude, a few clear conclusions can be drawn from a comparison between the two charts shown above. These conclusions are supported by the soft intelligence discussed earlier in this report.

1. Slower growth in 2007 Firstly, premium growth in 2007 is much more modest when rate decreases are taken into consideration. This reflects the general opinion that price wars in 2007 will eat into insurers’ premium bases.

2. Exponential growth from 2009 onwards Secondly, the rate decreases early in the period clear the way for much more substantial growth later on. As the insurance market adjusts to an open pricing structure, the model predicts strong growth in 2009 and 2010 (between 24% and 30% respectively) under the adjustable rate model.

While premiums will slow down initially, there will be increased growth towards 2010… …With the Indian market expanding by the size of the Norwegian market between 2007-2010

The total premium ends lower under the adjustable rate model (USD 12.6bn) than under the constant growth model (USD 14.2bn), but higher than under the original premium extrapolation (USD 11.2bn), making the Indian market expand by a premium volume equivalent to that of the total Norwegian market in 2005.

This reflects our understanding of the dynamics of liberalisation:

Detariffication will bring real benefits to both Indian consumers and the insurance industry over the medium term.

While short-term price adjustments will lead to lower growth during the first one to two years, premium growth is expected to gain momentum towards the end of this decade.

96 Lloyd’s Business Development calculation based on IRDA, “Annual Report 2005-2006”, (2006) ♣ Including adjustments for asset price building, asset price inflation and underinsurance for fire of 35% for 2007 97 Lloyd’s Business Development calculation based on IRDA, “Annual Report 2005-2006”, (2006)


53

3. Changing product mix Thirdly, the product mix changes significant when the expected rate changes are taken into consideration.

Most noticeably in this model, motor third-party increases substantially, taking into consideration the increasing rates. In the past, motor TP has been considered unattractive due to low rates and high loss ratios. Provided the rates are allowed to rise to a competitive level, this sector should become more attractive.

The chart below compares the current class breakdown with the forecast class breakdown.

CHART 35: Change in proportion of business mix (in %)98

0%

25%

50%

75%

100%

2006 2010

Aviation

Liability

Marine Cargo

Engineering

Marine Hull

Fire

Miscellaneous

PA & Health

Motor TP

Motor OD

By 2010, India’s product mix is set to resemble those of other major emerging markets

With regards to motor premium, in particular, the forecast more accurately reflects the kind of breakdown we would expect to see in a developing insurance market such as India. Motor business in total accounts for just less than 50% of total premium. Motor TP, which typically drives the development of motor business in a developing economy, accounts for a much more significant share.

In contrast to motor TP, the growth of the property classes, fire and engineering, has been stunted by the price wars and by significantly higher growth in other classes. Even though they have grown in absolute terms, their combined share is forecast to fall to 12% by 2010. Apart from a significant adjustment for fire in 2007 of 35%, this model does not take into consideration the expanding client base that may be attracted by lower premiums.

Motor and Health are forecast to see the most significant growth

Finally, the other big winner is personal accident and health, which by 2010 will have become the largest class after motor. Again this reflects current speculation that there is considerable potential for growth here.

98 Lloyd’s Business Development calculation based on: Swiss Re sigma database, Non-Life Insurance Premiums – 1980-2005", (2006); IRDA, various publications, (2007)

Conclusion 54

1 Continued strength in the broader economy and gradual reform in thenon-life sector are expected to combine to produce strong premiumgrowth in the Indian market over the next few years.

2 Whilst India currently remains a medium-sized non-life market, thegrowth predicted over the medium to long term is attracting increasinglevels of foreign investment and competition. Many of the world’s largestinsurers such as AIG, Lombard and Allianz are present in the market.The new private insurers are growing fast and have already developed acombined market share in excess of 30%.

3 Leading international reinsurers such as Munich Re and Swiss Re areaggressively targeting proportional treaty business. As the market isgradually liberalised and becomes more mature, these private firms areconsidered well placed to capture an even greater share of a fast-growing market. The main risk to private insurers is the high likelihood ofsustained price competition as tariffs are removed from classes ofbusiness such as fire and engineering, the impact of which have beenmodelled and explained in this paper.

Lloyd’s liaison office

In order to capitalise on the insurance opportunities discussed in thispaper, Lloyd’s is seeking regulatory approval to establish a representative(liaison) office in Mumbai, India. The objectives of this office will be to:

• Promote understanding of Lloyd’s and build Lloyd’s profile in India.

• Improve Lloyd’s understanding of the Indian insurance market.

• Promote amongst Lloyd’s members, the opportunities available to Lloyd’sin India.

• Develop and manage Lloyd’s relationship with the Indian government.

It is expected that Lloyd’s liaison office will be registered in mid-2007.

Lloyd’s representative

In addition, Lloyd’s has already appointed its first General Representativein India, Mr Shrirang V. Samant, whose contact details can be found below.

Shrirang V. SamantGeneral Representative, IndiaLloyd’sOne Lime StreetLondon EC3M 7HAUnited Kingdom

Mobile: +91 (0)98337 6001Email: [email protected]

Bibliography 55

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Bibliography 56

Forbes, “Munich Re’s Ergo in talks with India L&T on insurance venture –report”, (2007), www.forbes.comFok, R., Panthaky, K., “China and India: Opportunities too Big to Ignore”,(2005), Americas Insurance Digest – July 2005, PWC,www.pwcglobal.com

HHiscock, G., “Infrastructure the Missing Link”, (2004),http://edition.cnn.com

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MMicrosec, “Indian Union Budget 2005-6”, (2005), www.microsec.co.in

NNadkarni, S, “Private Insurers Storm Indian Market”, (17 May 2006),www.insuranceday.comNational Council for Applied Economic Research, “India MarketDemographics Report 2002”, (2002), www.ncaer.orgNew Scientist, “India special: The next knowledge superpower”, (2005),www.newscientist.com

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Bibliography 57

Star Health, “About Us”, (2007), http://www.starhealth.in/Sukumar, C., “Eligibility Limit for Special Discount Raised to Rs 15 cr –IRDA Revises Norms on Broking Commissions”, (2005),www.thehindubusinessline.comSwiss Re, “No. 5, 2004: Exploiting the Growth Potential of EmergingInsurance Markets – China and India in the Spotlight”, (2004),www.swissre.comSwiss Re, “Swiss Re sigma database, “Non-Life Insurance Premiums –1980-2005”, (2006), www.swissre.com

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Glossary 58

GlossaryABI Association of British Insurers

IAR Industrial All Risks (Insurance)

AIA American Insurance Association

IMF International Monetary Fund

ALOP Advance Loss of Profit

IPO Initial Public Offering

ASEAN Association of Southeast Asian Nations

IRDA Insurance Regulatory & Development Authority

BJP Bharatiya Janata Party

IT Information Technology

BPO Business Process Outsourcing

LMA Lloyd’s Market Association

CAGR Compound Annual Growth Rate

MFN Most Favoured Nation

CBI Central Bureau of Investigation

MLOP Machinery Loss of Profits (Insurance)

CIA Central Intelligence Agency

MoF Minister of Finance

CL Consequential Loss (Insurance)

OECD Organisation for Economic Co-operation & Development

CVC Central Vigilance Commission

ONGC Oil and Natural Gas Corporation

D&O Directors’ and Officers’ (Liability)

PPP Public Private Partnerships

E&O Errors and Omissions (Insurance)

PSU Public Sector Undertaking

EAR Erection All Risks (Insurance)

R&D Research and Development

EIU Economist Intelligence Unit

TAC Tariff Advisory Committee

FDI Foreign Direct Investment

UN United Nations

GATT General Agreement on Tariffs & Trade

UPA United Progressive Alliance

GIC General Insurance Company of India

VAT Value Added Tax

GNI Gross National Income

WTO World Trade Organization

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Since merchants firstmet to insure their shipsat Edward Lloyd’s coffeeshop over 300 years ago,nearly every aspect ofthe way we do businesshas changed. But oneconstant is the boldconfidence proclaimedby our motto, reflectedin both our uniqueappetite for risk and ourworldwide reputationfor settling valid claims.

Lloyd’s One Lime Street London EC3M 7HA Telephone +44 (0)20 7327 1000 Fax +44 (0)20 7626 2389 www.lloyds.com

Lloyd's Report on General Insurance in India

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