india - a market to watch

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Digest: India – a market to watch

The opening up of the Indian insurance market to privateplayers, a little over five years ago, was heralded as a goldrush. This was despite government’s knee jerk approachto the liberalisation agenda and somewhat distorted rollout of events.

As a way of achieving liberalisation for the insuranceindustry, the government constituted the MalhotraCommittee, which gave its recommendation way back in1993. Thanks to political instability, successivegovernments could not muster enough political support tolegislate these recommendations. It took six years tofinally win approval.

The recommendations were also diluted in view ofpolitical expediency. The equity participation of foreignpartners, for example, was kept at 26%. It will now take awhile to build this figure back up to the originallyproposed 49%. The new law overlooked the provision forbrokers. It took another three years to make that happen.Motor business was to lose its tariffs first but the changesstill keep being postponed. From the current single tariff,for fire and engineering, there is a proposal to have aninternal tariff for each insurer. Health insurers andreinsurers of foreign origin will be permitted but the entrylevel, in terms of capital requirement, is considered veryhigh by all concerned and interested players.

Notwithstanding all this, private players have indeedfound their feet and carved a strong niche for themselves.To understand where they are now headed for, one needsto recognise some significant undercurrents and likelytrends. Needless to say, the main focus of this piece willbe non-life business.

Approximately, 70% of the premium underwritten in Indiais regulated by tariffs. Motor, fire and engineeringdominate. Marine (cargo) was brought off controlledpricing more than a decade ago. Most recently the teatariff ( which covers: A tea crop; B tea crop hail; C inlandand overseas transits of tea, including storage; D transits,including storage for blending, processing, packing ofmade tea) and marine (hull) tariffs were also ended. The

Insurance Regulatory and Development Authority (IRDA),the insurance regulator, went back on its original plan tolose tariffs on motor and property lines thereafter.According to the latest announcements, pricing ofproperty lines will be decontrolled in January 2007.

As and when the motor portfolio is altered, it will only bethe own damage part of motor that will lose its tariff andnot the third party. Insurance companies are opposed tothis. Interestingly, India is now the only market that stilloffers an unlimited third party bodily injury and deathcover, the pricing of which cannot be tinkered with. Anyattempts to do so has resulted in a reversal of plans inface of paralysing strikes by the truckers, a very strongpolitical lobby. All this while the loss making motorportfolio has been subsidised by the property segment.

The concerns, therefore, are not misplaced and all themore so, in light of some recent developments.

• Rising catastrophe losses (increasing frequency andseverity of flood and earthquake perils) has erodedthe profitability of property business. Western partsof the country, with the highest value concentrations,have been the worst affected. The states of Gujaratand Maharashtra are the most industrialised in thecountry. Located on the western coast, theyrepresent highest values at risk because ofpetrochemical industries and virtually the largest ofall other industries.

• “Mega Mania” (all industries with a sum insured inexcess of Rs100,000m or a PML exceeding Rs10,540mare preferring to choose the comprehensive packagepolicy, popularly known as Mega Policy) in a move toavoid tariff pricing and take advantage of lowerreinsurance driven international pricing and a widercover. In these cases the Indian insurers would retainminimum and reinsure maximum portion. Thisparticularly applies to oil & energy business and largeinfrastructure entities.

India – a market to watchby Praveen Gupta

Praveen Gupta joined the Allianz AG representative office in 2000 as the general manager (businessdevelopment). He is the co-founder of Bajaj Allianz General Insurance Co Ltd. The second largest private sectornon-life insurer in India. He started his career with The New India Assurance Company Ltd 26 years ago andhas worked in diverse markets like Thailand, Hong Kong, UK and India. He has an MA (History) from StStephen's College, Delhi, is a Fellow of Chartered Insurance Institute and Chartered Insurer and has a Diplomain direct marketing from the IDM (UK).

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• Any breaches in tariff are being used creatively tobring down pricing. A higher category risk isinterpreted as a lower rated risk. Thereby managing aprice saving. Unfortunately, the TAC (Tariff AdvisoryCommittee), which prescribes and supposedlyenforces the ratings, lacks teeth. Breach of tariff isalso being seen by many as the natural demise of theartificial pricing mechanism. International reinsurersand brokers are apprehensive about the prospects.

Moreover, profitability is suffering from some insurers’keenness to carry deductibles on their net account or offerdeductible buybacks hand-in-hand with low priced, highdeductible covers. The Indian customer is averse to anydeductibles and some insurers are indulging insuredseven at the cost of unduly exposing their bottom-line.

That motor can indeed be underwritten profitably hasbeen vindicated by some of the new insurance companies.Private insurers such as Bajaj Allianz and Tata AIG havebeen consistently managing their motor portfolios with aless than 70% loss ratio. Thereby the COR is well below100%. True, they started cautiously, concentrating on thenew private car segment. They were not allowed tointroduce any product differentiation but, thanks to somesignificant service differentiators, they developedinnovations like: issuance of policy certificates at the pointof sale; cashless claims settlement; quick turnaround; andtime tested customer relationship managementtechniques (leveraging on call centres and databasemanagement/ customer engagement/ cross-selling).

The two most heavily competitive portfolios are health andmotor. The rising middle class; inflation in medicalexpenses and demise of state sponsored primaryhealthcare together have provided a fillip to healthinsurance. And on the motor side, the buying power, easymotor financing and rapidly increasing choice ofautomobiles have all boosted the volumes in motorinsurance. This hand in hand with dipping propertypremiums, likely to be triggered by its imminent loss oftariffs, is expected to push the contribution of auto tomore than 50% of the non-life insurance pie.

While the new generation players compete for the privatemotor car segment and make money on superior qualityservice as well as cost efficient delivery, public sectorinsurers bear the brunt of selection against them. Thestory is no different in health and liability lines either. Inthis, the state owned companies compete more vigorouslywith each other rather than with the private players. Hencethe very rationale for four government companies may nolonger be valid.

The boost in IT Enabled Services has led to increaseddemand for liability products such as crime; errors &omissions; umbrella covers et al.

Directors & officers (D&O) is receiving a further thrustthanks to the Clause 49 amendment to the IndianCompanies Act, which virtually makes a D&O cover

mandatory. Corporate governance is now high on thegovernment agenda and companies are becomingincreasingly board run. A stringent code of conduct; thegrowing probity of audits and increasing responsibility ofsenior management now makes them increasinglyvulnerable to any negligence of stakeholder interest, asare overseas listings and acquisitions by Indiancorporates. Traditionally India is not a litigious society,but the complex offshore exposures and contracts withIndia based solution providers is pushing the demand forliability insurance. With growing outsourcing into India –thanks to IT enablement – there is a mushrooming ofbusiness process outsourcing which is becoming morecomplex by the day. Any negligence and criminal act of anoperative in India could make that entity vulnerable tobreach in contract vis-à-vis an overseas principal.

Health insurance tops it all – in the last five years thehealth insurance portfolio in India has grown eight-fold.According to some very optimistic estimates the potentialfor this segment is as much as Rs400,000m. Even thoughthe health segment has grown 10 times since the openingup of the market, critics believe that neither the regulatornor the players are doing enough to realise theexpectations of the liberalisation agenda. There is a strongcase for standalone health insurance companies. Manyreputed international players decided not to jump inbecause the capital requirement (Rs1000m – 74% to beheld by an Indian partner and 26% by a foreign partner)was same as any other insurance company. There is onceagain a case for a lower entry level for health insurancecompanies (most likely Rs500m). In the meantime,supported by funding from overseas Indian interest, apure health insurer (Star Health Insurance Company) is inan advanced stage of entry – Bupa, Blue Cross and manyothers are expected.

The growth of private medical infrastructure has beensignificant. There is already a new phenomenon of‘medical tourism’, where foreigners are travelling toreputed centres of excellence for relatively low cost andhigh quality treatment. Attempts at outsourcing hospitaltie-ups, customer care and record management have notbeen very encouraging. Poor performance by third partyadministrators used by insurers has led to a seriousrethink. One of the players has even resorted to in-househealth administration. The growth and well-being of thehealth segment depends upon how soon the industry getsits act right and puts in place a highly reliable andcustomer focused infrastructure.

With more than 1m general insurance agents, 200-plusbrokers, more than 36 bancassurance tie-ups and everevolving forms of affinity marketing – the Indianmarketplace is buzzing with intermediation. The newinsurers were disadvantaged, vis-à-vis the public sectorinsurers, in not having countrywide branch networks.Thanks to these distribution platforms and the web-enabled products, reach is no longer an issue. Theopening up of the insurance market is indeed attractingentrepreneurs. According to latest IRDA reports, privatenon-life insurers have already captured 26% of the

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market-share. Nowhere in the world have green-fieldinsurers grown so rapidly in a newly opened economy.

Indian private companies with identical partners havemost to gain in the form of synergies (Allianz and AIG bothhave a life and non-life company with a common partnerfor both businesses). For every 1% of GDP growth, lifebusiness is expected to grow by 4%. It is anyone’s guessas to how much it will grow with the economy growing at7% to 8%, annually. This may hold true for the healthsegment as well. Cross-selling and up-selling between thecompanies through a common agency force is expected toreap a rich harvest. Pension funds business has been keptout of purview of the IRDA. Originally pension fundsbusiness was to be supervised by the IRDA. However, aseparate regulator has been created – The Pension FundRegulatory and Development Authority (PFRDA). There isan ongoing debate on the case for a super regulator onthe lines of the UK’s Financial Services Authority. Perhapscircumstances are heading in that direction.

If there is a dearth of anything at all, it is the humancapital. In the early days the private players poached stafffrom the public sector companies. The latter thenintroduced a Voluntary Retirement Scheme (VRS) whichfurther depleted a productive resource pool. With virtuallyno fresh recruitment, leadership issues and intensifyingcompetition – the PSU (public sector) insurers are forcedto engage professional intermediaries. PSU insurers havea vast network and most business was sold direct. But,with high staff attrition, their reach and degree ofcustomer interaction has been considerably eroded.Unlike the private insurers who use, say brokers foracquisition of new business, they use them more as aretention strategy. Some staff from the new insurers havebegun to move to brokers who were the last to come inafter a much desired amendment to the Insurance Act.

The challenge, therefore, is to hasten the development offresh human resource. Insurers and some of the topbrokers are recruiting management trainees frombusiness schools. Insurance Institute of India’s diplomasearn cross credits from the Chartered Insurance Institute(UK) and CPCU.

Local risk management courses also have internationaltie-ups. While the insurance fraternity may have begun to

lure young managers to embark upon a career path, theyoungsters are in an exciting job market. There is alwayssomeone in the BFSI (banking, financial services andinsurance) sector willing to improve their salaries, whichis a major ongoing concern for the cost conscious. Thiswill get further heated when the equity share of foreignpartners rises from 26% to 49%, which will only bring inmore interested players. Multinational BPO companiespay very lucrative salaries and provide good qualityworking environments. Many young people working forinsurance companies are getting lured by BPOs. The churnis expected to become greater when more foreign insurersenter the Indian market, likely to happen in the next12 months.

In conclusion, despite all the initial delays and barriers,the Indian insurance marketplace has exceededexpectations. More and more participants are gettingdrawn in. Private players already have more than aquarter of the market share. On the non-life side theremay be a skewed growth towards health and motor lines;there are also deficiencies in both product and servicedistribution; loss of tariffs will only make insurancecheaper and hence more affordable. Perhaps a wayforward is to increase the penetration and per capitaspend. Today all insurers have huge technology spends.One of the ways to reduce cost is to minimise humaninterface and bring efficiencies using powerful technology.Internet sales and insurance kiosks are in a modest waybeginning to produce a small transformation. Webenabled products allow customers and partners to be selfreliant for documentation. There is speed and minimalbureaucracy. Any cost saving in this process can bepassed on to the customer. And thanks to high qualityservice standards set by the rest of financial services,good quality customer care, as well. Hopefully, this wouldonly help fulfil the Indian customer’s penchant for valuefor money. India is definitely a market to be watched inthe times to come.

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Royal Sundaram JV OF Sundaram and RSA, UK

Tata-AIG JV OF Tata and AIG, US

Reliance General 100% formed by Reliance Industries, India

IFFCO-Tokio JV of Iffco and Tokio Marine, Japan

ICICI-lombard JV of ICICI and Fairfax Group, Canada

Bajaj Allianz JV of Bajaj and Allianz, Germany

HDFC CHUBB JV of HDFC and Chubb, US

Cholamandalam JV of Cholamandalam and Mitsui, Japan

Private sector insurers Conversion

1 crore 10 million

1 lakh 100 thousand

1 USD Rs45

1 Euro Rs58

1 Pound Rs80

Insurer Premium 2005-06 Premium 2004-05 Market share up toAugust, 2005

Growth over the correspondingperiod of previous year

Up to the month Up to the month

Royal Sundaram 19,020.00 13,131.00 2.17 44.85

TATA-AIG 25,330.37 21,132.28 2.89 19.87

Reliance General 6,609.82 7,364.89 0.75 -10.25

IFFCO-Tokio 35,037.57 20,233.39 4.00 73.17

ICICI-lombard 70,454.83 33,736.03 8.04 108.84

Bajaj Allianz 53,863.69 32,740.79 6.15 64.52

HDFC Chubb 7,765.68 6,666.83 0.89 16.48

Cholamandalam 10,708.12 7,529.33 1.22 42.22

New India 187,646.00 170,786.00 21.41 9.87

National 149,950.19 157,883.55 17.11 -5.02

United India 138,964.00 135,620.00 17.11 -5.02

Oriental 149,209.00 133,675.00 17.02 11.62

ECGC 21,941.44 19,980.38 2.50 9.81

Private Total 228,790.08 142,534.54 26.10 60.52

Public Total 647,710.63 617,944.93 73.90 4.82

Grand Total 876,500.71 760,479.47 100.00 15.26

Sl No. Insurer Fire Misc Marine Total premium in India

Total premium includingbusiness outside India

1 National 515.77 2688.15 187.18 3391.10 3399.97

2 New India 775.20 3011.27 259.21 4045.68 4921.47

3 Oriental 524.00 2089.18 218.93 2832.11 2899.74

4 United India 631.32 2136.73 300.14 3068.19 3063.47

5 ECGC 445.49 445.49 445.49

6 AIC * 369.21 369.21 369.21

Sub-Total 2446.29 10740.03 965.46 14151.78 15099.35

6 Royal Sundaram 50.53 193.85 13.38 257.76 257.76

7 Reliance 46.37 101.49 13.19 161.05 161.05

8 Iffco-Tokio 142.89 154.86 24.49 322.24 322.24

9 TATA AIG 78.45 234.18 30.89 343.52 343.52

10 ICICI Lombard 239.46 203.68 43.59 486.73 486.73

11 Bajaj Allianz 120.29 335.51 20.73 476.53 476.53

12 Cholamandalam 25.45 65.77 5.83 97.05 97.05

13 HDFC-Chubb 0.37 112.58 112.95 112.95

Sub-Total 703.81 1401.92 152.10 2257.83 2257.83

Grand Total 3150.10 12141.95 1117.56 16409.61 17357.18

Progress report – India non-life

Gross premium underwritten up to the month of August, 2005

* Agriculture Insurance Company of India Limited (AIC)

Public sector insurers

The New India Assurance Company Limited

National Insurance Company Limited

United India Insurance Company Limited

The Oriental Insurance Company Limited

Export Credit Guarantee Corporation Limited

Source: IRDA website

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