Developments in the Indian Insurance History
The effect of the Indian insurance industry on global premiums may be relatively low but the world is paying attention to India. All of the world leaders in the insurance industry have a presence in India: AIG, Allianz, Chubb, ING, Royal & SunAlliance, Lombard, Swiss-Re, Munich-Re, Marsh, Aon, Willis… the list is still growing. Lloyd’s has also indicated that they would like to set up operations within India.
What has changed in India? Why is there a sudden move from corporations across the globe to perceive India as a growing opportunity? This article attempts to provide a brief insight into the Indian insurance industry and what drives the market. The focus of this article is on the general (non-Life) insurance sector.
Indian Economic Background
India is one of the fastest growing economies in the world today with a GDP of 9.4%. The per capita income in the company has grown by about 8.4% and the foreign reserve of the country is almost US$ 180 billion. FDI expected this year in the country is to the tune of US$ 12 billion and 35% growth in the export market is expected to happen! No wonder the world is looking at India!
Key facts of the country
Growth in economy has been between 8-9% in the first quarter of the fiscal year
Major contributors to the growth are the Manufacturing, Agriculture, Transport & Communication and the Infrastructure Industry
Exceptional growth has also been seen in the commercial vehicles, telephone connections, passenger growth in civil aviation - indicating higher disposable income for the average person
India has emerged as the fastest growing wealth creator, thanks to the buoyant stock market and higher earnings
40% of the Top 100 of the Fortune 500 companies are present in India
Infrastructure to get almost US$ 320 billion as part of the 11th five year plan!
Almost US$ 36.6 billion was raised from IPOs in 2006.
Indian Companies - Big and Small - are reaching overseas destinations to tap new markets and acquire technologies. Outbound deals in India crossed the US$ 15 billion mark in 2006!
With all this growth, the insurance industry in India is not lagging far behind. Growth in the economy brings with it increased risks and an awareness among players of the importance of Risk Management and mechanisms of Risk Transfer which are available.
The general insurance industry in India has been growing at an average rate of 15% over the last few years.
How the Industry Evolved
It was only three decades ago that 107 insurance companies in the country merged into four nationalised general insurance companies governed by the national reinsurer – General Insurance Corporation of India. Since the choice was so minimal, insurance buying became just a matter of routine. Most of the insurance covers available were guided by a pre-defined tariff and thus the chances of value addition by any of the insurers were also minimal.
The Liberalised Market
The last five to seven years have seen a sea change in the insurance industry. This began with the setting up of a regulatory body in the year 1999: the Insurance Regulatory Development Authority! The primary role of the regulator in addition to protecting the rights of the policy holder was also to ensure that there was a speedy and orderly growth in the Indian insurance industry. This was demonstrated by the opening up of the sector and the introduction of private sector companies to start insurance operations. This also led to the inclusion of foreign players in the market. AIG, Chubb, Allianz, Royal & SunAlliance, were amongst the first to set up office in India. Slowly over the last three or four years, the state owned companies have lost 35% of their market share to the private sector companies.
They are now being forced to sit up and take stock of how they do business and how they need to change.
The total market size today is approximately US$ 6.15 billion, 40% of which comes from the Motor insurance segment. Given below is the market bifurcation of the general insurance industry in India.
In order to bring in more professionalism and expertise into the industry, the regulator decided to introduce third party administrators and insurance brokers in the years 2001 and 2003 respectively. Today there are about 25 TPAs and 300 licensed insurance brokers in the market.
The TPAs provide support to the insurance companies by providing value added services for the health Insurance policies. Services such as claim processing, claim payment, cashless facilities at network hospitals are provided by the TPAs.
The role of the broker is very close to the global definition of the insurance broker, except that in India, the premium / claims payment is not done to / by the broker for retail business within the corporate sector. Brokers are only allowed to facilitate the entire buying process of insurance for the corporate client by providing consultancy and advisory services. Brokers also handle the administration of the policies and in many a cases provide outsourcing solutions for insurance management.
The true impact of liberalisation in the Industry was felt only in the beginning of the year 2007 when the regulator finally decided to take the bold step of de-regulating the premium rates for the Property and Engineering insurance covers. Prior to this a free market or a non-tariff market existed only for the Health & Accident, Marine, Liability and some other small miscellaneous insurance classes. Cross-Subsidy was an unwritten rule for the insurance companies.
While the industry expected that the overall premium base would get washed out due to the de-regulation, surprisingly the overall market growth is about 24% this year. This growth is due to the increase in rates for Motor as well as the increase in the asset base of the corporate sector when they were able to cover for same premiums as the previous year with a lower asset base.
The deregulation of the remaining insurance portfolio changed the scenario completely! Or at least it was meant to… A rat-race started in the market in order to gain back lost market share or to increase market share and the customer was enjoying an almost 70-80% drop in premiums. In order to control unrealistic underwriting, the regulator announced that the premiums could be reduced only by the maximum of 55%. The change is currently allowed only with respect to rates and the policy terms and conditions are not to be altered for another year.
What to look out for in the Indian Insurance Industry
The changing dynamics of the industry are giving rise to tremendous development potential. Some of the key aspects to look out for are:
Growth in the Export Market - Whether it is the IT / ITES industry, the auto component industry, the pharmaceutical industry; growth in exports is averaging 10-12 % annually. Initially the target country for exports used to be the United States of America, but slowly companies are looking at alternative markets like – Europe, Asia, Middle East, Africa etc. Insurance covers which are gaining importance because of this are the liability insurance policies, such as Product Liability, Professional Indemnity, General Liability, etc. The overall market for this business is almost US$ 120 million. So far the book of business has been profitable for all insurers and reinsurers who have participated in this class.
Strengthening of the Financial Markets - The stock markets has been bullish and there has been a lot of FDI flowing into the country. The number of companies going for a domestic listing has been increasing over the last three years. Moreover, large Indian corporate houses are on a buying spree, acquiring companies domestically as well as internationally. Last year the Securities Exchange Board of India also came out with very strict corporate governance norms which have forced corporations to look into their Risk Management philosophy. Specific insurance covers like Directors & Officers and the Public Offerings Securities insurance have been gaining a lot of importance over the last couple of years. The increased asset base of corporations has also seen the need for Business Interruption cover and large sums insured to be in place.
Growing Need and Importance of Health Care - Almost 6-7% of the country’s GDP is spent on the health care industry. Yet, so far health insurance is only available to a very select group. It is only the large corporates and some of the government owned organisations which provide health insurance coverage to their employees. The onset of the TPAs, and the growing health care costs have led to the growth of the health insurance market in India. Most of the companies do not make an underwriting profit for this particular class and hence are not in a position to offer competitive premiums. The state owned companies rely on their historical capital to offer cheap policies, but the trend is showing that this may not last too long. Stand alone health insurance companies are being encouraged and with the onset of the de-tariff regime in the country, health insurance costs will go up considerably. While the need for the coverage is increasing consistently, so are the related costs.
State Owned Insurance Companies looking at alternative methods for making good the loss in domestic Market Share - The state owned companies have a lot of historical capital and are keen on providing capacity to the international markets. While the need for reinsurance of their current book of business has been either decreasing or constant over the last few years, the companies are keen on providing capacity for property risks based abroad.
The effect of the Indian insurance industry on global premiums may be relatively low, but it is definitely not worth watching!
In preparing this Spotlight article we received invaluable assistance from the leading broker, India Insure Risk Management Services, for which we are grateful.
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