indian business surveys
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IND
IA2010ALLOYDSVIEW
June 2007www.lloyds.com/marketintelligence
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This document is intended for general information purposes only.
Whilst all care has been taken to ensure the accuracy of the information,
Lloyds does not accept any responsibility for any errors or omissions.
Lloyds does not accept any responsibility or liability for any loss to any
person acting or refraining from action as a result of, but not limited to,
any statement, fact, figure, expression of opinion or belief contained in
this document.
For enquiries relating to this report, please contact:
James Sutherland
Head of Operations
Lloyds Business Development Directorate
One Lime StreetLondon EC3M 7HA
United Kingdom
Telephone: +44 (0)20 7327 6883
Email: [email protected]
Filip Wuebbeler
Manager, Market Intelligence
Lloyds Business Development Directorate
One Lime Street
London EC3M 7HA
United Kingdom
Telephone: +44 (0)20 7327 6209Email: [email protected]
For information regarding Market Intelligence publications,
please contact: [email protected]
DISCLAIMER
QUESTIONS?
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Executive summary 5
The insurance environment in 2007 6
Looking forward to the market in 2010 7
Lloyds seeks to capitalise on Indian opportunities 7
Introduction 8Purpose 8
Methodology 8
Structure 8
Businessenvironment 9
Politics 9
Economy 12
The IndianNon-lifeMarket 2007 18
Products 21
Market players 24Distribution 30
Reinsurance 33
Class-by-class analysis 38
The IndianNon-lifeMarket 2010 44
Regulatory drivers 44
Growth drivers 45
Risk factors 47
Structural changes 47
Growth projection: scenario I simple extrapolation 50
Growth projection: scenario II accounting for price wars 51
Conclusion 55
Lloyds Indian liaison office 55
Bibliography 56
Glossary 59CO
NTENT
S
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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 109.4bn
Expenditures: USD 143.8bn
Industries Textiles, chemicals, food processing, steel, transportation
equipment, cement, mining, software
insurance environmentPremium levels (2006) USD 6.0bn in 2006
Nominal annual
premium 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 industry
association General Insurance Council
Main life industry association Life Insurance Council
LLOYDSBUSINESSPremium levels (2006)* USD 94m Growth in 2006: 35%
Lloyds 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.
Lloyds 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 Lloyds
For compliance guidance, visit www.lloyds.com orcontact Lloyds International Trading Advice on +44 (0)20 7327 6677
Miscellaneous 11%PA& Health 14%
20%
Motor OD 28%
Engineering 6%
Marine Cargo 4%
Marine Hull 3%
Liability 2%
Aviation 1%
Motor TP 11%
India 2006:
USD 6.0bn*
*Lloyds Business Development estimate
Business Mix (2006)
* Gross written global premiums based on figures processed by Xchanging by processing year and country of
origin; based on Business Development calculations from Source: Lloyds, REG 258 Premiums Database,
(2007); average exchange used for the period of 2005-2006
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Executive summary 5
Despite political uncertainties, Indias economy is thriving.
Assisted by this growth, significant progress has been made in
the non-life insurance market since liberalisation, and the pace
of change has stepped up in 2007 as a result of detariffication.
1 EconomicgrowthdespitepoliticaluncertaintyWhilst India prides itself on being the worlds largest democracy, the
country is beset by political uncertainty. On the domestic front, Indias
United Progressive Alliance coalition is considered to be inherently
unstable. From an international perspective, relations with Pakistan are
viewed as a risk, due to ongoing tensions in Kashmir. Following the
implementation of reforms, Indias economy has been outperforming
other 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 Indias
demographics, human capital, global integration, macroeconomic and
fiscal stability, and its diversifying industries. However, inefficiencies such
as infrastructure bottlenecks, the evolving regulatory environment and the
overburdened legal system hinder Indias economy in performing as well
as those of China and Russia.
2 Substantial reformprogress innon-lifeReform of the Indian non-life insurance market has progressed
substantially since market liberalisation began in 2001. Whilst
detariffication occurred in early 2007, the market remains heavily
regulated, and its growth is hindered by the 26% cap on foreign
ownership of insurers. Private insurers are relatively new entrants into the
Indian market, but they already share over one-third of the market and are
expected to increase their market share further as liberalisation continues.
3 Growthprojectionspoint towardshigh growthThe extent of the insurance market liberalisation process is the subject of
ongoing debate. Detariffication is likely to be associated with a period of
adjustment and predatory pricing. Already a sharp decrease in rates has
been seen as a result of the January 2007 detariffication process. While
it is difficult to project the behaviour of market players and responses of
the IRDA, in the medium to long term, these reforms are expected to
lead to more dynamic growth.
4 Lloyds is seeking tocapitalise on IndianopportunitiesThe opportunities presented by the Indian market are deemed to be too
significant for Lloyds to overlook. As such, Lloyds will be setting up a
liaison office in Mumbai in 2007. The objectives of the office will be to
inform potential clients about the benefits of Lloyds offering to the Indian
economy. Additionally, the office will help to raise Lloyds profile with
brokers, cedants, insureds and the media. Ultimately, Lloyds wants to
gain access to the direct insurance market in India.
Executive summary
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Executive summary 6
The insurance environment in 2007
The Indian insurance market cannot be understood except in the context
of its history of nationalisation and liberalisation. Reform of the Indian non-
life insurance market, which was nationalised in 1972, has progressed
substantially since the turn of the century, and received an additional
boost in 2007 with the detariffication of key classes of business.
Non-life premium income has increased by 106% since initial
liberalisation in 2000, consistently outstripping global growth, as
summarised by the indexed premium chart below. However, growth in
Indias non-life market appears to have slowed to 13% in 2006 down
from 18% in 2005.
Despite the welcome reforms between 2000 and 2006, the Indian non-life
market remains heavily regulated. Nonetheless, 2007 has so far been
one of the most exciting years for the Indian insurance industry, with
significant reforms taking place. Some key characteristics of the market
are listed overleaf.
Tariffs: Up until the end of 2006, tariffs remained in place across 70% of
the market.3 Rates for property and motor were detariffed at the
beginning of 2007. However, insurers will not be allowed to change the
terms 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 an
estimated market share of over 60%. However, this share is reducing as
a result of private sector competition.
26% FDI cap: Foreign entities must partner with an Indian entity in order
to form an insurer and are limited to a maximum 26% stake in the jointventure. While the current government has suggested increasing the FDI
cap to 49%, the timing of this change remains unclear as it is likely to
trigger further policy discussions within the centre-left government
coalition.
Agents: Around 80% of premiums are still distributed through the
traditional medium of the direct sales (or marketing) agent. Brokers have
failed to gain a significant market share largely due to regulations that
have 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 compulsory
cession to the GIC was reduced from 20% to 15%.
despite liberalisationin2000, the indianmarketremainsheavy regulated
Non-lifepremiumincome increasedby106%between 2000and 2005
2006 figures are based on gross premium underwritten; figures are provisional and unaudited;
amalgamated through Lloyds 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 2.12.2 2.2 2.3 2.4
2.63.1
3.74.1
4.8
6.0
1995 1996 1997 1998 1999 2 00 0 2 00 1 2 00 2 2 00 3 2 00 4 2 005 2006*
Nominalmarketpremiums(inbillionsUSD)
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
Indexednon-lifedirectpremium
levels(2000+100)
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Executive summary 7
Looking forward to the market in 2010
The Indian insurance market is likely to change significantly over the next
three years largely due to regulatory changes. In addition, premium growth
is being driven by other factors such as the growing consumer class,
increased foreign direct investment, infrastructure development, and an
increased awareness of catastrophe exposure. Despite singificant positivechanges, the insurance market must still face the challenge of poor
customer perceptions and the danger that the pace of reform will slow.
Several significant structural changes are expected in the market as a
result of the drivers discussed above:
Price competition has already begun to increase and is likely to continue
to 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 have
increased access to the international reinsurance markets.
Finally, rising demand for insurance is likely to be met by increased
capacity as foreign insurers look to access this growing market.
One conclusion is certain the Indian non-life market is set to grow
dramatically over the next few years. The simplest forecasts suggest that
premium income could double in five years to reach USD 11.6bn in 2010.
When the structural changes above are taken into consideration, this
growth becomes exponential, with relatively slow growth in 2007 rising to
rapid growth by 2010.
Lloyds seeks to capitalise on Indian
opportunities
In order to be best placed to take advantage of the forecast rise in
commercial non-tariff business, Lloyds is lobbying for improved access
to the Indian direct market.
Moreover, Lloyds is establishing a liaison office in Mumbai. From this
platform, Lloyds will seek to build relationships within the Indian market,
to promote collaborations between Lloyds and other market players,
and to act as a communication channel between Lloyds in London and
Indian companies.
the extentof futureliberalisation is thesubject ofanongoingdebate
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Introduction 8
Purpose
This report, which serves as a market intelligence piece, provides a
detailed background on the Indian non-life insurance sector. In addition to
analysing the key components driving todays market conditions, the
report takes account of changes likely to occur within the regulatory
environment in the next three years.
Methodology
The information upon which this report is based has been derived from a
wide range of both primary and secondary sources. Most of the facts and
figures originate from extensive desk research of an array of publicly
available information. This research is mainly quantitative in nature and
forms the backbone of this report.
In order to gain further insight into the findings highlighted by secondary
research, a series of interviews were held with industry professionals in
London, Delhi and Mumbai. These discussions provided soft, qualitative
intelligence that helped develop an understanding of the key dynamicsthat are likely to impact future developments in the Indian market and
enabled assessment of the likely level of future use of the London market
by Indian firms.
Structure
This report is structured into three interdependent sections:
1 BUSINESSENVIRONMENTThe opening section provides an overview of the dynamic growthcurrently being experienced in India. In particular, it highlights the most
important political and economic factors that are likely to influence the
countrys economic progress between 2007 and 2010.
2 the indiannon-lifemarket 2007This section provides information and analysis on the key components of
the Indian non-life market today. These components include: premium
income, products, competitors, reinsurance and regulation.
3 the indiannon-lifemarket 2010Premium growth projections are particularly challenging to compile due to
the large number of unknowns such as company strategy and policy
response. As such, this paper aims to simplify such growth projections by
offering two scenarios. Scenario I gives a simple constant growth
projection based on recent growth experience and Scenario II takes into
account the impact of detariffication.
Finally, this report then demonstrates how Lloyds has utilised its
research into the Indian insurance market by giving an overview of
Lloyds current two-pronged approach to capitalising on opportunities
arising from the Indian market.
INTR
OD
UCTION
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Business environment 9
Business environment
Politics
The efficiency of Indias
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
Indias politics and regulatory environment is dictated by the difficulties of these competing
interests.
Regulatory environmentDespite 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
75
Voice and Accountability
Political Stability
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
India Regional Average
Compared to regional
peers, India scores high
in terms of rule of la
w
and accountability
Notwithstanding the countrys heterogeneous society, there is an established and bind
institutional framework, which includes a legal system, capital market regulators a
banking 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)
6In addition to relatively high levels of corru
there 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 issues
intellectual property rights."7
4 NB: The above chart depicts the percentile rank on each governance indicator. Percentile rankindicates 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 Indias Potential for Accelerated Growth, (2004), page 9
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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
Indias population is low. Consequently, the demand for corresponding insurance protection
remains modest.
There is a large backlog
of cases clogging Indias
judicial process
Domestic politicsIn a dramatic turnaround in its fortunes, the Indian National Congress emerged as the
largest party following 2004s elections. This party formed a governing alliance, the United
Progressive Alliance (UPA), with a number of smaller regional parties, as well as utilisingthe 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
countrys burgeoning middle classes and their interests rather than those of the mass rural
poor.Though unstable, Indias
current government is
expected to remain in
office
Indias 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 Indias economic liberalisation will be determined by the leaderships ability to
pursue the countrys 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, Indias pluralist political system can complicate and thus further hinder the reform
process.
Foreign relationsIndias foreign relations have in the past been dominated by its difficult relationship with
Pakistan and, more recently, with Bangladesh. Indias 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
Partys (BJPs)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 Kashmirs 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
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Business environment 11
Moreover, it is argued that neither of these two things can happen without a durable solution
in Kashmir.9
Bangladesh
Relations with Indias 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. Anissue 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 1962Sino-Indian Warand continuing
territorial/boundary disputes in Kashmirand 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
Chinas expanding
power
US
Indias 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 Indias ambitions to gain a permanent seat on the United Nations (UN)
Security Council.10
UN Security Council
The question of Indias permanent membership on the UN Security Councilis a high and
pressing priority for New Delhi. All elements along the Indian political spectrum are united in
the belief that their countrys 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 Assemblyin 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 councils 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: Indias Horror, (15 July 2006), page 10
10 Ibid11 BBC News, Profile: The UN Security Council, (3 January 2006)
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Business environment 12
EconomyFor 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, Indias
economy
underperformed
relative to its potential
Following the implementation of these reforms, for which todays Prime MinisterManmohan
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
IndexedNominalGDP(1
997=100)
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, andfinancial 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, Indias business
environment and the countrys 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 Indias economy is to continue to perform well in the future.
TABLE 1: Factors affecting Indias 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)
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Business environment 13
Demographics
Indias 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 Indias working population is projected to grow significantly
over the next 15 years as highlighted by the chart below. This signifies that there will be asignificant 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
Agegrou
pofpopulation(in%oftotal)
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
Worlds 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 ItalyAustralia
BrazilMexico
Pakistan
India
Surp
lus
Work
ing
Popu
lation
(inm
illions
)
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, Indias New Opportunity 2020, (2005), page 11
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Business environment 14
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
Indias surplus population are likely to be positive.
Human capitalIndia 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 countrys 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 economyIndias 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,
Indias 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 Indias 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 Indias Potential for Accelerated Growth, (2004), page 117The Boston Consulting Group, Indias New Opportunity 2020, (2005), page 1118 World Bank, Education Profile India, (2005)19 Chaudhry, H., Trade in Higher Education, City University of Hong Kong20 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)
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Business environment 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
Indias 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 emergeas 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 stabilityInflation 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 authoritys success in
maintaining relative price stability going forward will require improvements in fiscal policies.
Indias 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
Indias 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 Actwas passed in 2002, with a goal of bringing
down total deficit and revenue deficit8to 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 MinisterManmohan 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 governments
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 6-727 Ibid28 For detail see APPENDIX Macroeconomic Imbalances29 Deutsche Bank Research, India Rising: A medium-term Perspective India Special, (2005), page 6
30 FICCI, Infrastructure Transformations, (2005), slide 531 Hiscock, G., Infrastructure the Missing Link, (2004)
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Business environment 16
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 Indias poorest
regions remain impoverished, and this has impeded the rapid expansion of manufacturing.
Service sector biasIndias 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, Indias 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 industrialsector 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
Indias Technology,
software and
outsourcing sector is
highly competitive
At the high end of Indias productivity spectrum is the IT, software and BPO sector. Initially
starting with back office services such as call centres and tax work, Indias 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 Indias
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)
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Business environment 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
Indias 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, Indias food retailing industry is considered to be the
least competitive sector in the subcontinent.
33 IndianAuto.com, Information on the Indian Automobile Industry, (2006)
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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 economys greater urbanisation, number of
automobiles and emphasis on manufacturing. China also began its insurance liberalisation
process earlier. Nonetheless, Indias 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
Indexednon-lifedirectprem
iumlevels(2000=100)
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 thepast decade and has demonstrated a surge since market liberalisation in 2000.
CHART 8: Premium levels (in billion USD)36
1.9 2.12.2 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*
Nominalmark
etpremiums(inbillionUSD)
Point of liberalisation
Average annual growth (1995-1999): +5% Average annual growth (2000-2006): +15%
Liberalisation has led to
a marked increase in
Indias 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 andunaudited; growth factor has been applied by company growth of PSU vs Private comparing 1H 2005 vs1H 2006; amalgamated through Lloyds Business Development Directorate calculations based on IRDApublications
36 Swiss Re sigma database, Non-Life Insurance Premiums 1980-2005", (2006); IRDA, variouspublications, (2007)
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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 Sigmas
S-Curve, which links non-life penetration to incomeper capita.
High regulation may be a
major reason for the
low level of insurance
penetration
A significant contributing factor in the disparity between Indias actual penetration / GDP per
capita and that expected by Sigmas research (The S-Curve Gap) is the highly protectionistregulatory 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 10,000 100,000
Logarithmic scale of GDP per capita (in PPP USD)
Non-lifep
remiums(in%
ofGDP)
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 countrys S-Curve Gap in the short to medium term.
Analysing the market todayThe 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 below39 Non-life premiums in % of GDP from Swiss Re sigma database, WWM Calculation
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The Indian Non-Life Market 2007 20
Historical context
Colonial era
The first insurer in the
Indian market was
established in 1850
Indias first general insurance company, Triton, was established in 1950 and was owned
and operated by the British. In 1938, the Insurance Actwas 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 Regulatoryand Development Authority Act
1938: InsuranceAct passed
1850: 1st insurancecompany created
Colonial era Nationalisation Liberalisation
1972: Insurance marketfully nationalised
1947
1947: Economicnationalisation begins
1991
1991: Economicliberalisation begins
2000: 1st privatecompanies licensed
2007: Remainingtariffs abolished
1994: Marine tariffsremoved
18501850 2007
1999: Insurance Regulatoryand Development Authority Act
1938: InsuranceAct passed
1850: 1st insurancecompany created
Colonial era Nationalisation Liberalisation
1972: Insurance marketfully nationalised
1947
1947: Economicnationalisation begins
1991
1991: Economicliberalisation begins
2000: 1st privatecompanies licensed
2007: Remainingtariffs abolished
1994: Marine tariffsremoved
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 1938was
amended to set up a Tariff Committee, which fell under the control of the General Insurance
Councilof 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-settingBy 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 underManmaohan Singh. Three years later, the
MalhotraCommittee Report on the state of the Indian insurance industry was released. Itrecommended 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.
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The Indian non-life market 2007 21
ProductsThe 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 marketThe 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, workmens 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 gothrough a qualifying process before placement can be made outside India;
Workmens 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 gothrough a qualifying process before placement can be made outside India;
Workmens 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
LiabilityLiability
Engineering
Fire
Marine Hull
PA & Health
Marine Cargo
Aviation
Liability
Motor TP
Motor OD
Engineering
Fire
Marine Hull
PA & Health
Marine Cargo
AviationAviation
LiabilityLiability
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
LiabilityLiability
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 f ire 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 Lloyds Business Development, (2007)
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The Indian non-life market 2007 22
Legacies of a tariffed product marketThe 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 f rom 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 marketA 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 Lloyds Business Development calculation
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The Indian non-life market 2007 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
Absolutepremiumgrowth(inmillionUSD)
12.0%
13.0%
14.0%
15.0%
R
elativepremiumgrowth(in%)
Indias non-tariffedmarket 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
MotorOD
Fire
PA&Health
Miscellaneous
MotorTP
Engineering
MarineCargo
MarineHull
Liability
Aviation
1H2006prem
ium
by
bus
inessc
lass
(inm
illion
USD)
0%
10%
20%
30%
40%
1H2006
annua
lgrow
thinprem
iums
(%)
43 Lloyds, Business Development calculation based on: IRDA, Journal, (2006 - 2007) 2006 figures are based on gross premium underwritten; figures are provisional and unaudited;amalgamated through Lloyds Business Development Directorate calculations based on IRDA
publications44 IRDA, Journal, (2006 - 2007)
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The Indian non-life market 2007 24
Market playersCompetition 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
NewIn
dia
Orien
tal
Nation
al
Unite
dIn
dia
ICICI-L
om
bard
BajajAllianz
IFF
CO-T
okio
Relian
ce
Gen
eral
Tata-AIG
Royal
Sun
daram
Ch
olam
an
dalam
HDF
CCh
ubb
ECGC
StarH
ealth
&
Allie
dIn
suran
ce
1H2006Writtenpremium(inbillionUSD)
0%
5%
10%
15%
20%
25%
Marke
tshare(in%oftotal)
Special
Institutions:
2.5%
Private
Companies:
34.6%
Public
Sector:
62.9%
Since liberalisation,
private companies havegained 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 Lloyds Business Development Directorate calculations based on IRDApublications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and
thus they are not included in the premium development bubble chart45 IRDA, Journal, (2006 - 2007)
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The Indian non-life market 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 commonchallenges:
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 andprovides 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
publics 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
2006 figures are based on gross premium underwritten; figures are provisional and unaudited;amalgamated through Lloyds Business Development Directorate calculations based on IRDApublications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and
thus they are not included in the premium development bubble chart46 IRDA, Journal, (2006 - 2007)
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The Indian non-life market 2007 26
Private companiesThe 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 isstill 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 companys business class breakdown (1H 2006)47
1H 2006
Private Companies:
USD 1.0bn
Marine 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
2006 figures are based on gross premium underwritten; figures are provisional and unaudited;amalgamated through Lloyds Business Development Directorate calculations based on IRDApublications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and
thus they are not included in the premium development bubble chart47 IRDA, Journal, (2006 - 2007)
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The Indian non-life market 2007 27
Foreign playersThe 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 worlds 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 banks customers. Bajaj Allianzs 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 Res health insurance subsidiary and Apollo, a major Indian healthcare provider.
The others see Generalis 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 inAsia 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 res Ergo in talks with India L&T on insurance venture report, (2007)
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The Indian non-life market 2007 28
Significant premium growth for private companiesWhen 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--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 mainlyconcentrated on commercial lines. Conversely, HDFC Chubbs 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
ICICI-Lombard
Reliance
General
IFFCO-Tokio
BajajAllianz
TataAIG
Royal
Sundaram
Cholamandalam
HDFCChubb
1H2005vs
1H2006prem
iumgrow
th
-100%
0%
100%
200%
300%
400% 1H2005vs1H2006percentageprem
iumgrowth
Absolute premium growth (in million USD) Premium growth (in %)
Recent premium gr
has shown significant
variations
owthAbsolute premium
growth has been lead by
ICICI Lombard
Private companies are emerging as serious competitorsDespite 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)
1H2005vs.
1H2006premiumgrowth(in%)
Bajaj Allianz
New INdiaNational
ICICI-LombardIFFCO
Tokio
Tata AIG
Royal Sundaram
HDFC Chubb
Reliance General
Cholamandalam
Oriental
United
INdia
PSU Private companies
Legend
Size of bubble is equivalentto 1H 2006 premium levels
USD 75m
2006 figures are based on gross premium underwritten; figures are provisional and unaudited;amalgamated through Lloyds Business Development Directorate calculations based on IRDApublications; the IRDA classes ECGC and Star Health & Allied Insurance as specialised institutions andthus they are not included in the premium development bubble chart.
51 IRDA, Journal, (2006 - 2007)52 Ibid
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The Indian non-life market 2007 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
OD
Fire
PA
&H
ea
lth
MotorTP
Mis
cellan
eous
En
gin
eerin
g
Marin
eCa
rgo
Marin
eH
u
ll
Lia
bility
Avia
tion
1H2006businessclassbreakdown(in%
ofto
tal)
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 companiesA 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 risksare 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