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MARKET ANALYSIS AND KNOWLEDGBASE (This report is research into the Indian Non- Life Insurance and Automobile market and opportunities arising

from the Indian market. Some data herein is dated 2005-07, to show trends and some because of

unavailability of new data).This is the basis of the Project ASO – Automobile Services Outsourcing.

GENERAL BACKGROUND

Market 1

Non –Life Insurance

Despite political uncertainties, India’s economy is thriving. Assisted by this growth, significant

progress has been made in the non-life insurance market since liberalization, and the pace of

change has stepped up in 2007 as a result of detariffication.

1 ECONOMIC GROWTH DESPITE POLITICAL UNCERTAINTY

Whilst India prides itself on being the world‘s largest democracy, the country is beset by political uncertainty.

On the domestic front, India‘s 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, India‘s 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 India‘s 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

India‘s economy in performing as well as those of China and Russia.

2 SUBSTANTIAL REFORM PROGRESSES IN NON-LIFE

Reform of the Indian non-life insurance market has progressed substantially since market liberalization began

in 2001. Whilst de-tariffication 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 liberalization continues.



3 GROWTH PROJECTIONS POINT TOWARDS HIGH GROWTH

The extent of the insurance market liberalization 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

behavior of market players and responses of the IRDA, in the medium to long term, these reforms are

expected to lead to more dynamic growth.

THE INSURANCE ENVIRONMENT IN 2008-09

The Indian insurance market cannot be understood except in the context of its history of nationalization and

liberalization. Reform of the Indian non- life insurance market, which was nationalized in 1972, has progressed

substantially since the turn of the century, and received an additional boost in 2008 with the detariffication of

key classes of business.

NON-LIFE PREMIUM INCOME INCREASED BY 106% BETWEEN 2000 AND 2005

Non-life premium income has increased by 106% since initial liberalization in 2000, consistently outstripping

global growth, as summarized by the indexed premium chart below. However, growth in India‘s 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.

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 joint venture. 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 Sessions: There is only one local reinsurer, the 100% government-owned GIC. In April 2007,

the proportion of compulsory session to the GIC was reduced from 20% to 15%.

DESPITE LIBERALISATION IN 2000, THE INDIAN MARKET REMAINS HEAVY REGULATED

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 significant positive changes, the insurance market must still face the

challenge of poor customer perceptions and the danger that the pace of reform will slow.



THE EXTENT OF FUTURE LIBERALISATION IS THE SUBJECT OF AN ONGOING DEBATE

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-subsidization 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 2008-9 rising to rapid growth by 2010.

INTRODUCTION

Purpose

This report, which serves as a market intelligence piece, provides a detailed background on the Indian non-life

insurance sector. In addition to analyzing the key components driving today‘s 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.

Structure

This report is structured into three interdependent sections:

1 BUSINESS ENVIRONMENT

The opening section provides an overview of the dynamic growth currently being experienced in India. In

particular, it highlights the most important political and economic factors that are likely to influence the

country‘s economic progress between 2007 and 2010.

2 THE INDIAN NON-LIFE MARKET 2008

This 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 INDIAN NON-LIFE MARKET 2010

Premium 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 give‘s a simple constant growth projection based on recent growth

experience and Scenario II takes into account the impact of detariffication.



BUSINESS ENVIRONMENT

Politics

India prides itself on being the world's largest democracy modeled on the British parliamentary model. India is

a large country, not only with regard to its size but also in terms of culture, languages, religions and

contrasting convictions. Much of the complexity of India‘s politics and regulatory environment is dictated by

the difficulties of these competing interests.

THE EFFICIENCY OF INDIA’S REGULATORY ENVIRONMENT IS QUESTIONABLE

Regulatory environment

Despite its reputation, India performs well in terms of control of corruption, rule of law, and voice and

accountability, when compared to the regional average. However, this does not disguise the fact that the

country is often beset by political volatility, manifest by comparatively low levels of political stability. COMPARED TO REGIONAL PEERS, INDIA SCORES HIGH IN TERMS OF RULE OF LAW AND

ACCOUNTABILITY

Notwithstanding the country‘s 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. In addition to relatively high levels of corruption

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 sector the 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 like corporate citizenship, market opportunities and intellectual property rights." Narayana Murthy, Infosys Technologies, India, WEF Summit, (2004)

Economy

For decades, India‘s economy underperformed relative to its potential. Socialist policies and a powerful

bureaucratic apparatus led to red tape that stifled entrepreneur-led development.

With the collapse of the Soviet Union, a major reorientation of trade was needed. This, in combination with

additional external factors, led to a balance-of-payments crisis at the start of the 1990s, which provided

further stimulus for a wave of economic reforms.

FOR DECADES, INDIA'S ECONOMY UNDERPERFORMED RELATIVE TO ITS POTENTIAL.

Following the implementation of these reforms, for which today‘s Prime Minister Manmohan Singh is widely

regarded as the ‗architect‘, growth surged through to the mid-1990s and the beginning of this decade – with

India outperforming other large economic blocks, with the notable exceptions of China, throughout the whole

decade and Russia in 2005.

FOLLOWING REFORMS, GROWTH SURGED AND MADE A STEP CHANGE UPWARDS IN 2002



In addition to the change in its economic development policies, India‘s business environment and the country‘s

growth prospects are influenced by a number of characteristics. These characteristics demonstrate that whilst

the economy is growing and developing, it is still held back by inefficiencies and bureaucracy. These

challenges will need to be tackled if India‘s economy is to continue to perform well in the future.

TABLE 1: Factors affecting India‟s growth prospects

Favourable factors

Unfavourable factors

• Favourable demographics

• Improving human capital

• Globally integrating economy

• Challenging but improving

macroeconomic and fiscal stability

• A mix of sheltered manufacturing and

some competitive services sectors

• Infrastructure bottlenecks

• Evolving regulatory environment

• Transparent but overburdened

legal system

Demographics

INDIA’S WORKING POPULATION IS PROJECTED TO GROW SIGNIFICANTLY

Economic growth depends on, amongst other factors, having large pools of high-quality labour supply. India

has a young population of approximately 1.1 billion, the second-largest in the world after China, increasing at

roughly 1.5% per year. Latest figures from the UN

Population Division reveal that India‘s working population is projected to grow significantly over the next 15

years as highlighted by the chart below. This signifies that there will be a significant growth in labor supply

over the next 15 years.

The Indian Non-life Market 2007-08

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

INR 9752 crore worth of premiums were written in the Indian non-life insurance market in 2007-8, making

India the 27th largest market in the world in terms of non-life premium.

India contributed .004 % of the world non-life Insurance direct premium collection while in terms

of GDP (Gross domestic Product) ranking, India stands 4th worldwide, behind USA, China and

Japan.

Though India's insurance sector accounted for 4.1 per cent of GDP in 2006-07 and the insurance companies

recorded a 19.9 per cent growth in premium as compared to the world market growth rate of 2.9 per cent; on

world averages India ranks 78th in terms of insurance density and 54th in terms of insurance penetration.

India is one of the world‘s fastest growing economies, with real GDP rising to 9.4 per cent in 2006-07 as

against 9.0 per cent in 2005-06. India‘s share in world GDP thus has increased to 6.3 per cent in 2006

measured in terms of purchasing power parity. Growth in per capita income also accelerated to 8.4 per cent in

2006-07 from 7.4 per cent in 2005-06.



Economic fundamentals strongly suggest that there is a tremendous potential for the insurance sector to

attain a high growth level. The insurance penetration in a country depends on its level of economic activity,

risk awareness among the people and the deepening of the financial system.

With a large population and an untapped market, insurance industry has a huge growth potential in India. The

improved performance in the domestic economy has an impact on the insurance industry, in particular. Higher

per capita income, domestic savings and availability of more instruments for parking surplus funds facilitates

growth in the activities of financial services, particularly insurance. At the time of opening up of the sector in

1999, insurance was viewed primarily as a tax saving device. However, policyholders‘ perspective began

gradually changing towards an insurance cover irrespective of the tax incentives.

Most of the private insurance companies are joint ventures with recognized foreign players across the globe.

Consumer awareness has improved. Competition has brought more products and improved the customer

service. It has had a positive impact on the economy in terms of income generation and employment

opportunities in this sector.

The Indian non-life market currently lags behind that of its main economic rival, China, predominantly as a

result of the Chinese economy‘s greater urbanization, number of automobiles and emphasis on manufacturing.

China also began its insurance liberalization process earlier. Nonetheless, India‘s growth performance is very

strong relative to that of the world as a whole.

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

Worldwide non-life premiums have grown significantly over the past few years; a key contributory factor to

this was the 9/11 attack on the World Trade Center. However, the growth of non-life premiums in India has

outstripped average global rates every year for the past decade and has demonstrated a surge since market

liberalization in 2000.

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

Despite outgrowing the global non-life market over the past decade, non-life penetration levels in India remain

extremely low at just 0.6%.Whilst low penetration in a developing economy is to be expected, the Indian

position falls well below that expected by Sigma‘s ‗S-Curve‘, which links non-life penetration to income per

capita.

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

A significant contributing factor in the disparity between India‘s actual penetration / GDP per capita and that

expected by Sigma‘s research (‗The S-Curve Gap‘) is the highly protectionist regulatory position adopted by

the government until reforms were adopted in 2000.

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

Current insurance market reforms and continued high economic growth would appear to provide a strong

platform from which to drive premium development in the Indian market and, thereby, to close the country‘s

S-Curve Gap in the short to medium term.

Analyzing the market today

The current state of the Indian insurance market is so heavily influenced by the history of nationalization and

liberalization, 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 analyze

the process of liberalization in four main categories: products, market players, distribution and reinsurance.

Finally, the impact of these liberalization dynamics will be analyzed on a class-by-class basis. This will set the

scene for looking forward to 2010 in the following section.



Historical context Colonial era

The first insurer in the Indian market was established in 1850

India‘s first general insurance company, Triton, was established in 1850 and was owned and operated by the

British. In 1938, the Insurance Act was passed. This was the first legislation specifically dealing with the

supervision of insurance companies. Prior to this, general insurance firms had fallen under the broad auspices

of the Companies Act (1866).

Nationalization

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

nationalized. In 1950, the Insurance Act of 1938 was amended to set up a Tariff Committee, which fell under

the control of the General Insurance Council of the Insurance Association of India – the Tariff Committee was

so influential that it soon became known as the ―Rate Maker‖.

The non-life industry was not initially nationalized 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 nationalization in 1972, the independence of the TAC came into question – observers described

the TAC as the ―handmaiden of the nationalized 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 nationalized in 1972 following many years of tariff-setting

By 1972, general insurance in India was fully nationalized. 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.

Liberalization

In 1991, economic liberalization began under Dr. Manmohan Singh. Three years later, the Malhotra Committee

Report on the state of the Indian insurance industry was released. It recommended sweeping changes that

would reactivate competition in Indian insurance.

The market was reopened to competition in 2000 following an influential report

These recommendations were put into practice via the Insurance Regulatory and Development Authority Act

(IRDA 1999). In particular, the monopoly previously enjoyed by the GIC was removed. The act effectively

reinstated the 1938 legislation. The following year, the first license was 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.



Products The subsequent section aims to give a brief overview of product dynamics, recent growth experience,

detariffication and potential future growth areas.

Detariffication will change the dynamics of the market

The progress towards full detariffication of the non-life sector began in 1994 when insurance tariffs on

personal accident and bankers‘ indemnity were dismantled. Between 1994 and 2006, some progress was

made towards detariffication in marine insurance. Nevertheless, motor, fire, workmen‘s compensation and

engineering risks remained tariffed – accounting for around two-thirds of premium. As of January 2007, all

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

Motor third-party liability has not yet been detariffed as it was thought that the poor pricing could be

addressed separately. It is suggested that this final tariffed product will be liberalized in 2008, although that

has not yet been confirmed.

CHART 2: Detariffication roadmap (1994 – 2008)

□ Tariffed□ Detariffed

Aviation Aviation Aviation Aviation

Liability‡ Liability‡ Liability‡ Liability‡

PA & Health PA & Health PA & Health PA & Health

Marine Cargo Marine Cargo Marine Cargo Marine Cargo

Marine Hull Marine Hull Marine Hull Marine Hull

Fire♣ Fire♣ Fire♣ Fire♣

Engineering Engineering Engineering Engineering

Motor OD Motor OD Motor OD Motor OD

Motor TP Motor TP Motor TP Motor TP

Motor TP

All 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 customize insurance

products as early as October 2007, although these would still be subject to IRDA approval.

♣ Large properties with a total insured value of > USD 500m are freely priced, but must still go

through a qualifying process before placement can be made outside India;

‡ Workmen‘s compensation and Public Liability (Act) was detariffed in January 2007

* Some observers anticipated that some product controls, including price controls for Motor TP, would remain in place but it was eventually withdrawn in January 2009



In addition to product restrictions, insurers are not permitted to drop the price of a product by more than 49%

in the case of fire risks and 20% in the case of motor own damage without the approval of the regulator. While

this may not prevent a rise in price competition, it will certainly create an administrative barrier to rapidly

falling prices

Legacies of a tariffed product market

The latest round of detariffication is more significant than it may appear at first. Although the Indian insurance

regulator (the IRDA) has been pursuing a policy of detariffication since 1994, around two-thirds of all non-life

premiums in the Indian non-life market remained tariffed until the beginning of 2007.

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

Until the end of 2006, only specialist commercial classes such as marine, aviation and professional liability had

been fully detariffed – leaving the large mainstream classes such as motor, fire and engineering tariffed. As

the tariffs covered most of the market until very recently, their effects dominated the market, influencing the

pricing of even non-tariffed products.

Sophisticated insurance buyers are aware that insurers profit from hitherto tariffed lines such as fire and place

demands on insurers to cut their rates in other ways.

Cross-subsidization 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 (e.g. marine cargo cover for USD 1) in the hope that

this loss-making line is cross-subsidized by the tariff business and that they make a profit over the account as

a whole.

Considerable growth despite tariffed market

A strategy of bundling and cross-subsidization 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.

INDIA’S NON-TARIFFED MARKET IN THE 1H 2006 EXPANDED BY USD 144M (15%) WHEN

COMPARED TO 1H 2005

It is significant that the non-tariffed products grew at a faster rate than tariffed products between 2005 and

2006. In particular, the non-tariffed classes of PA & healthcare, marine hull and liability experienced high

growth rates as summarized by the chart below.



Market players Competition was reintroduced in 2000 with the licensing of the first private companies. Foreign investment

was also allowed at the same time, but limited to 26% ownership.

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

insurance sector.

1. Firstly, while the public sector insurance companies made an enormous contribution in the spread of

awareness about insurance and expanded the market, it was recognized 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 recognized 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 organization: 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.)

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

The PSUs remain dominant in the general insurance sector, with a combined market share of 62.9%, while

private companies had a combined market share of 34.6% in 1H 2006.

The special institutions segment only accounts for 2.5% of total market share and, as result, will be

disregarded in the analysis below. The subsequent section is aimed at giving a high-level overview of both

PSUs and private companies, with a focus on comparative strengths and weaknesses.



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

National Insurance Company Limited www.nationalinsuranceindia.com

New India Assurance Company Limited www.niacl.com

Oriental Insurance Company Limited www.orientalinsurance.nic.in

United India Insurance Company Limited www.uiic.co.in

40 %

30 %

20 %

10 %

0%

1 H 2 0 0 6 B u s i n e s s c l a s s b r e a k d o w n ( i n % o f t o t a l )

A v i a t i o n

L i a b i l i t y

M a r i n e H u l l

E n g i n e e r i n g

M o t o r T P

M i s c e l l a n e o u s

P A & H e a l t h

F i r e

M o t o r O D

PSUs VS. Private companies class breakdown * (1H 2006)

M a r i n e C a r g o

PSU PRIVATE COMPANIES

http://www.nationalinsuranceindia.com/#_blank

http://www.niacl.com/#_blank

http://www.orientalinsurance.nic.in/#_blank

http://www.uiic.co.in/#_blank



The four major PSUs currently operating in the Indian general insurance market: National (Calcutta); Oriental

(Delhi); United India (Madras); New India (Bombay). In practice, the PSUs tend to focus their efforts on

maintaining a strong status and market position within their local region rather than competing with one

another. Although New India is generally regarded as the most successful of the PSUs, the PSUs have the

following common challenges:

• Sales focus (rather than underwriting): The tariff system, which has existed for a generation, has

resulted in the lack of a need for insurance companies to underwrite.

Additionally, PSUs have their own in-house sales agents for whom sales targets rather than underwriting are

at the forefront of their activities. This position is now no longer sustainable, due to the phasing out of the

tariff system during 2007.

• Poor systems: The lack of competition in the Indian market, and the backing that the PSUs receive from

government, has meant that these insurers had hitherto faced lower incentives to improve their levels of

efficiency. Accordingly, sophisticated IT systems are currently lacking in this environment – most PSUs

continue to operate at a paper-based level. This is indicative of the inefficiency inherent within the Indian

insurance market and provides a reason for generally poor customer satisfaction.

• Poor claims-paying record: There is a general perception within the Indian market that the PSUs either

fail to pay claims or take far too long to do so. This reinforces the general public‘s perception of insurance as a

tax rather than being of any economic value.

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

• Staff leakage: The gradual loss of market share and competitiveness that the PSUs are currently

experiencing, in conjunction with the higher monetary rewards on offer from private sector players, is leading

to significant levels of high-quality staff leaving the PSU companies to join private competitors.

• Exposure to motor business: A further issue for the PSUs to consider is their substantial exposure to the

poorly performing motor third-party liability sector.

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



Private companies The fourteen 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 FOURTEEN PRIVATE COMPANIES HAVE BEEN ESTABLISHED SINCE 2000

• Small and flexible: The private firms have smaller and less disparate workforces than the PSUs and are

therefore able to respond quickly to changes in market conditions.

Private companies have been able to choose the highest-calibre staff from the PSUs

• Good staff, systems, processes and data: Due mainly to their ability to pay higher salaries, the private

companies have been able to choose the highest-calibre staff from the government-owned PSUs. The foreign

partners involved in the new privately owned Indian insurance ventures have ensured that high-quality

systems and processes have been implemented from the very beginning of their enterprise. This ensures that

the companies are run using international industry best practice standards to provide a higher quality of data.

• Greater focus on underwriting: Although the sales function of the private companies is still extremely

important to them, more emphasis is placed on maintaining sound underwriting procedures and high-quality

back office processes than is seen in the PSUs.

The business models, Customer service and staff are stronger in private companies

• Strong claims-paying reputation: As a result of their greater efficiency and information capture, the

privately owned insurers operating in the Indian market have developed a far better reputation than the PSUs

for paying claims quickly and efficiently.

• Product focus: Aside from outperforming PSUs in terms of overall business growth, private companies

have been able to build up a more favorable business mix. This is due to the fact that PSUs are not allowed to

decline certain unprofitable business such as motor third-party.

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

companies



Following are the list of General Insurers in India.

1) Bajaj Allianz General Insurance Co. Limited www.bajajallianz.co.in

2) ICICI Lombard General Insurance Co. Ltd www.icicilombard.com

3) IFFCO-Tokio General Insurance Co. Ltd www.itgi.co.in

4) Reliance General Insurance Co. Limited www.ril.com

5) Royal Sundaram Alliance Insurance Co. Ltd www.royalsun.com

6) TATA AIG General Insurance Co. Limited www.tata-aig.com

7) Cholamandalam General Insurance Co. Ltd. www.cholainsurance.com

8) Export Credit Guarantee Corporation www.ecgcindia.com

9) HDFC Chubb General Insurance Co. Ltd. http://www.hdfcchubbindia.com/

10) Future Generali Insurance Co. Ltd. http://www.futuregenerali.in

11) Apollo DKV Insurance Company Ltd. http://www.apollodkv.co.in/

12) HDFC Ergo General Insurance Co. Ltd. http://www.hdfcergo.com/

13) Bharti AXA General Insurance Co‘ Ltd. http://www.bharti-axagi.co.in/

14) Universal Sompo General Insurance Co. Ltd. http://www.universalsompo.com/

Foreign players

The ability of foreign insurers to participate in the Indian non-life insurance market is currently restricted to a

26% stake in a joint-venture vehicle with an Indian company. Even with this relatively low level of foreign

participation, many of the world‘s largest insurers (such as AIG, Allianz and RSA) have already entered the

market. Despite their disadvantaged position, foreign capital providers have been able to influence strategy,

product focus and speed of growth. As a result of this influence, there are growing differences between private

companies.

Tata AIG is a joint venture (JV) between the multinational Indian conglomerate Tata and American insurance

giant AIG. The Mumbai-based Tata AIG intends to develop its retail book but has stated that it is looking for

quality of business rather than quantity – it is not prepared to compete on extremely low deductible business.

It is estimated that Tata AIG has employed 1,500 direct sales agents specifically to target this business.

Additionally, Tata AIG has embraced alternative channels that include bancassurance, corporate agency,

brokers and direct marketing, which contribute significantly to premium growth. Tata is said to be a virtually

silent partner in its venture with AIG.

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

http://www.bajajallianz.co.in/#_blank

http://www.icicilombard.com/#_blank

http://www.itgi.co.in/#_blank

http://www.ril.com/#_blank

http://www.royalsun.com/#_blank

http://www.tata-aig.com/#_blank

http://www.cholainsurance.com/#_blank

http://www.ecgcindia.com/#_blank

http://www.hdfcchubbindia.com/#_blank

http://www.futuregenerali.in/

http://www.apollodkv.co.in/

http://www.hdfcergo.com/

http://www.bharti-axagi.co.in/

http://www.universalsompo.com/



ICICI, on the other hand, is the main driver in its operation with Lombard. ICICI-Lombard and IFFCO-Tokio

are aggressively targeting personal lines business, the intention being to grow market share quickly.

Conversely, HDFC-Chubb announced that it intended to scale back its personal lines business and focus

instead on commercial business and liability lines, particularly D&O. Since then, Chubb has exited from its

Indian joint venture with HDFC.

Bajaj Allianz has formed a strategic alliance with Karnataka Bank to launch two co-branded over-the-counter

insurance products covering the health and home insurance sectors exclusively for the bank‘s customers. Bajaj

Allianz‘s success is due to its extensive branch network of more than 550 branches and more than 110,000

agents, which are estimated to contribute around 70% of total premiums.

Cholamandalam-Mitsui is based in Madras and continues to focus on the mid-market small and medium-

sized enterprise (SME) business from Southern India.

Royal Sundaram is also based out of Madras and is said to maintain a stable book of business as well as

strong brand recognition in financial lines.

Future Generali is a joint venture between the India-based Future Group and the Italy-based Generali

Group. Future Generali is present in India in both the Life and Non-Life businesses as Future Generali India

Life Insurance Co. Ltd. and Future Generali India Insurance Co. Ltd.

Apollo DKV is a joint venture between DVK and Apollo Group, Hyderabad. Apollo Hospitals group is a pioneer

and leader in corporate healthcare in India and currently owns and manages 42 large tertiary care hospitals,

60 primary care clinics, and the largest retail pharmacy chain of over 600. DKV is the European market leader

and one of the world‘s top five private health insurers. DKV‘s headquarters are based in Cologne, Germany.

The company is a member of the ERGO Insurance Group and thus part of the Munich Re Group, one of the

world‘s largest reinsurers.

HDFC ERGO is a joint venture between HDFC Limited, India‘s premier Housing Finance Institution & ERGO

International AG, the primary insurance entity of Munich Re Group.

Bharti AXA is a joint venture between Bharti, one of India‘s leading business groups with interests in

Telecom, Agri Business and Retail; and AXA, world leader in Financial Protection and Wealth Management. The

company was incorporated on July 2007. Headquartered in Bangalore, the company currently has 30 branches across India.

Universal Sompo (Universal Sompo) - a joint venture (JV) between Allahabad Bank, Sompo Japan Insurance

Inc., Indian Overseas Bank, Karnataka Bank and Dabur Investments - Universal Sompo is a uniquely symbolic

example of fruitful Public-Private sector

Significant premium growth for private companies

When total figures are aggregated, the picture emerging is that IFFCO-Tokio, in particular, recorded

spectacular growth figures of USD 148m (79%) during 1H 2006 vis-à-vis 1H 2005.

Furthermore, the jump in premium growth for Reliance General of USD 66m almost quadrupled its premium

underwritten when comparing the same periods. This was largely due to the fact that the company is now

driving its retail business – having previously mainly concentrated on commercial lines. Conversely, HDFC

Chubb‘s premium declined over the same time period as summarized by the chart below.

Recent premium growth has shown significant variations

Absolute premium growth has been lead by ICICI Lombard



Private companies are emerging as serious competitors

Despite the continued overall dominance of PSUs, private companies such as IFFCO Tokio, are emerging as

serious competition not only in quality of products and services but also in terms of relative market size, which

is illustrated best in the chart below.

Overall, private companies have therefore been building a book with significant focus on the more profitable

fire, engineering and, lately, PA & health business.

PRIVATE COMPANIES ARE FOCUSING ON THE MORE PROFITABLE LINES SUCH AS FIRE, MOTOR OD

AND PA & HEALTH



Class-by-class analysis The remainder of this section will consider each of the major classes in the light of the liberalization dynamics

discussed above. This will be used as the basis of the forecasting in the following section.

INCURRED CLAIMS RATIO – MOTOR -2007 -2008

PARTICULARS

EARNED PREMIUM (Rs. Lakhs) NET CLAIMS INCURRED (NET) (Rs. Lakhs)

INCURRED CLAIMS RATIO (Per cent)

PUBLIC 2007-08 2006-07 2007-08

2006-07 2007-08 2006-07

NEW INDIA 194078 198559 209996 180653 108.20 90.98

ORIENTAL

137012 132846 136423 130377 99.57 98.14

NATIONAL

167841 153428 170449 133293 101.55 86.88

UNITED

106080 94441 116943 90049 110.24 95.35

SUB-TOTAL

605011 579274 633811 534372 104.76 92.25

PARTICULARS

EARNED PREMIUM (Rs. Lakhs) NET CLAIMS INCURRED (NET) (Rs. Lakhs)


PRIVATE

2007-08 2006-07 2007-08

2006-07 2007-08 2006-07

ROYAL SUNDARAM

29749 20673 22856 15280 76.83 73.91

BAJAJ ALLIANZ 92566 49254 61817 33010 66.78 67.02

TATA AIG

24809 22888 15305 13695 61.96 59.83

RELIANCE 71660 14918 53013 9149 73.98 61.33

IFFCO TOKIO

37945 34613 28976 22395 76.36 64.70

ICICI LOMBARD 87333 55105 66505 33463 76.15 60.73

CHOLAMANDALAM

14073 5195 9353 3883 66.46 74.75

HDFC CHUBB 12017 11830 8491 6995 70.66 59.13

FUTURE GENERALI

2

SUB-TOTAL 370154 214476 266316 137870 71.95 64.28

GRAND TOTAL

975165 793750 900127 541367 92.31 68.20

Motor Sales of automobiles tend to have a significant influence on the level of non-life insurance premiums in a

developing country. The main reason for this situation is that motor insurance is generally a compulsory

product in most countries. The relationship between automobile growth and non-life premium income is

illustrated by the Chinese market. Between 1998 and 2002, automobile registrations in China grew by 141%;

during the same time period, non-life premiums increased by 68%. India is just entering a period in which car

sales are likely to grow exponentially; market leader Maruti Udyog reported a 22% increase in domestic sales

at 56,606 vehicles during September 2006 compared with 46,393 vehicles in the same period the previous

year.



The premium breakdown shows that the compulsory motor class plays a less significant role in the Indian

market than in other developing territories. By comparison, the Chinese market consists of 61% motor

premium.

The difference in contribution is reflected in the number of new car registrations in each of the countries. In

2005, China recorded 3.8 million new car registrations whereas India recorded 1.3 million in the same year.

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

Motor third-party (TP) liability has been a famously loss-making business due to fixed, very low pricing and to

galloping, very high claims payouts. During 2003-2004, the motor TP portfolio was estimated to have a claims

ratio of 200% to 250%.

It has been common practice for this segment to be cross-subsidized by the motor own damage (OD)

premiums (which business is estimated to have a better claims ratio of about 80%). In particular, ICICI

Lombard has been making significant progress in gaining market share in motor OD business, growing by USD

60m between 1H 2005 and 1H 2006.

On the other hand, Baja Allianz is a significant player in the much less desirable motor TP business. Yet even

in this segment, ICICI Lombard has grown its business more in absolute terms as summarized by the charts

below.



PA & Health

INCURRED CLAIMS RATIO – HEALTH -2007 -2008 PARTICULARS

EARNED PREMIUM (Rs. Lakhs)

NET CLAIMS INCURRED (NET) (Rs. Lakhs)


PUBLIC 2007-08 2006-07 2007-08

2006-07 2007-08 2006-07

NEW INDIA 82012

30612 73801 65146 89.88 212.81

ORIENTAL

40605

32371 50256 42895 123.77 132.51

NATIONAL

46806

35756 55238 47010 118.01 131.47

UNITED

48146 32981 65170 52787 135.36 160.05

SUB-TOTAL

217569 131720 244465 207838 112.36 157.79

PARTICULARS

EARNED PREMIUM (Rs. Lakhs)

NET CLAIMS INCURRED (NET) (Rs. Lakhs)


2007-08 2006-07 2007-08

2006-07 2007-08 2006-07

ROYAL SUNDARAM

8305

5487 3719 2578 44.78 46.99

BAJAJ ALLIANZ 17808

10693 15171 8367 85.19 78.64

TATA AIG

3708

2974 2778 1835 74.93 61.69

RELIANCE

13617

3017 15269 3410 112.14 113.01

IFFCO TOKIO

7223

4656 8750 7119 121.14 152.89

ICICI LOMBARD

40662

30593 40170 36313 98.79 118.70

CHOLAMANDALAM

2967

884 2761 703 93.03 79.51

HDFC CHUBB

1692

500 2411 436 142.46 87.10

FUTURE GENERALI

25

SUB-TOTAL

96007

58804 91029 60761 94.81 103.42

GRAND TOTAL

313576 190524 335494 268599 106.99 140.97



While corporate business until recently was largely about the manufacturing sector, the economy is now

shifting from manufacturing sector to services sector. This means that group health and liability insurance are

becoming increasingly important for insurance companies.

Group health and liability insurance are becoming increasingly important for the Indian economy

The fundamental causes of upward pressure on health care costs include the rapid progress of medical

technology and the fact that patients are becoming more demanding about health care services and ‗wants‘

are expanding in relation to ‗needs‘.

Rising health costs lie behind considerable growth in health insurance premiums While it is difficult to measure

the extent of rising medical costs, observers suggest that health care costs are typically increasing at three to

five times the rate of general price inflation.

Even though health insurance is seen as becoming increasingly unprofitable for PSUs, due to escalating

healthcare costs, adverse selection, moral hazard and a low premium structure, ICICI Lombard has clearly

targeted this segment of the market as summarized by current market share and growth figures above.



The Indian Non-life Market 2010

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

The Indian non-life market has experienced significant changes that are likely to influence the country‘s

development of its insurance market in the medium to long term.

So far, the entry of a large number of Indian and foreign private companies has led to greater choice in terms

of products and services for Indian consumers. A growing realization of the benefits and importance of

sophisticated insurance and reinsurance tools has

broadened the pool of potential buyers of insurance.

Given this backdrop, the Indian insurance market has experienced considerable growth since its liberalization

in 2000. Over the next three years, the Indian insurance market is likely to see its process of maturation

accelerate.

Regulatory drivers

Regulatory changes in the four areas discussed in the previous section – products, market players, distribution

and reinsurance – will drive change in the Indian insurance market in the medium term. In some areas, such

as detariffication, the majority of reform has already taken place, although the consequences are yet to be

seen. In other areas, while the reform is promised, it is difficult to anticipate when it will occur. As a result,

there is a lot of uncertainty in the Indian insurance market. The four main areas of change are now considered

in turn.

40 %

30 %

20 %

10 %

2%

28% 28% 27%

25%

10% 10%

6%

11%

17%

200

400

600

800

0% 0

1 H 2 0 0 6 P r e m i u m b y b u s i n e s s c a l s s ( i n

m i l l i o i n

U S D )

1 H 2 0 0 6 a n n u a l g r o w t h i n p r e m i u m ( % )

A v i a t i o n

L i a b i l i t y

M a r i n e H u l l

M a r i n e C a r g o

E n g i n e e r i n g

M o t o r T P

M i s c e l l a n e o u s

P A & H e a l t h

F i r e

M o t o r O D

Business classes' premium growth * (1H 2008)



Detariffication

The process of detariffication, first begun in 1994, has gradually moved the Indian market to a position where

the overwhelming majority of insurance is transacted without a tariff. As of 1 January 2008, tariff rates have

been withdrawn from all lines of business inclusive of motor third-party (TP) liability. While hitherto, insurance

professionals had limited exposure to sophisticated technical pricing based on actuarial data analysis, in a

detariffed market, this is increasingly a necessity for businesses in order for them to remain profitable.

Foreign ownership

As discussed earlier, foreign ownership is currently restricted to 26%, although there are plans to increase this

limit. The typical structure adopted by the Indian government for the phasing in of foreign-owned entities

across other industries (such as construction and pharma) has been as follows:

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

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

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

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

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

In January 2007, the Indian government reiterated that it would introduce legislation to hike the FDI cap in

the insurance sector to 49%. No time limit has been set for taking a decision on it although consultations with

the industry and stakeholders are underway. There is ample opposition from the left, but analysts expect that

this change will be made effective in the next one to two years.

The effect of this change will be twofold. Firstly, it will increase the focus of the existing private insurers

operating within the Indian market. As discussed in the previous section, the private companies are

increasingly diverging on strategy as they are influenced by their foreign partners. It is likely that increased

foreign ownership will lead to differentiated strategy, more niche players and a wider product range.

Secondly, it is expected to increase the supply of capacity in the market as new investors will decide to enter

the market. Indeed, a number of insurers have commented that, as soon as foreign companies are allowed

more than 26% ownership, they would move as quickly as possible to participate in the market.

Broker distribution

The broker channel was recognized in 2002; again, foreign capital providers can take up to a 26% stake in an

Indian brokerage operation.

There is also no indication at the time of writing as to whether the constraints placed on brokers, such as high

set-up costs and activity restrictions will eventually be removed.

What remains clear, however, is the fact that in a detariffed market, the broker has more opportunity to

demonstrate value to both the customer as well as the insurer. Value-added services can be in the form of

consulting regarding risk management responsibilities as well as more traditional insurance-related roles.

Compulsory cessions

In line with detariffication, there has been some progress in reducing the compulsory cession to the GIC from

20% to 15%.

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



However, a complete abolishment of the remaining 15% compulsory cession to the GIC is unlikely to occur in

the medium term. Although it would seem natural to liberalize this position as the broader non-life market

begins to open up, the Indian government and legislator reiterated their desire to retain insurance premium in

India in the central legislation of 2000, and there is no reason to believe that this position has since changed.

In addition, many local companies are happy with the automatic reinsurance support that they receive from

the GIC.

The PSUs are pleased that they are able to cede 15% of their poorly performing motor book onto their parent

whereas the growing number of private insurers are grateful for the additional capacity that they receive from

the GIC‘s de facto proportional treaty coverage.

While a further reduction to 10% is expected in 2008, abolishing compulsory cessions altogether is not at the

top of the legislator‘s agenda.

Growth drivers

Overall, sales of both commercial and retail products are expected to benefit from India‘s surging economic

output over the medium term. Economists expect India‘s output to grow by around 6% per annum over the

next ten to 15 years, and the political and business environments are expected to stabilize further.

The combination of this economic growth, increased stability and the liberalization of the non-life sector is

expected to provide premium growth in the range of 10% to 15% per annum over the short to medium term.

Personal lines insurance premium growth drivers:

Personal lines products are expected to develop quickly as Indians grow wealthier

Although probably not of immediate interest to Lloyd‘s underwriters, a developing economy‘s initial growth in

insurance penetration is often driven by personal lines products, especially motor cover as this tends to be

compulsory. Indeed, India‘s fast-developing private insurers expect retail products to provide them with their

main source of premium growth over the medium term.

The reason for their focus is as follows:

• Growing consumer class: The Indian consumer class is currently estimated to be around 200 million and

growing. However, even amongst this class of consumers, non-life penetration remains extremely low. The

reasons for the low penetration are twofold. Firstly, most members of the consumer class have gained their

wealth recently and, therefore, have had little time to consolidate and protect their assets. Secondly, lack of

competition in the insurance market has led to mundane products and poor customer service. These limiting

factors are likely to decrease over the medium term.

Commercial insurance premium growth drivers:

Foreign investment and infrastructure development will drive commercial premium

The widely acknowledged dynamism of the Indian economy is currently attracting global attention.

Commercial enterprise is likely to benefit from this, and the success of commercial enterprise is likely to filter

down to the general insurance sector. Reasons for this include:

• FDI: Foreign direct investment in industry is often made with several requirements that generally include

adequate insurance cover. Sectors most likely to benefit from investment in the medium term are IT,

pharmaceuticals and manufacturing. Product demand is likely include product liability (for exporters) and

directors‘ and officers‘ liability (D&O) cover.



• PPP infrastructure development: The quality of India‘s ports, airports and railways leaves much to be

desired, and infrastructure development in the next few years is likely to cost USD 150bn. Given the need for

speedy infrastructure development and the shaky state of its public finances, the Indian government appears

to have embraced the concept of Public Private Partnerships (PPP). Examples of PPP projects underway are the

Western Freeway Sealink project in Mumbai, which will cost around USD 560m;

development of a metro system in the cities of Ahmedabad and Gandhinagar in Gujarat at a cost of USD

711m; and a series of gas-based power plants across Gujurat at a cost of USD 800m per plant. Many more

projects of this type are being scoped across India over the medium term, and the support of specialist

commercial insurers will be required to ensure their success.

• Insurer quality and client education: Market-leading companies will expect market-leading insurance

cover. Household name insurers have already recognized this and have entered the non-life sector with Indian

partners. Direct investment in the non-life sector by foreign entities is expected to drive growth in insurance

premium through increased quality of product, higher-quality customer service and increased customer

awareness of the economic benefits of purchasing sound insurance coverage.

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

• Catastrophe exposure: India is heavily exposed to natural catastrophe loss but is poorly insured against

such risks. For example, in 1999, India accounted for approximately 25% of the world‘s fatalities due to

natural catastrophes; in 2001, this figure stood at 80%.

Events in recent years, such as the 2005 Kashmir earthquake (more than 87,000 dead in India and Pakistan),

the 2005 Mumbai floods (1,000 dead) and the 2004 Boxing Day tsunami (18,045 dead), have proved that

India remains one of the catastrophe centers of the world. However, less than 15% of the damage caused is

thought to have been insured. According to government estimates quoted by the Times of India, economic

damage from the Tsunami has been estimated at RS. 100bn (GBP 1.3bn). To date, the four Indian public

sector insurers have received 13,000 claims worth just RS. 14bn (GBP 178m). In contrast, insured losses in

the US following Hurricane Ivan (2004) totaled 55% and insured losses following Hurricane Katrina (2005) are

estimated to be up to 48% of the total economic damage suffered.

The Mumbai flood has taken insurance companies by surprise, leading to two insurance companies exhausting

their reinsurance protection. In 2006, all insurance companies had purchased more catastrophe reinsurance

cover. With the increased reinsurance cover purchased, Mumbai flood loss would be only 30% of the

reinsurance cover purchased by all the insurance companies put together in 2006-2007; as against 52% of

the reinsurance cover in 2005-2006.

One of the short-comings of the Indian insurance industry is the lack of credible data to simulate potential loss

from a natural catastrophe of a high severity. At best, insurance companies are following an aggregate loss

model whereby they assess the impact of a natural catastrophe by analyzing the severity of a single event

applied to their portfolio.

Risk factors Insurance analysts are excited about the prospects of the Indian market. However, there are

risks that may adversely affect the levels of growth in the Indian non-life market:

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

• Slow reform: Much of this growth prediction is based upon the liberalization agenda set out by the

government and the regulator, the IRDA. Due to a number of competing interests, it should be noted that

there is significant potential for delay in this liberalization program.



• Poor customer perception: Due to the poor levels of customer service provided by PSU insurers and their

failure to pay claims promptly, Indian assureds tend to perceive insurance to be a tax (ie with no returns)

rather than a product of genuine economic value.

Structural changes

Combining the regulatory and growth drivers, there are a number of structural changes that are likely to occur

if risk factors such as a slow reforms and poor customer perception are overcome.

PRICE COMPETITION IS SET TO INCREASE While it is yet too early to verify the impact of the detariffed environment, competition is expected to manifest

itself in prices, products, underwriting criteria, sales methods and creditworthiness. As experience with other

markets has shown, insurance companies are expected to vie with each other to capture market share

through better pricing and client segmentation. Industry observers estimate that there is likely to be a

significant price war, which is expected to last for 18 to 36 months.

A significant price war is expected over the next few years

When marine hull insurance was completely detariffed, the stiff competition that followed led to rates falling

by 40 to 50%. Marine hull insurance premiums are, however, now expected to rise back to the levels

prevailing before detariffication occurred. Moreover, Indian shipping companies are expecting to see strong

demarcation and differentiation between fleets of different ship owners. Factors such as claims history,

maintenance condition and average age of vessel are expected to strongly influence premium rates. General

insurers have predicted that premiums for older ships will increase by as much as 40% at renewal this year,

but that good shipping fleets with a no loss record, of which there are few in India, are likely to get a 10% to

20% reduction in new premiums.

Cross-subsidization is expected to cease

In the initial phase of detariffication, the free pricing regime is expected to result in a decline in growth. Other

markets in which detariffication has occurred on a similar scale, such as Japan, South Korea and Ireland, have

shown that the first few years can witness a decline of 20% in premiums for detariffed classes – leading to

growth resuming only three years after the lifting of pricing restrictions.

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

The issue of fire detariffication is of particular interest to insurers as they have hitherto used the fire portion of

an account to cross-subsidize the losses that they frequently experience in motor and non-tariffed business

classes. To put it differently, in the loss-making areas, the premium rates are expected to increase to meet the

losses, while premium rates are expected to come down in profitable portfolios such as fire and engineering.

As fire premiums are being detariffed, there is most likely going to be a competitive struggle between the

PSUs and the private insurers. It is believed that this is the reason why the IRDA has placed an administrative

burden on insurers wishing to reduce rates by more than 20%. Some commentators believe this will limit

price competition, while others think it will merely cause confusion in the market.

The public sector insurers in India have continued to push for motor detariffication as, for many years, they

have incurred losses in this mandatory insurance sector. State-owned insurers have argued that since they

handle more than 40% of the country‘s motor business, any delays in implementing the detariffication of this

segment would hit the companies‘ profitability.



RISK-BASED PRICING WILL INCREASE

Rationalization of premium structures is expected

Detariffication is expected to result in risk-based pricing of portfolios and therefore a rationalization of

premium structures. While we can expect some level of unpredictability in the market initially, experience from

other countries that have gone through detariffication shows that prices will stabilize to reflect the underlying

risks and cost of capital, whereas insurers‘ underwriting efficiency will increase. For detariffication to be

successful, stronger solvency supervision will also be required as, without fixed tariffs, insurers‘ results will

become more volatile. This will force out badly performing insurers that have hitherto placed little emphasis

on quality underwriting.

Building of profitable portfolios could help access to reinsurance support

Currently, the Indian market has ample capacity for even the largest risks, due to inter-company cessions of

the PSUs, the market surplus treaties and facultative support from the GIC. With detariffication, some

reinsurers have expressed concern over the possible impact of the ensuing ‗price war‘, which could result in

the revenues of primary insurers shrinking. This, in turn, could lead to a deterioration in underwriting losses

and a consequent weakening of domestic retention capacities.

Some international reinsurers looking at the Indian market believe that it could take some time for cedants to

gather experience with the new situation and to find their minimum rates.

This is due to the fact that the primary reflex for reinsurers is to compete via price for new or renewal

business. Insufficient ratings, in turn, take at least a year to have an impact on the companies to better

differentiate products and price risks appropriately.

The comfort of an anchor tariff rate has made the industry more transaction-focused. From

a reinsurer‘s perspective, the transition toward a business-driven and profit-and-loss-driven

approach should be seen as a positive step. Those insurers that are able to demonstrate their commitment to

building profitable portfolios will enjoy positive reinsurance support.

Growing insurance demand will be met by increased capacity

Growth in insurance demand will need to be matched by increased supply of insurance capacity. There is

unlikely to be a shortage of capacity due to the global interest in India from leading insurers. The three

candidates for this capacity provision are as follows:

Growth in demand is expected to be more than met by increased capacity

1. Existing insurers (PSUs or privates) either by receiving additional capital from their parent companies

or via a capital-raising exercise, e.g. a PSU doing an initial public offering (IPO).

2. New insurers that choose to join the market.

3. Heavier reliance on the global reinsurance market.

The most likely scenario is that all three of these groups will be involved in the evolution and growth of the

Indian non-life market to the extent that the government allows them to be.

The growth prospects in India are very real and understandably attractive to Western insurance groups that

are searching for growth outside of saturated, developed markets.

However, increased capital supply may depress prices to unrealistic levels in the short term.



Growth projection: scenario I – “simple extrapolation”

Having looked at the regulatory and growth drivers, we are now in a better position to project premium levels

for the Indian non-life direct market up to 2010.

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

The most basic growth scenario that we can start with is a mere projection based upon the compound annual

growth rate for the period of 2000 to 2006, which stood at 17%.

This is a useful exercise in understanding the recent growth dynamics of the Indian insurance market and its

potential up until 2010. To put it into context, the Indian insurance market in this scenario could expand by

almost 100% to overtake today‘s markets of Ireland or Taiwan.

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

double by 2010

However, the scenario fails to take into consideration the considerable structural changes in the market

following detariffication of virtually all classes of business since January 2007.

Adjusting for detariffication

In order to be prepared for a virtually complete detariffed market, Indian insurers have had to pursue detailed

analyses of risks based on occupation, sum insured and geographic area to prepare for the new regime

starting in January 2007.

DETARIFFICATION IS LIKELY TO BE ASSOCIATED WITH A PERIOD OF ADJUSTMENT

The new regime is helping to eliminate the frictional costs associated with administering the tariff and to allow

market forces to determine individual risk appetite.

However, as in any market, this is likely to be associated with a period of adjustment and predatory pricing,

and it may even include what some have termed a ‗blood bath‘ for some lines of business that have hitherto

been excluded from the competitive pressures of market forces.

Experience of other markets, and the marine cargo detariffing in India, suggests that the initial period of

detariffing will result in a considerable erosion of the premium base as competition for good risks drives down

rates. Having realized the potential for large rate reductions, the IRDA has limited the level of rate changes for

various classes.

Fire and engineering rates may be reduced by up to 49% and motor rates by 20%. If an insurer wishes to

adopt rates lower than these ceilings, they will be required to file their rates and wait the IRDA‘s

consideration.

While this may not prevent the predicted ‗blood bath‘, it does create administrative costs associated with

lowering rates substantially.

However, this is merely an interim dispensation, which stands to be withdrawn with the approval of the rates

filed by the insurers under the ―File and Use‖ system. Once new products that have been filed for approval are

cleared, IRDA limits for discounts are likely to go up, but it remains unclear by how much this is likely to be.

Even with a set limit for discounts, some insurers are circumventing this directive by offering discounts that

allow premiums to drop. For instance, installation of fire extinguishing aids allowed for discounts of anywhere

between 2.5% and 15%.



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

MOTOR

Fundamentally, in a detariffed environment, the motor insurance is priced on the risk factor rating system

(RFRS) model, which is widely used around the world. The premiums are based on factors such as vehicle,

driver, location and extent of use, occupation, accident repair cost, liability, etc. With detariffing, the rating of

the products should be based on the risk profile of the customer. In the motor classes, the private cars

segment is expected to witness a premium reduction, while commercial vehicles are likely to see an increase

in premium.

Motor third-party (TP) is traditionally considered an unprofitable sector and according to the Times of India,

rates would rise anywhere between 34% and 257% if the product was detariffed.

In 2007, the IRDA decided against a full detariffication of motor TP with the hope that premiums for this class

of business could be adequately increased. The IRDA has proposed an initial increase of 150% in TP premium

rates, which were later brought down to 70% once the transporters threatened to go on strike. For our

scenario, we have used the latest 70% rate increase for 2007 but have assumed that rates will rise again by a

further 10% in 2008. This is likely to be the minimum rate increase if the product is detariffed and the

transport sector can no longer exert political pressure. Once markets have adjusted for this 10%, discussions

have revealed that there may still be room for a further 20% in both 2009 and 2010 in order to converge to

the initially proposed increase of 150%.

Motor own damage (OD) in contrast is profitable and being targeted by the private companies. In addition,

the decision to pool all commercial TP premium could further provide an incentive for private companies to

target the more profitable OD sector. It is likely that this will put downwards pressure on motor OD rates and

the Times of India has predicted a 20% to 25% rate reduction in 2007.

For the first quarter of 2007, however, motor OD rates remained stable, although commentators have

suggested that they will be continually reviewed. As a result for our scenario, we have used a relatively small

rate reduction of 20% in 2007, followed by a further smaller reduction in 2008. Rates are expected to rise

again in 2009 and 2010.

HEALTH

Health insurance should shoot up 100% if insurers try to cover the current losses with the same coverage,

according to an article published by the National Insurance Academy.

However, the regulatory situation may allow only a moderate rise, and competition is likely to push down

prices in an effort to gain market share in one of the fastest-growing business classes. Accordingly, our

conservative estimate is that premiums may rise by a mere 5% in 2007 and a further 5% in 2008.

FORECASTING GROWTH BY CLASS

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

In the first chart below, the 2006 growth rate per class has been used to extrapolate to 2010 premium levels.

In the second chart, the same growth rate has been applied, but thereafter adjusted for expected premium

rate changes as summarized in the previous section.

While this forecast is fairly crude, a few clear conclusions can be drawn from a comparison between the two

charts shown above. These conclusions are supported by the soft intelligence discussed earlier in this report.



1. Slower growth in 2007

Firstly, premium growth in 2007 is much more modest when rate decreases are taken into consideration. This

reflects the general opinion that price wars in 2007 will eat into insurers‘ premium bases.

2. Exponential growth from 2009 onwards

Secondly, the rate decreases early in the period clear the way for much more substantial growth later on. As

the insurance market adjusts to an open pricing structure, the model predicts strong growth in 2009 and 2010

(between 24% and 30% respectively) under the adjustable rate model.

WHILE PREMIUMS WILL SLOW DOWN INITIALLY, THERE WILL BE INCREASED GROWTH TOWARDS

2010…

…WITH THE INDIAN MARKET EXPANDING BY THE SIZE OF THE NORWEGIAN MARKET BETWEEN

2007-2010

The total premium ends lower under the adjustable rate model (USD 12.6bn) than under the constant growth

model (USD 14.2bn), but higher than under the original premium extrapolation (USD 11.2bn), making the

Indian market expand by a premium volume equivalent to that of the total Norwegian market in 2005.

This reflects our understanding of the dynamics of liberalization:

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

medium term.

While short-term price adjustments will lead to lower growth during the first one to two years,

premium growth is expected to gain momentum towards the end of this decade.

3. Changing product mix

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

Most noticeably in this model, motor third-party increases substantially, taking into consideration the

increasing rates. In the past, motor TP has been considered unattractive due to low rates and high loss ratios.

Provided the rates are allowed to rise to a competitive level, this sector should become more attractive.

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

BY 2010, INDIA’S PRODUCT MIX IS SET TO RESEMBLE THOSE OF OTHER MAJOR EMERGING

MARKETS

With regards to motor premium, in particular, the forecast more accurately reflects the kind of breakdown we

would expect to see in a developing insurance market such as India. Motor business in total accounts for just

less than 50% of total premium. Motor TP, which typically drives the development of motor business in a

developing economy, accounts for a much more significant share.

In contrast to motor TP, the growth of the property classes, fire and engineering, has been stunted by the

price wars and by significantly higher growth in other classes. Even though they have grown in absolute

terms, their combined share is forecast to fall to 12% by 2010.

Apart from a significant adjustment for fire in 2007 of 35%, this model does not take into consideration the

expanding client base that may be attracted by lower premiums.



MOTOR AND HEALTH ARE FORECAST TO SEE THE MOST SIGNIFICANT GROWTH

Finally, the other big winner is personal accident and health, which by 2010 will have become the largest class

after motor. Again this reflects current speculation that there is considerable potential for growth here.

Conclusion

1. Continued strength in the broader economy and gradual reform in the non-life sector are expected to combine to produce strong premium growth in the

Indian market over the next few years.

2. Whilst India currently remains a medium-sized non-life market, the growth predicted over the medium to long term is attracting increasing levels of

foreign investment and competition. Many of the world‟s largest insurers such as AIG, Lombard and Allianz are present in the market. The new private

insurers are growing fast and have already developed a combined market

share in excess of 30%.

3. Leading international reinsurers such as Munich Re and Swiss Re are aggressively targeting proportional treaty business. As the market is

gradually liberalized and becomes more mature, these private firms are considered well placed to capture an even greater share of a fast-growing

market. The main risk to private insurers is the high likelihood of sustained price competition as tariffs are removed from classes of business such as fire

and engineering, the impact of which have been modeled and explained



Market 2 Automotive Industry

Automotive Market in India

Domestic Market Share – 2008-09

Passenger Vehicles 15.96%

Commercial Vehicles 3.95%

Three Wheelers 3.6%

Two Wheelers 76.49%

Current Scenario

India represents one of the largest two-wheeler markets in the world, with an estimated size of 5.4

million units a year.

India is the two-wheeler capital of Asia with an average of 27 two-wheelers per thousand people, compared

to China's 8 two-wheelers per thousand people.

India became the fastest growing car market in the world in 2004, growth rate of 20%.

Overview

India is being recognized as potential emerging auto market. Foreign players are adding to their investments

in Indian auto industry. Passenger vehicles sales crossed the mark of 1 million in 2004-05.

2/3rd of auto component production is consumed directly by OEMs.

Trends in Automobile sector



Cars by Price Range

Under Rs.

3 Lakhs

TATA V2 XETA, NANO

Maruti 800, OMNI, ALTO

Rs. 3-5

Lakhs

Maruti ZEN ESTILO, WAGON-R, A-STAR, VERSA, SWIFT, D-ZIRE, SANTRO XING

CHEVROLET SPARK,AVEO-UVA

FIAT FIAT PALIO STILE

FORD IKON

HYUNDAI SANTRO XING,HYUNDAI i-10,GETZ PRIME

MAHINDRA-RENOULT LOGAN

REVA MAINI REVA i

SKODA SKODA FABIA

TATA VISTA,V2 XETA,CS,INDIGO,MARINA

Rs. 5-10

Lakhs

MARUTI-SUZUKI GYPSY,SX4

CHEVROLET AVEO-UVA,TAVERA,OPTRA CRV,MAGNUM

FIAT FIAT LINEA

FORD FUSION,FIESTA

HONDA HONDA CITY 2008

HYUNDAI HYUNDAI i-20,HYUNDAI ACCENT,HYUNDAI VERNA

ICML ICML RHINO RX

MAHINDRA MAHINDRA BOLERO,MAHINDRA XYLO,MAHINDRA SCORPIO

MITSUBISHI MITSUBISHI LANCER

SAN STORM SAN STORM

TATA SUMO,INDIGO XL,GRANDE,SAFARI,XENON XT

TOYOTA TOYOTA INNOVA

Rs. 10-15

Lakhs

MARUTI-SUZUKI GRAND VITARA

HONDA HONDA CIVIC

HYUNDAI HYUNDAI SONATA TRANSFORM

MITSUBISHI MITSUBISHI CEDIA

SKODA SKODA OCTAVIA, SKODA LAURA

TOYOTA TOYOTA COROLLA ALTIS

VOLKSWAGEN VOLKSWAGEN JETTA



Rs. 15-30

Lakh

AUDI AUDI-A4

BMW BMW-3 SERIES

CHEVROLET CAPTIVA

FIAT FIAT 500

FORD ENDEAVOUR

HONDA HONDA ACCORD,HONDA CRV,HONDA HYBRID

HYUNDAI HYUNDAI TUCSON

MERCEDES-BENZ MERC-C CLASS

MITSUBISHI MITSUBISHI PAJERO,MITSUBISHI OUTLANDER

NISSAN NISSAN X-TRAIL,NISSAN TEANA

SKODA SKODA SUPERB 2009

TOYOTA TOYOTA CAMRY

VOLKSWAGEN VOLKSWAGEN PASSAT

Rs. 30-90

Lakhs

AUDI AUDI-A6,AUDI-TT,AUDI-Q7,AUDI-A8

BMW 5 SERIES,X3,X5,X6,7 SERIES,M3,6 SERIES

MERCEDES-BENZ MERC-SLK CLASS,MERC-M CLASS,MERC-S CLASS,MERC-E CLASS

MITSUBISHI MITSUBISHI MONTERO 2009

PORCHE PRCHE BOXTER,PORCHE CAYMAN,PORCHE 911

TOYOTA TOYOTA LANDCRUISER PRADO

VOLKSWAGEN VOLKSWAGEN TOUAREG

VOLVO VOLVO S80,VOLVO XC90

Above Rs.

1 Crore

BENTLEY BENTLEYCONTINENTAL G7,BENTLEYCONTINENTAL G7 FLYING SPUR,BENTLEY

CONTINENTAL GTC,BENTLEY CONTINENTAL ARNAGE,

BMW M5

ICML LAMBORGHINI GALLARDO,LAMBORGHINI MURCIELAGO

MAYBACH MAYBACH 62

ROLLS ROYCE ROLLS ROYCE PHANTOM,ROLLS ROYCE DROPHEAD CAUPE

The segregation is made on Ex-Showroom price of base models.



MOTORCYCLE MANUFACTURERS AND MODELS

LML INDIA ROYAL ENFIELD TVS MOTOR

› LML ADRENO FX › BULLET 350 › SUZUKI HAYABUSA 1300

› LML BEAMER › THUNDERBIRD TWINSPARK › SUZUKI INTRUDER M1800R

› LML ENERGY FX › BULLET ELECTRA › SUZUKI GS 150R

› LML FREEDOM › BULLET MACHISMO › TVS APACHE RTR FI

› LML GRAPTOR › BULLET MACHISMO 500 › TVS FLAME

› TVS STAR CITY

› TVS TAURUS FIERO F3*

HMSIL SUZUKI MOTOR YAMAHA MOTOR

› HONDA SHINE › SUZUKI ACCESS 125 › YAMAHA FZS

› HONDA UNICORN

GRAND PRIX EDITION › SUZUKI HEAT › YAMAHA FZ 150CC

› HONDA STUNNER CBF › SUZUKI ZEUS › YAMAHA GLADIATOR

- › SUZUKI HAYABUSA 1300 › YAMAHA LIBERO G5

- › SUZUKI INTRUDER M1800R › YAMAHA GLADIATOR TYPE JA

- › SUZUKI GS 150R › YAMAHA ALBA 106

› YAMAHA YZF R1

› YAMAHA MT 01

› YAMAHA YZF-R15

› YAMAHA CRUX

http://auto.indiamart.com/motorcycles/lml-adreno-fx/

http://auto.indiamart.com/motorcycles/lml-graptor/



Industry Growth

According to the press release issued by Society of Indian Automobile Manufactures, the cumulative

production data for April 2008 – March 2009 shows a growth of 2.96 per cent over April 2007 – March 2008. Overall production in March 2009 grew by 5.17 per cent over the same month last year.

In 2008-09, production of passenger vehicles segment and two-wheelers segment recorded single digit growth

with the growth rates being 3.44 per cent and 4.88 per cent respectively. Three-wheelers segment registered

marginal growth in production at 0.07 percent. However, production of commercial vehicles fell drastically at

(-) 24.02 percent. The year 2008-09 saw automobile exports registering a growth of 23.61 per cent with all

segments except commercial vehicles, registering positive growth. Passenger vehicles and two-wheelers

segment grew by 53.73 per cent and 22.50 per cent respectively. Three-wheelers exports grew by 4.85

percent. However, exports of commercial vehicles declined at (-) 27.67 per cent during this period.

Passenger vehicles segment registered growth with 0.13 per cent growth during 2008-09 over 2007-08.

Passenger cars and Multi purpose vehicles grew by 1.31 per cent and 5.69 per cent respectively during this

period. However, sales of utility vehicles fell by (-) 7.94 per cent. The sales in March 2009 for passenger

vehicles declined at (-) 1.15 per cent over March 2008.

The sales of commercial vehicles declined by (-) 21.69 per cent during 2008-09 over same period last year.

Medium& heavy commercial vehicles declined by (-) 33.16 per cent and light commercial vehicles recorded

de-growth at (-) 7.10 percent. In March 2009, commercial vehicles sales fell by 26.22 per cent compared to

March 2008. M&HCV fell by 43.40 per cent and LCV fell by 0.17 percent. Also, buses (M&HCV) grew marginally

at 0.57 per cent and smaller buses declined by 6.72 percent.

Three-wheelers sales registered a decline of (-) 4.13 per cent in 2008-09. While passenger carriers grew by

14.36 per cent during 2008-09, goods carriers declined at (-) 37.52 per cent. In March 2009, three-wheelers sales grew by 11.40 per cent over same month last year.

Two-wheelers registered marginal growth of 2.60 per cent during 2008-09. Mopeds and scooters grew by 4.22

per cent and 9.11 percent. Motorcycles also grew marginally at 1.16 percent. Electric two-wheelers segment

grew by 49.48 percent. Two-wheelers sales grew at a growth rate of 3.65 per cent in March 2009 over same month last year.

Two wheelers: Growth across segments

Domestic sales for two wheelers were up 14.5% Y-o-Y in September, with growth seen across segments, as

motorcycle sales grew 15.2%, moped by 13.1%, and scooters by 9.4% Y-o-Y. Within domestic motorcycles,

Hero Honda‘s (HH) sales rose 22.8% and TVS‘ by 28.4%. However, Bajaj Auto (BAL) saw motorcycle sales

decline 2.9% Y-o-Y.

On sequential basis, while HH‟s market share declined 85bps, BAL‟s market share went up

150bps and TVS‟ by 127bps. This was due to HH‟s Y-o-Y growth rate dipping by 575bps (to

22.8%) as compared to previous month when it registered 28.5% Y-o-Y growth.

Motorcycle exports for the month were up 36.9% Y-o-Y, in line with the recent trend. BAL

and TVS reported growth of 48.3% and 45.2% Y-o-Y, respectively.

Two wheelers (domestic)



Volume (Units) September

'08

September

'07

%Chan

ge YTD FY09 YTD FY08

%

Change

Motorcycles 632,369 548,816 15.2 3,063,541 2,721,290 12.6

Scooters 104,196 95,266 9.4 568,831 530,430 7.2

Mopeds 38,050 33,644 13.1 217,164 204,769 6.1

Electric two-wheelers 3,809 2,040 86.7 14,521 11,676 24.4

Total two-wheelers 778,424 679,766 14.5 3,864,057 3,468,165 11.4

Two wheelers (exports)

Volume (Units) September

'08

September

'07

% Change

YTD FY '09

YTD FY08 %

Change

Scooters 2,972 1,985 49.7 13,235 13,735 -3.6

Mopeds 810 1,746 -53.6 4,445 12,692 -65

Total two-wheelers 87,816 65,109 34.9 519,762 409,126 27

Passenger vehicles: Domestic sales record modest growth; exports double Domestic passenger vehicle (PV) sales grew 5.4% Y-o-Y in September compared to the Y-o-Y declines

seen in the preceding two months, as buyers postponed purchases due to high interest rates and in

anticipation of model launches in the near future.

The car segment was up 2.8% Y-o-Y, utility vehicle (UVs) 5.4% Y-o-Y, and multi-purpose vehicles

(MPVs) 41.3% Y-o-Y.

Within the car segment, while the compact category was up 1.5% Y-o-Y, the mid-size category was

up 8% Y-o-Y. However, volumes in the entry category (M800 model) declined substantially by 32.2%

Y-o-Y, as buyers await the launch of TML‘s Nano.

Volume growth in the compact category was led by Hyundai Motors (HML) whose sales grew 26.4%

on good demand for i10. However, its key rivals, Maruti Suzuki India (MSIL) and TML, saw a decline in

sales—by 1.3% and 24.4% Y-o-Y, respectively.

Volume growth in the mid-size category was led by TML whose volumes doubled Y-o-Y, mainly due to

success of Indigo CS, followed by MSIL, which recorded a growth of 51.8%, as demand for Swift DZire

remained high.

In the UV segment, the largest player, Mahindra and Mahindra (M&M), posted an increase of

27.6% Y-o-Y, led by high demand for Bolero. Among its key competitors, while TML registered

modest growth of 2.8% Y-o-Y, Toyota Kirloskar Motors (TKM), and General Motors (GM) saw a decline

in volumes by 22.8% and 20.2% Y-o-Y, respectively.

In MPV segment, while MSIL‘s sales rose by 16.8% Y-o-Y to 7,416 units, TML, which now has its Magic

model under this category, saw a steep jump of 188.8% Y-o-Y to 3,047 units.

Passenger car exports doubled Y-o-Y to 32,059 units. HML registered robust growth in exports, up

151.6% Y-o-Y, to 23,911 units. MSIL also saw a 45.5% jump in exports, which came in at 6,201.

Passenger vehicles (domestic)



Volume (Units) September '08 September '07 %Change YTD FY09 YTD FY08 %

Change

Passenger Cars 108,823 105,822 2.8 600,352 568,121 5.7

Utility vehicles 21,180 20,155 5.1 123,317 109,635 12.5

MPV's 10,463 7,405 41.3 54,862 44,779 22.5

Total PVs 140,466 133,382 5.3 778,531 722,535 7.7

Passenger vehicles (exports)

Volume (Units) 8-Sep 7-Sep %Change YTD FY09 YTD FY08 % Change

Passenger Cars 31,543 15,139 108.4 154,665 98,826 56.5

Utility vehicles 357 602 -40.7 2,263 3,470 -34.8

MPV's 159 89 78.7 562 450 24.9

Total two-wheelers 32,059 15,830 102.5 157,490 102,746 53.3

Domestic Sales

Passenger Vehicles segment registered growth with 0.13 percent growth during 2008-09 over 2007-08.

Passenger Cars and Multi Purpose Vehicles grew by 1.31 percent and 5.69 percent respectively during this

period. However, sales of Utility Vehicles fell by (-) 7.94 percent. The sales in March 2009 for passenger

vehicles declined at (-) 1.15 percent over March 2008.

The sales of Commercial Vehicles declined by (-) 21.69 percent during 2008-09 over same period last year.

Medium & Heavy Commercial Vehicles declined by (-) 33.16 percent and Light Commercial Vehicles recorded

de-growth at (-) 7.10 percent. In March 2009, Commercial vehicles sales fell by 26.22 percent compared to

March 2008. M&HCV fell by 43.40 percent and LCV fell by 0.17 percent. Also, buses (M&HCV) grew marginally

at 0.57 percent and smaller buses declined by 6.72 percent.

Three Wheelers sales registered a decline of (-) 4.13 percent in 2008-09. While Passenger Carriers grew by

14.36 percent during 2008-09, Goods Carriers declined at (-) 37.52 percent. In March 2009, three wheelers sales grew by 11.40 percent over same month last year.

Two Wheelers registered marginal growth of 2.60 percent during 2008-09. Mopeds and Scooters grew by 4.22

percent and 9.11 percent. Motorcycles also grew marginally at 1.16 percent. Electric two wheelers segment

grew by 49.48 percent. Two Wheelers sales grew at a growth rate of 3.65 percent in March 2009 over same month last year.

Exports

The year 2008-09 saw automobile exports registering a growth of 23.61 percent with all segments except

Commercial Vehicles, registering positive growth. Passenger Vehicles and Two Wheelers segment grew by

53.73 percent and 22.50 percent respectively. Three Wheelers exports grew by 4.85 percent. However,

exports of Commercial Vehicles declined at (-) 27.67 percent during this period.



Trends in Automobile Industry

Automobile Domestic Sales Trends (Number of Vehicles)

Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Passenger

Vehicles 707,198 902,096 1,061,572 1,143,076 1,379,979 1,549,882 1,551,880

Commercial

Vehicles 190,682 260,114 318,430 351,041 467,765 490,494 384,122

Three

Wheelers 231,529 284,078 307,862 359,920 403,910 364,781 349,719

Two

Wheelers 4,812,126 5,364,249 6,209,765 7,052,391 7,872,334 7,249,278 7,437,670

Grand Total 5,941,535 6,810,537 7,897,629 8,906,428

10,123,98

8 9,654,435 9,723,391

Automobile Exports Trends (Number of Vehicles)

Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Passenger

Vehicles 72,005 129,291 166,402 175,572 198,452 218,401 335739

Commercial

Vehicles 12,255 17,432 29,940 40,600 49,537 58,994 42673

Three

Wheelers 43,366 68,144 66,795 76,881 143,896 141,225 148074

Two

Wheelers 179,682 265,052 366,407 513,169 619,644 819,713 1004174

Grand

Total 307,308 479,919 629,544 806,222 1,011,529 1,238,333 1,530,660



Domestic Market Share for 2008-09

Passenger Vehicles 15.96%

Commercial

Vehicles 3.95%

Three Wheelers 3.60%

Two Wheelers 76.49%

Automobile Production Trends (Number of Vehicles)

Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Passenger Vehicles 723,330 989,560 1,209,876 1,309,300 1,545,223 1,777,583 1,838,697

Commercial Vehicles 203,697 275,040 353,703 391,083 519,982 549,006 417,126

Three Wheelers 276,719 356,223 374,445 434,423 556,126 500,660 501,030

Two Wheelers 5,076,221 5,622,741 6,529,829 7,608,697 8,466,666 8,026,681 8,418,626

Grand Total 6,279,967 7,243,564 8,467,853 9,743,503 11,087,997 10,853,930 11,175,479

Sizes, Segments & Trends

Two-wheel Purchase Trend



Growing working population

Increased access to credit and lower interest loans

Increased consumer embrace of financial products

Upward migration of household income levels

Fast paced urbanization to rise from 28% to 40% by 2020

Middle class expanding by 30 - 40 million every year

Demographics of a Potential Two-wheeler Owner

Lower middle class to upper middle class households

45% own a desktop

87% own at least 1 mobile phone

Surf internet more than 8 hours per week

Average household income above Rs.15,000 per month

Single 55% Married 45%

TWO WHEELER SECTOR UPDATE Riding through tough times…..

Two wheeler sales have been witnessing a tough road ever since October 2006. Although during April-

November 2008 the two wheeler sales volume have reported a growth of 4% on a comparative lower base in

the same period last year. Although the interest rates have come down by 75 bps during last 4 months, there

is no relief from the financing institutions on stringent financing norms adopted by them earlier. We believe

although the interest rates are softening and prices have come down due to cut in excise duty, the road ahead

for two wheelers for rest of FY09E period does not look promising. After registering minor a growth of 4% in

the first 8 months, we believe that the sales volumes will fall in the remaining 4 months thereby reporting a 2-

3% fall for FY09E in the overall two wheeler sales volumes.

Two wheeler sales have been falling since the last 24 months, After touching a peak of 8,18,537 vehicles

during festive season in October 2006 sales volumes of two wheelers have not been able to breach this

benchmark.

Although interest rates have started coming down, two wheeler market is likely to remain weak in

the near term.

Estimate - FY09E two wheeler market to report decline by 2-3%.

Average growth in sales volume for last 32 months has come down to 0.8% as against long term

growth of ~10%

All the three segments Viz. Motorcycle, Scooters and Mopeds have registered positive growth in

the first 2 months of FY09.

April-November 2008 sales review Segment wise

All the three segments Viz. Motorcycle, Scooters and Mopeds have registered positive growth in the first 8

months of FY09. Motorcycle segment which accounts for 80% of the market for two wheelers has reported a



growth of 3% on low base effect. While scooters and Moped have reported growth of 7%and 5% y-o-y

Why sales volumes have been declining?

Interest rates still hovering at high levels

High interest rates are among the major reasons for the slowdown in sales. PLR has moved northwards from

10.25% in May 2006 to 13.75% in November 2006. A year back almost 50% of two wheeler sales were

financed on credit but with soaring interest rates credit financing has dropped and the proportion of cash sales

have increased.

Our analysis and feedback from industry suggest that credit financing has dropped to 30% while cash sales

have moved up to 70%. We cite the main reason for this change is because of the high level of interest rates

offered by financing institutions. The two wheeler market in India is especially vulnerable to interest rate. But

although interest rates have started softening due to cut in CRR and repo rates, we believe it is still hovering

at high levels and needs to come down to push the two wheeler demand.

Lack of Financers also affecting sales

Due to increase in number defaults, financers like Citi and ICICI irked themselves out of the two wheeler

financing business thereby the pie of two wheeler financing has contracted. Initially ICICI which had a major

market share of 40% in two wheeler financing started lending in few locations, but later with the rise in

number of delinquencies it has completely moved out of the two wheeler financing business at the dealer‘s

location.

We believe that financers are not likely to return back in the short term.

Financing norms have become more stringent

With the increase in number of defaults and rising delinquencies, the existing financers have made financing

stricter in order to minimize the number of defaults. Our check with dealers brings us the point that previously

financing was pretty easy, but now with various requirements such as CIBIL check, permanent residence

proof, strict check on number of dependent etc., financing has become more difficult which in turn has lead to

rejection of financing cases which is also impacting the sales volumes in the two wheeler sector.

Price hikes mainly due to raw material cost push

Prices of key raw materials such as steel and aluminum had started moving up since January 2008, which led

to few price hikes by the players in the two wheeler market which in fact deteriorated the situation to worse

level for the struggling two wheeler industry.

Consumers of two wheeler market had started postponing their purchase decision due to rising prices of

vehicles. However, since October 2008 price of steel has softened to a marginal extent and so there is not

much scope of a price cut. Even if there is a price cut, we believe that the price cut will not fuel the growth of

two wheeler sales volumes, as the main problem faced by the two wheeler industry still remains due to lack of

financing.

Key Segments 2009 (INR. M)

2010 (INR. M)

2011 (INR. M)

2012 (INR. M)



Segment Non-Life

Insurance(Motor & Health)

55,000 65,500 75,000 1,00,000

Segment Automobile 12,50,000 18,00,000 25,00,000 35,00,000

Segment OEM

Automobile

10,000 11,000 13,000 15,000

Total market 13,15,000 18,76,500 25,88,000 36,15,000

Review of Competition

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

With the passage of a series of legislative reforms in recent years, the Indian insurance market now has a full

range of distribution channels. However, most of them still have some way to go before they start to make an

impact in those market sectors in which they have chosen to work. At present, the vast majority (around 70%

to 75%) of all Indian non-life premiums are still distributed through the legions of on-the-ground direct sales

agents (or ‗marketing‘ agents) who are largely employed by the PSUs.

The vertically integrated structure of distribution in the Indian non-life sector is often compared with the

system found in Japan. This comparison holds true to the extent that both countries‘ policyholders buy the

majority of their coverage directly from insurers via an employee of the insurance organization. However, a

key difference between India and Japan is that Indian insurance buyers are more price-sensitive than their

Japanese counterparts; Indian buyers are far more concerned with obtaining the ‗best‘ deal.

The dominance of the direct marketing agent in India is expected to prevail over the medium term. While

bancassurance is gradually picking up as an alternative channel of distribution to the traditional agency model,

other low-cost direct channels – such as telephone and internet – have yet to make a significant impact on the

market.

Bancassurance has witnessed some growth since IRDA‘s notification on Corporate Agency regulations in

October 2002, which allowed banks to act as an agent of only one life and one non-life insurer. Overall, India

is set to follow other Asian markets such as Singapore, South Korea or Indonesia in which bancassurance

partnerships are beginning to bear positive results.

The challenges facing brokers

Brokerage in India is still in its infancy



Brokerage in India is still in its infancy. In December 2006, there were 222 licensed brokers

(193 direct brokers, 4 reinsurance brokers and 25 composite brokers).However, the role of an insurance

broker does not seem to have been properly understood or appreciated because non-life market has hitherto

largely been tariffed.

Brokers currently account for a small percentage of all premiums distributed in India and are finding it difficult

to grow and attract new business. This position is a concern for entities such as Lloyd‘s and is mainly caused

by structural elements within the Indian market; the following discussion outlines the main challenges facing

brokers:

1. High set-up costs: The IRDA has made it mandatory for the insurance brokers to pay a registration fee of

RS.50 lakhs (USD 110k) in order to show commitment to the market and their clients. In contrast, registration

costs for insurance agents are just RS.250 (USD 6) per annum.

Brokers are also required to have professional indemnity cover of three times their brokerage income, subject

to a minimum of RS.50 lakhs (USD 110k).

Brokers face significant cost disadvantages compared to Agents

2. Sole trader competition: The vast majority of the 222 or so brokers currently operating in the Indian

market are extremely small operations targeting small and medium-sized enterprises. These brokers currently

have two distinct advantages over their corporate competitors in the Indian market. Firstly, their relatively

small fixed cost base enables them to intermediate business for commission levels that are as low as 1%.

Secondly, as insurance is not currently perceived to be a product of economic value, the deep relationships

that these brokers hold with their clients are deemed to be more important than insurance expertise. So while

internationally, the top ten brokers tend to be Fortune 500 companies, in India the top ten brokers are

currently either chartered accountants or surveyor firms.

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

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

3. Legacies of the tariff market: The fact that 70% of all Indian premium income has hitherto emanated

from tariffed products means that brokers have so far been unable to demonstrate real value to clients. First

of all, the tariff market did not enable brokers to demonstrate their value in ‗shopping around‘ for the best

deal. Clients have therefore understandably questioned the value of an ‗expert‘ intermediary when the product

that they are purchasing is basically a commodity. While detariffication is changing these dynamics of the

broking community, it is likely to take significant time and resources to ensure that clients understand the full

benefits brokers can bring to them.

4. Activity restrictions: In addition to the above challenges for brokers, brokers are currently unable to

accept business or settle claims on behalf of insurers. The lack of these value-added back office services is yet

another barrier to clients purchasing their insurance through brokers.

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

As a result of high set-up costs, sole trade competition, a long history of tariffs and certain activity

restrictions, brokers have had to focus their attention on niche sectors of the Indian market namely: non-tariff

business, so-called mega risks and risks where a company‘s paid-up capital is below USD 3.5m.

Future developments



Insurance

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

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

Gradual demise of the „marketing‟ agent: The PSUs will need to readjust their business models to deal

with the underwriting challenges posed by a detariffed market. In order to maintain competitiveness, it is

likely that their huge sales forces will need to be reduced.

Voluntary Retirement Schemes (VRS) have already been set up by the PSUs to cater for the loss of sales jobs

that detariffication is expected to cause.

In the short term, however, local private insurers do not appear to be prepared to wait for brokers to gain a

foothold in the market. Furthermore, the take-up of the VRS offered by the PSUs is reported to have been

disappointing. Some private insurers have adopted direct distribution strategies. ICICI-Lombard is utilizing the

extensive retail bank branch network of its Indian partner to sell products via the Bancassurance channel, and

Tata AIG has recently employed 1,500 direct marketing agents of its own. This situation may prove difficult for

organizations reliant on the broker channel because if these direct strategies prove successful, the extent to

which the private companies are prepared to support the cause of brokers may reduce substantially.

HOWEVER, THERE IS A CHANCE THAT INSURERS WILL HAVE CREATED OTHER

DISTRIBUTORS BY THEN

Brokers will have to demonstrate value to clients: While the value of brokers lies to a great extent in

their skills in structuring a customized solution for their client, it will take some time until this value

proposition filters down to end customers. On the whole, the market will take some time to allow brokers to

establish a name.

Automobile

Sales of used cars zip past new car business

Consumer aspirations in urban India are on a never-before overdrive, if the database on the countries recent

passenger car sales collated by an auto portal is of any indication. And surprisingly, it‘s the used car business that‘s in top gear.

While an average car owner changed vehicles once in 7-8 years till a year or two ago, in the current fiscal the trend is to change cars once in 3-4 years, according to the empirical findings of AutoIndia.com Online.

As the rate of changing cars doubled, the fast track growth is on the used car segment. From 1:1, the new car sales to used car sales ratio is rolling towards the US counterpart of 1:2.5 ratio.

What pushes the secondary market is the entry of organized sector players like MUL and Mahindra to this segment.

These findings roughly tally with the industry projections that the new car market is pegged to grow 17-18%

this year, while the used car market is more buoyant at 25% growth this fiscal. Last year, 1.4 million new cars

were sold, as per SIAM (Society of Indian Automotive Manufacturers) figures. Since as much as 80% of the used car market is spread out in the unorganized sector, there is so far, no countrywide comparable data.

Car sales are most vibrant in Delhi and Punjab region, if the info-base drawn from 35,000 car dealers in the country gives the big picture.



In August 2007, the automotive portal felt a dramatic burst of sales in the following order of metros: Delhi,

Bangalore and Mumbai. The customer profiles show that IT yuppies graduating from fancy motorbikes to cars prefer buying a used premium brand car to a new low-end car.

Lead conversion ratio (leads to sales) for the portal too has been a robust 14.5%. Internationally, in car sales, any ratio that goes double-digit is considered healthy enough.

Opportunities in the Indian Automotive Industry

India is the most important automotive industry manufacturing hub in South Asia. It is projected that the

Indian middle class will reach 550 million by 2025, from the present 200 million, signalling a sustained growth

for the automotive sector. Indian automotive sales revenue is projected to reach $122-159 billion by 2016

from an estimated $54 billion in 2007. India produced 1,416,480 passenger cars and 545,176 commercial

vehicles during 2007. Major international automobile companies including Ford, General Motors, Hyundai,

Suzuki, Mitsubishi, Toyota, BMW, Nissan, Renault compete with home- grown companies such as Tata Motors,

and the Mahindra Group.

The Indian auto parts sector recorded a sales turnover of $18 billion in 2007 including exports of $3.6 billion

and imports of $4.9 billion. The ACMA-McKinsey projected that the Indian auto parts industry has a potential

to reach $40-45 billion by 2015. With a projected 7+ per cent GDP growth for the current fiscal year, India

continues to be a formidable market for U.S. products and technologies.

Auto industry revenue skids 7%

Revenue of the auto industry has slipped 7% to Rs 1 lakh crore in the April 2008-January 2009 period, from

Rs 1.1 lakh crore in the same period last fiscal, an effect of slowdown in sales (in units). Though the fall in

revenue is almost across the entire spectrum of the automotive industry, commercial vehicle segment has

been the worst-hit.

The commercial vehicle industry, which even saw temporary production closures by companies like Tata

Motors and Ashok Leyland due to shrinkage in demand, registered a turnover of Rs 24,724 crore in the first

ten months of the current financial year, registering a 22% fall against Rs 31,843 crore in the same period last

year. This comes on the back of a 20% fall in sales to 3.11 lakh units in April-January, from 3.88 lakh units in

the same period last year.

Turnover of cars was down 0.6% at Rs 34,113 crore against Rs 34,326 crore in the ten months of the previous

fiscal. Car sales that had been on a growth trajectory since 2003-04 have also been impacted by the economic

slowdown and the lack of retail financing, though they are now limping back to normalcy after the recent

steps initiated by the government to boost liquidity and demand.

Big-volume motorcycle industry also saw revenues dipping by 0.3% to Rs 24,108 crore against Rs 24,182 in

the ten months of the previous fiscal. Scooters however, were the only category which stayed robust. Revenue

of the industry increased 8% to Rs 3,354 crore against Rs 3,093 crore. Scooter sales have grown 8% to 9.5

lakh units in current financial year.

But just when the domestic industry's turnover took a beating, export turnover managed to stay healthy as

the number of cars and motorcycles sold abroad increased. Turnover from exports increased 28% at Rs

14,154 crore against Rs 11,072 crore in the ten months of the previous fiscal.

3rd Party Logistics Market in India

With globalization, the demand for third party logistics (3PL) business, a western concept, is increasing in

India, as firms are now focusing towards better management of their supply chain processes and to increase



their penetration level in the market. The 3PL services are now being perceived as a better way for managing

internal as well as external logistic process driven by improving logistic infrastructure and rising awareness of

efficient logistics practices.

The current market scenario of 3PL services in India can't be compared with that of developed markets like

Japan and the US where usage of 3PL services is more than 50% in the overall logistic cost. But Indian market

offers immense opportunity as compared to developed markets due to improving infrastructure like highways,

ports, bridges and increasing connectivity, along with increasing importance of logistic services.

We expect that the increasing focus on core business activities and the improving infrastructure will drive the

3PL in future. During our forecast period (2009-2013) 3PL market in India will witness a CAGR of approx 28%,

earning total revenue of around US$ 4 Billion.

Auto Sector to Drive 3PL (Third Party Logistics) Services in India

The automobile and auto components industry of India is increasingly concentrating on logistics practices and

innovative supply chain to balance costs in order to improve the levels of services and increase product

diversity amid intensifying global competition. More and more automobile manufacturers are now opting for

3PL services providers instead of handling logistic operations themselves. According to our latest research

report "3rd Party Logistics Market in India", auto and auto component industry has evolved has the

frontrunner in inheriting 3PL services in its value chain model.

Auto and auto component industry accounted for more than 50% of the total 3PL industry revenue during

2008. The total revenue generated by 3PL service providers through auto and auto component industry stood

at around US$ 900 Million. At present, 3PL players account for 15% of the overall automobile logistic market

in India. Despite the growing concern to focus on core areas and to outsource the logistic operations, the non-

3PL players dominate the overall automobile logistic segment in the country.

The 3PL market in the automobile sector is set for explosive growth during 2009-2012 as compared to the

period spanning from 2005 to 2008. The market fundamentals are strongly in favour of growth and there exist

enormous opportunities for 3PL players in the automobile industry.

Expected 3PL services revenue from automobile industry will account for 60% of total industry revenue as 3PL

services help automobile companies to focus on their core operational areas in order to improve their

competitive level in the market. It is further anticipated that rising export levels and growth in domestic

market will drive the demand of 3PL services in the Indian automobile and auto component industry in the

coming times.

Manufacturing, Logistics and Supply Chain Management Outsourcing

Automakers are outsourcing more aggressively. Driven by the pressures of global competition, companies in

the automotive manufacturing industries are more aggressively outsourcing their back-office information

technology (IT) and business processes in order to reduce costs and improve their performance.

The industry has been long-time user of outsourced services in IT, call centre and customer relationship

management, finance and accounting, as well as contract manufacturing, logistics, application development,

and engineering. Now they are all embracing back-office IT outsourcing (ITO) and business process

outsourcing (BPO).

“EXTREME LEVELS OF PRODUCT INNOVATION AND OPERATIONAL EFFICIENCIES ARE

PREREQUISITES FOR NORTH AMERICAN FIRMS TO REMAIN COMPETITIVE IN THESE INDUSTRIES

AGAINST LOWER-COST EMERGING MARKET RIVALS”

The increasing demand was highlighted in a recent study finding regarding future outsourcing investment

plans, which found:



-- 32 percent of manufacturing and related organizations that had outsourced one or more process

areas planned to expand outsourcing into new process areas.

-- 38 percent planned to expand outsourcing into new geographies or business units.

-- 29 percent planned to expand existing outsourced process areas.

In terms of measuring outsourcing success, 67 percent of companies surveyed in these industries identified

cost reductions as the key means of measuring outsourcing success. Measuring customer satisfaction levels

ranked second, cited by 46 percent of respondents, with improved process performance levels coming in third

at 31 percent.

Back-office BPO will become more prevalent with the emphasis shifting to extending outsourcing usage to

more remote global resources. For some companies, outsourcing to lower-cost markets such as India or China

can help them enter those markets to sell their own goods and services. Smaller markets such as Central and

Eastern Europe, however, will most likely remain primarily a source of services.

COMPANIES WILL ALSO SEE OPPORTUNITIES TO OUTSOURCE LESS-COMMON PROCESS AREAS.

EXAMPLES INCLUDE WARRANTY SERVICES, SERVICE AFTER SALE, DOCUMENT SERVICE, AND

FORMS OF “KNOWLEDGE PROCESS OUTSOURCING” (KPO) SUCH AS R&D AND ANALYTICS.

On the outsourcing service provider landscape, large multi-national service providers are bundling their ITO

and BPO offerings, and also extending services into others, such as R&D, logistics services, document

services, warranty, and service after sales.

“As outsourcing becomes more pervasive and encompasses more back-office support as well as

critical functional areas, outsourcing service providers will more closely resemble a critical

member of a manufacturer‟s supply chain rather than a traditional third-party support

organization,”

Buyers will see a broader array of service provider options, but the number of service providers able to deliver

large multi-function deals across multiple geographies will still be limited.

The Perspective paper concludes that firms in the automotive, manufacturing, and high-tech industries must

develop second and in some cases third-generation outsourcing and governance strategies to manage both

new and existing arrangements. Their long-term strategy requires an understanding not only of what to

outsource and what to retain, but also how that situation changes over time.

US based Tenneco Automotives outsourcing to India.

The U S based Tenneco Automotive said that it is shifting parts of its back office work to India.

The company has set up Tenneco India Engineering and Shares Services (TIESS), a wholly

owned subsidiary in Chennai to develop and provide IT (information technology), HR

(Human resources), engineering and finance related services. Tenneco Automotive is a

manufacturer of ride and emission control equipments.



Is the domestic Indian outsourcing market poised for rapid growth?

Indian client organizations are increasingly looking at comprehensive outsourcing to meet the

needs of a fast-growing economy and a shifting business environment. So is the market finally ready to embrace outsourcing in a big way?

Notably, Indian organizations are behind the curve on sourcing maturity. At just $8.2 billion (FY 2007,

NASSCOM estimate), the domestic Indian sourcing market is less than 2% of the global market. Most

outsourcing contracts have been for project-based work, such as Enterprise Resource Planning (ERP)

implementation, rather than comprehensive outsourcing initiatives. In addition, while some Indian providers

have become leading global suppliers of outsourcing services, they have looked only opportunistically at the

local market.

This landscape is changing, however, and fast. In 2007, the average annual contract value of new deals in

India was almost double that of new deals in 2004-2006. In fact, deals increasingly are exceeding $50 million

in contract value, and the majority of these large deals in 2007-2008 had IT infrastructure components and business-critical applications in scope.

The key question is whether this trend is sustainable

The answer is yes due to four major developments which reflect a fundamental, irreversible shift in the Indian

outsourcing market.



Adopting global best practices

Indian companies are going global in a big way. The Tata Group, for example, has transformed into a major

global brand, with about 38% of its revenue in 2006-2007 coming from outside of India. Just as local

companies are becoming more global, established global players are entering the market. In the automotive

industry, global leaders like Ford, General Motors, Honda and Toyota have an established presence in India.

BMW, Audi and Porsche are among the newer entrants. This frenzy to enter the buoyant Indian economy will only increase in the next few years.

Amid this activity, the market is increasingly exposed to global best practices, and domestic organizations

must adopt them to stay in the game. Outsourcing is a key strategic investment. It enables Indian

organizations to leverage operational efficiencies while accessing providers‘ industry experience and exposure

to global best practices.

Outsourcing can lead to strategic benefits beyond cost savings:

Increased focus on core business: Best-in-class organizations worldwide have outsourced

transactional work so their retained organizations can focus on the core business. For example, an IT

organization that outsources technical work such as application coding and maintenance can instead focus on supporting the evolving business needs.

Driving standardization: As Indian organizations increase their global footprint through acquisitions,

outsourcing can help standardize processes and systems across the business entities.

Access to expertise: Outsourcing can provide access to process and technology expertise that is

unavailable in-house. As providers gain global experience across many sectors, they can share relevant expertise with Indian client organizations.

Access to new software tools and IT capability: Accessing the latest tools and technologies

through an outsourcing provider can be more economical than regularly upgrading in-house platforms.

Human Resources (HR), for example, is often last in the queue for capital investments in technology, so

organizations may have multiple standalone HR applications that make simple processes very

inefficient. That‘s why access to new technology is one of the most important drivers of HR outsourcing.

Ability to scale: Finally, service providers can provide scalability that is difficult to achieve in-house,

especially in sectors with exponential growth rates.

Increasingly, global organizations are entering the Indian market with a lean and mean setup that‘s focused

on the core business, thanks to the outsourcing of back-office operations. To remain competitive, the Indian incumbents will also have to evaluate outsourcing.



Early adopters have proven the model

A few large, comprehensive outsourcing deals in the Indian market have already passed the test of time. In

2004, for example, Bharti took the lead in the telecommunications sector by signing a multi-process deal with

IBM covering data centres, IT help desks and a number of IT applications. Following another deal with IBM for

developing a single customer services platform, Bharti outsourced all its customer service operations to a

consortium of four business process outsourcing (BPO) providers.

Bharti‘s activity sparked outsourcing throughout the industry. Tata Teleservices outsourced its IT infrastructure

to TCS in 2005. Idea outsourced infrastructure services and applications to IBM in 2007. BSNL signed a call

centre deal with Spanco in 2005 and an IT deal with TCS in 2007. Vodafone Essar outsourced its IT operations to IBM in December 2007.

Organizations in mega-growth sectors like telecommunications are finding it increasingly difficult to scale up

their back-office operations, which are prompting them to consider outsourcing. Meanwhile, other sectors such

as insurance and retail will continue to grow despite the recent global slowdown. In this rapid-growth

environment, incumbents and new entrants that do not actively consider outsourcing for back-office

operations may compromise the growth of their core business.

The value of outsourcing depends largely on the structure of the relationship, and Indian transactions are

undergoing a major shift. They are evolving from short-term, project-driven engagements to longer-term, comprehensive outsourcing initiatives.

Following are the different models for outsourcing engagements:

Staff augmentation: In this setup, the least evolved model, the supplier provides resources that can

temporarily satisfy the requirements of the buyer organization. The engagement is mostly priced at time and materials, and its limited scope allows for little leverage.

Project-based: In this model, the provider‘s role is limited to one or more specific projects, such as

an ERP implementation.

Comprehensive outsourcing: These are multi-year deals with a clearly defined scope driven by

Service Level Agreements (SLAs). If structured well, these deals enable providers to create operational

leverage and pass efficiency gains to the client. The buyer organization, accordingly, can rid itself of

transactional work and focus on higher-value goals like supporting the business and driving customer

satisfaction.

Transformational relationship: Here, the buyer and provider work as partners to transform the

client organization. Such deals are ―consulting-led‖ and rely largely on shared goals. Payback can be significant in terms of transformational results, but complexity and risks are also much greater.



Over the next few years, comprehensive outsourcing engagements will increase as the Indian market matures

and as buyers become more sophisticated and demanding, deals will become more transformational. Amid

this evolution, it‘s important for buyer organizations to ensure well-structured deals. Critical factors include

clear definition of scope, roles and responsibilities; structure and processes for the governance organization; structure and roles for the retained organization; and SLAs and pricing models.

Service providers‟ domestic focus

Until recently, Indian providers focused primarily upon the North American market. Even within Western

Europe, the majority of clients were UK-based, with limited revenue from continental Europe. Asia-Pacific,

likewise, was only a minor contributor for most major suppliers, and the local domestic Indian market has

been largely insignificant. After all, due to lack of an ―on-site‖ component (that has higher revenue

contribution) and pressure on billing rates, any Indian deals were viewed as mere training grounds rather than strategic relationships.

Now, however, with the ongoing dollar depreciation and a looming economic crisis, Indian suppliers are

working hard to minimize dependency on the US market. In addition to focusing on less-penetrated markets

like continental Europe and Asia-Pacific, suppliers are looking strategically at the rapidly expanding Indian

market. Indeed, all Tier 1 and Tier 2 Indian suppliers now have business units targeting the domestic sector. This increased supplier focus will have a positive influence on the client side.

Billing rates and outsourcing inertia

As Indian buyers and suppliers evaluate outsourcing, they still face challenges. One is billing rates, as Indian

buyers seek prices that are significantly lower than those for exported services. In addition, solely cost-driven

deals may not be as successful in India as in other markets (as there is no labour arbitrage) and non-financial

benefits will require higher executive support within a buyer organization (both for concept selling and

execution). Finally, there remains some outsourcing inertia, especially in sectors that are not yet facing an

onslaught of foreign players. As a result, buyers‘ long decision cycles may increase costs for suppliers‘ deal

pursuit teams.



Conclusion

Nevertheless, India is set to become a large buyer‟s market for outsourcing services and we can expect to see significantly more deals in the next few years.

Among Industries that have the most aggressive

strategic sourcing plans to expand initiatives in 2008-2009 include Insurance Percent Increasing Initiatives

in next 12 months - 62.7%

Automobile and Insurance Outsourcing together

constitute 6.94% of total world business outsourced ranked 4th behind, Business Services -13.52%, Banking -10.46% and High Tech. & Electronics 7.87%



Acknowledgement:

India 2010 - Lloyds Review

India Automotive Study 2007 – KPMG

AnnualReport2007-08 - Bajaj A Non-Life

2 Wheeler – Industry Analysis – Sify.com

Two Wheeler Sector update – Reliance Money

India Highway Data- Ministry of Surface Transport

2008 Black Book of Outsourcing -Brown-Wilson Group

World Vehicle forecast 2020 – Researches and Markets

Insurance BPO Market Survey - Celent Communications

Auto Components Industry: Vision 2015 - McKinsey Report

Analyst Presentation – Bajaj Allianz General Insurance Co. Ltd.

Indian Road Accident Statistics 1970-04 - Ministry of Surface Transport

Macro Indicators on Motor Insurance – Tariff Advisory Committee, IRDA

How India Earns Spends and Saves – A Study by MAX NEW YORK LIFE-NCAER

India‟s Automotive Industry: Challenges for Leadership 2016 and beyond – SIAM

Case Study – Development of Automobile Customer Portal – Tata Consultancy Services

A Complete Study about AutomobileIndustry in India – Royal Sundram Alliance

General Insurance Co. Ltd.

A study on Financial Performance of Indian Non – Life Insurance Industry - TASMAC &

University of Wales



Problems with Vehicle Exterior and Overall Driving Experience are Most Common in Long-

Term Ownership –JD Power Asia Pacific Reports

The Market Analysis is a result of the data collated from many sources, some of which have been

acknowledged as above. The entire study has been compiled in “ASO – Automobile Services Outsourcing: A

Project Report”

market analysis and knowledgebase: a study on indian non- life insurance and automobile...

Automotive

indian market

indian insurance market

nonlife insurance market

automobile market

market share

behavior of market players

general background market

insurance environment