Since the Indian insurance market threw open its doors to the private sector in 2001, the industry has flourished, says Shirish Nadkarni

In mid-June this year, a four-way meeting took place in the southern Indian city of Chennai; and the modalities of launching a new life insurance joint venture in India were formalised between Punjab National Bank, the Principal Financial Group of the US, Vijaya Bank and Berger Paints.

This partnership, and one in the offing between the Chennai-based Shriram group and South Africa's Sanlam, were among several, in both the life and non-life sectors, that have sprung up on the Indian scene since the country's insurance industry was officially thrown open to the private sector on 16 August 2001.

Before that time, insurance was the exclusive prerogative of state-owned firms - life was handled by the Life Insurance Corporation (LIC), while non-life was looked after by the four subsidiaries of the General Insurance Corporation (GIC) - New India Assurance, United India Insurance, National Insurance and Oriental Insurance.

Following the formation of the industry watchdog, the Insurance Regulatory and Development Authority (IRDA), licences were issued to private players, who were free to form partnerships with overseas players, so long as the equity structure of the joint venture remained loaded 74:26 in the Indian partner's favour. GIC was designated the national reinsurer, and its four arms de-linked from it.

Non-life players

Today, the Indian insurance industry is flourishing as never before.

The general insurance segment, in particular, witness to intense competition, is alone estimated at Rs 180bn ($4.15bn), and showed an annual growth rate of 13% in 2004-05 over the previous year.

Eight private non-life players, most of which were launched during fiscal 2001-02, have managed to wrest 19.7% of market share away from the four state-run outfits in well under four years. For the year ended 31 March 2005, the eight had, between them, raised total premiums of Rs 35.55bn, even as the four nationalised general insurers, along with the Export Credit Guarantee Corporation, had written total premiums of Rs 145.40bn.

But the significant fact was that the aggregate accretion in business of the eight private players during 2004-05 was Rs 13.02bn, while the four state-run outfits had lower accretion of Rs 7.62bn. It showed conclusively that the aggressive approach of the private players was helping them gain ground, literally by the day, over their public sector competitors.

The four who captured maximum market share among the private general insurers were ICICI Lombard, Bajaj Allianz, Iffco-Tokio and Tata AIG, all joint ventures between top Indian business groups and well-known international insurance companies. ICICI Lombard led the field, having captured 4.9% of the market, while Bajaj Allianz came a close second with a 4.7% share.

Iffco-Tokio and Tata AIG had market shares just above 2.5% each.

Among the public sector players, New India Assurance led the field in terms of market share, with 23.3%, followed by National Insurance (21.1%), Oriental (16.8%) and United India (16.3%). But the market shares of all of them, bar National, have been shrinking in the last three years. Of the four, National Insurance had the maximum premium accretion of Rs 4.08bn during 2004-05, while Oriental added Rs 2.06bn worth of business and New India Assurance Rs 1.61bn. Weighing the other three down was United India, which actually registered a decline of Rs 862m in premium income.

"We have been flooded with inquiries from a large number of players expressing interest in obtaining insurance licences," said IRDA chairman C S Rao.

"We have not yet received formal applications from any of the interested players, but they are no doubt busy scouting around for suitable Indian partners. Frankly, the double-digit growth in the non-life sector is unheard of in global markets, apart from China."

Life players

So far as the Indian life insurance sector is concerned, it has recorded phenomenal growth of 35% in 2004-05 over 2003-04. However, it has been running true to form, with global experience showing that only players with deep pockets can expect to run a long race. Industry experts say that it takes between six and seven years for a life insurance company to break even. Not one of the 12 private life insurers that have been in the business in India for nearly four years has yet turned in a profit.

In fact, their aggregate losses up until the year ended 31 March 2005, have crossed the Rs 10bn mark (see Table 1).

Despite this depressing fact, there are several more players waiting to jump into the fray, if one takes into account the approaches made to Watson Wyatt, a leading insurance and financial services consulting firm.

"There are at least 15 potential entrants in the life insurance business in India," said Graham Morris, director of Watson Wyatt. "A couple of them have evinced interest in getting into this business and have been talking to us for engaging our services."

The sheer potential of the one billion strong Indian market is very attractive; and even Mr Rao has admitted that there is room for more players in the Indian insurance industry. When asked if the IRDA would consider revising any of the entry norms, based on the experience of dealing with the existing players in the industry, the IRDA chairman said, "There is no need to revise any of the entry norms or barriers for the prospective entrants."

Of the dozen private players in the field, Birla Sun Life Insurance ended the fiscal year 2004-05 with a 70% increase in its premium income, to Rs 9.16bn, and plans to increase this to Rs 15bn by the end of the ongoing fiscal. The annualised premium grew by 32% to Rs 6.27bn, in comparison with Rs 4.61bn for 2003-04. The company has issued close to 200,000 policies this year, taking the total number of policies to 377,240, and the total sum assured to Rs 227.15bn. The result gave Birla Sun Life a market share of 3.3%, and catapulted it into the No 2 position among private life insurers in India, behind ICICI Prudential. Other players like Max New York Life, Allianz Bajaj, HDFC Standard Life, Tata AIG, Kotak Mahindra, SBI Life and AMP Sanmar are all jockeying for prime positions on the life table.

There are two major issues currently facing the Indian insurance industry - raising the current 26% limit on foreign equity in Indian joint ventures, and the de-tariffing of the non-life industry (especially in the field of motor insurance), along with dismantling the Tariff Advisory Committee.

Foreign equity

In recent weeks, a draft cabinet note on raising foreign equity in insurance companies to 49% has been prepared by the insurance division of the Finance ministry. The proposal is currently being circulated within several ministries for their approval. Once some level of concurrence has been obtained, it will be sent to the cabinet.

The major thorn in the process is that a hike in the foreign direct investment (FDI) limit for the insurance sector will need an amendment to the Insurance Act, 1938. In other words, Parliament will be required to ratify the measure.

It will be no easy task, since the Left Front, a constituent of the Congress-led coalition government that is ruling the country, is bitterly opposed to it.

A similar measure aimed at allowing greater foreign investment in the telecommunications and civil aviation sectors was approved by Parliament, but the third promise made by Finance Minister P Chidambaram in his 2004-05 budget speech, to raise the cap on FDI in insurance, continues to be stonewalled by the Communists. "Local companies are wooing the government to allow more foreign equity in their companies, because the current paid-up capital requirements of Rs 2bn for life insurance and Rs 1bn for non-life have become difficult benchmarks, given the pace of growth of the market," said Kamesh Goyal, chief executive officer of Bajaj Allianz.

"Companies rightly feel that the injection of additional foreign equity would reduce their costs and help penetrate further into the market. Insurance penetration in India is low, at around 2%; and there is plenty of scope for more growth."


The other major issue involves taking the non-life sector away from the straitjacket of tariffs. Even today, 65-70% of the general insurance market in India is tariff-driven. While the IRDA is, per se, in favour of de-tariffing, it recently decided to postpone the move, following opposition from non-life players on its selective de-tariffing proposal.

Private players have been reluctant to underwrite motor policies, although these are potentially a major source of income. Huge claims, going up to as high as 400% of the annual premiums on motor risks written in one instance, have been eating into the profits of the public sector insurers, who by law cannot refuse to accept motor proposals.

"We would like greater de-tariffing, provided it is done one step at a time, over a length of time marked by periods of stabilisation and correction," said Matthew Varghese, member (non-life) of the IRDA. "You see, liability risk underwriting is not new in India, but the local industry has failed to cope with increased demand for insuring against such risks. It is high time we built up past data, developed underwriting and claims handling skills, and some local capacity. Indian insurers cannot be fronting companies any longer."

While bodily injury, property damage and financial losses may well take new forms, corporate risk and liability insurance has not caught up in India to the extent it should have. Added to that is the problem of white-collar crimes, professional liabilities arising out of errors and omissions, fiduciary liability, and the like.

"Actually, such issues are of even greater significance today, thanks to the emergence of multinational players," said Dalip Verma, managing director of Tata AIG General Insurance. "The need to remove controls is, therefore, more important." Working towards this end, the IRDA has decided to make national reinsurer GIC a self-regulatory organisation, whose job will be to imbibe various facets of discipline and market conduct in the general insurance industry, and carve out a separate entity for itself.

GIC will be mandated to monitor the code of conduct of all non-life players.

There are also some irritating provisions in the outmoded Insurance Act, 1938, as also the IRDA Act, 1999, that need urgent revision. Towards this end, the IRDA set up a committee earlier this year, to review some of the recommendations made by the Law Commission in June 2004, suggesting amendments to both acts. The review relates to investments, sufficiency of assets and shareholders'/policyholders' funds. Indian insurers have been constantly demanding liberalisation of the directed investment norms, and want greater flexibility in making investments.

"The mean yield on investments has been adversely hit in recent months due to the fall in the value of government securities," said an insurance industry analyst, requesting anonymity. "The yields have dropped from around 11% in 2000 to barely 8%. Insurers want an increase in exposure to the corporate debt markets, which would allow them to raise their earnings and maintain solvency. They would like to be like banks, which are now allowed to raise funds through subordinated bonds or in the form of equity."

In fact, faced with large capital requirements to sustain growth, India's general insurance companies, in both the private and public sector, are leaning towards the initial public offering (IPO) route for raising additional capital.

"The Indian stock markets are currently going through a sustained bull phase, and sentiment towards all IPOs has been extremely bullish," said Mr Goyal of Bajaj Allianz General. "All the recent public issues have been heavily over-subscribed, though all of them were book-built and charged hefty bid premiums. This might therefore just be the correct time for us to raise funds through the IPO route for our long-term capital needs."

Until now, capital strengthening was done through Treasury operations, by selling investments, mainly equity holdings, acquired at low prices.

Some insurers have been booking profits by unloading small lots of their non-blue-chip equity investments. But, with share prices going up day after day, they are wary of losing out on greater capital appreciation.

The final provision for review related to the possible disbanding of the Tariff Advisory Committee. Both public and private sector insurers have been seeking greater flexibility in fixing tariffs to cut underwriting losses. When that happens, probably a few months down the line, India will usher in a free pricing regime as in the case of international markets.

- Shirish Nadkarni is a freelance journalist.