Six years after it was opened up for private participation, the Indian insurance industry looks headed for a period of heightened M&A activity, predicts Shirish Nadkarni.
India – an emerging insurance market with hot potential – is primed for a feeding frenzy. According to Standard & Poor’s, consolidation will eliminate weaker players. “It is true that, in emergent economies, China is ahead of India in terms of regulatory reform and opening of insurance markets,” says Michael Petit, managing director for Asia Pacific ratings at Standard & Poor’s. “The rapid growth and deregulation have also brought in new industry risks in terms of increased competition, inadequately experienced managers, unknown risks, and mismatching of assets and liabilities.”
Since the August 2001 opening up of the Indian insurance market, private operators have managed to wrest from the one state-run life insurer and four non-life insurers a market share of more than one-third of total premiums. The valuation of industry players is increasing rapidly, making them ripe targets for global mergers and acquisitions. However, the current Indian investment norms place restrictions on the proportion of foreign equity in the joint ventures.
Slice of the cake
Industry analysts believe it is only a matter of time before the central government grants permission to insurance companies to raise the foreign direct investment limit from the current 26% to 49%. “The valuation of players in the Indian insurance industry will impact the capital requirement of stakeholders in existing joint ventures,” Jean Francois Izac, director (mergers & acquisitions) with Aviva said at a recent insurance industry meet in Prague. “Going by the current trends, the Indian insurance industry will be a hotbed for M&A deals once the upper ceiling on foreign direct investment is relaxed or removed. The fact is that the Indian industry has staged impressive growth, and a lot of the top overseas players are interested in getting a slice of that cake for themselves.”
Citing a Merrill Lynch source, Izac said that, by 2008-2009, valuations in the Indian life insurance industry would be: ICICI Prudential $7.2bn, Bajaj Allianz $3.6bn, SBI Life $2.3bn, HDFC Standard Life $2.2bn and Max New York Life $1.3m. “While the figures are only indicative at the moment, they give a hint of what is in store for the industry ahead,” he observed. “With a re-jig of foreign direct investment norms by the government in the offing, insurance companies are focusing more on valuation procedures.”
Industry watchdog, Insurance Regulatory and Development Authority (IRDA), has announced plans to introduce a new benchmark for insurance outfits’ valuations. “The new measures will help in arriving at more realistic estimates based on disclosures,” says IRDA chairman CS Rao. “We had set up a sub-committee to suggest ways to evaluate these companies, and it has recommended the embedded value method as the ideal measure. We are studying the ramifications of the recommendations.”
“If international reinsurers such as Munich Re and Swiss Re are allowed to turn their liaison offices into branches, it could pose a potential threat to GIC Re
India’s insurance and reinsurance market is fast finding its feet, and true value, in the wake of the detariffing of general insurance from 1 January this year. This was a vital part of the first phase of insurance reforms to be implemented by the IRDA. The second phase involves a steady diminution of obligatory cessions to national reinsurer General Insurance Corporation (GIC). Until 31 March 2007, all general insurers in India had to compulsorily surrender 20% of their premium income to GIC for reinsurance cover.
This percentage has been reduced to 15% with effect from 1 April this year; and will be reduced further to 10% the following year. From 1 April 2010, obligatory cessions could be totally abolished. This could hit GIC’s turnover and profits hard. “Perhaps the top-line volume will go down in the short term,” says R Chandrasekaran, GIC’s general manager. “But we have been in India for so many years, and know the insurance companies so well that we are able to offer the capacity back to them. So I don’t think it will affect our bottom-line – or really, for that matter, even our top-line.”
Nevertheless, there will be loss of income for GIC with the phasing out of obligatory cessions, inducing the reinsurer to eye strategic stakes in local reinsurance companies abroad – Africa in particular. “In addition, we are looking at the option of setting up representative offices in the region,” says GIC Re’s recently appointed chairman and managing director Yogesh Lohiya. “We also think it would be good for our business if we were to acquire a strategic stake of 14%-15% in local reinsurance companies in Eastern and Southern Africa. We want to help these companies grow their business by becoming a part of their management, but do not want controlling stake.”
GIC Re’s present overseas business is done in West Asia through a branch office in Dubai, and in the UK and Russia through representative offices. Lohiya said the company hoped to increase the share of its international business from 22% of the portfolio to 28%. “In five to ten years, we would like the break-up between domestic and foreign businesses to be 50:50,” he says.
The reinsurer is also in the process of securing approvals from the IRDA and the Indian government to convert its representative office in London into a full-fledged branch. “We also want to do selective business in the G7 countries, but will keep away from liability and catastrophe insurance policies,” reveals Lohiya.
In its attempt at becoming a player of international standing, GIC Re has appointed Deloitte as a consultant to work on areas like technology, human resources and evolve a vision for the company. The consultants’ report is expected to be submitted in three months.
“The northern state of Uttar Pradesh, and to a lesser extent, the eastern state of Bihar in the Hindi-speaking hinterland, have seen a large number of kidnappings
At home, if international reinsurers such as Munich Re and Swiss Re are allowed to turn their liaison offices into branches, it could pose a potential threat to GIC Re. “We are not averse to them setting up shop in the country. But we know India better than them. We don’t exit markets after catastrophic events such as 9/11; in fact, we formed a terrorism pool,” says Lohiya.
Kidnap and ransom
The health of India’s terror pool, which today stands at Rs12bn ($304m), has caused rates for insurance policies against terrorism to head southwards. General insurers have begun offering cover to businessmen and company executives against kidnapping for ransom.
The northern state of Uttar Pradesh, and to a lesser extent, the eastern state of Bihar in the Hindi-speaking hinterland, have seen a large number of kidnappings, with money being extorted from companies or families in exchange for the safe return of their people.
Over the past four months, three private sector non-life insurers Tata AIG, ICICI Lombard and HDFC Chubb have introduced a kidnap policy for covers ranging from Rs5m ($122,500) to Rs50m. More than 200 people have signed up to the policy which covers them for the ransom amount, loss of money during transit and injury or death during the kidnapping.
“Risk cover is offered to groups under the corporate protection insurance policy to cover incidents like extortion, kidnapping and demand for ransom,” said Deepak Kumar, regional manager, internal control and loss minimisation for ICICI Lombard in its Lucknow office. “There are many international companies with subsidiaries in India that provide protection to their employees under such schemes. A study we conducted recently showed that a number of executives roaming around in the states of Uttar Pradesh and Chhattisgarh are keen to avail of the policy.”
The demand for such a policy in Uttar Pradesh is clear from the fact that all eight private insurance companies have set up risk management units in Lucknow to investigate kidnap cases. In at least two of the cases in the state, the ransom money was paid by the insurance company.
India: Healthy state of affairs
A number of initiatives, aimed directly at Indiaâ€™s poor 1.1 billion population, have recently been introduced. There are powerful reasons for the free health insurance plan unveiled by the Congress-led coalition government in India, and aimed at an estimated 22% of the countryâ€™s population considered to be â€œpoorâ€. The central government will bear 75% of the premium for the policies, while the state governments will pay the remaining. The policies will be administered through the four state-run general insurers, New India Assurance, United India Insurance, Oriental Insurance and National Insurance.
The governmentâ€™s initiative comes close on the heels of the state-run Syndicate Bankâ€™s drive to refinance farm loans taken from unorganised money lenders who have been charging their clients usurious rates of interest touching 120-150% per annum.
Other noteworthy insurance efforts aimed at rural India come from private-sector insurers. ICICI Lombard General Insurance Company (ILGIC) and the National Bank for Rural Development (Nabard) have joined forces to design a liability product targeting the debt-hit farmers of two states, Maharashtra and Andhra Pradesh. â€œThe product will help the farmers in these states mitigate their debt burden,â€ said Pranav Prashad, head of the rural and agriculture business group with ILGIC. â€œWe intend launching the product from the next kharif (primary crop) season.â€
Prashad said the ILGIC insurance scheme would be a risk mitigation product. In the event of crop losses or failures, insurance claims could be used to settle debt liabilities with banks or even money lenders. â€œHowever, our product would be specifically customised to meet the requirements of high-debt farmers; and crop losses would just be one component in the product,â€ added Prashad.
ILGIC was one of the first private sector insurers in the country to launch weather risk covers. Weather cover has found phenomenal success in the states where it was launched, including Punjab, Rajasthan, Chhattisgarh, Andhra Pradesh and Karnataka. For the financial year 2006-2007, ILGIC saw premium growth on farm covers in the excess of Rs2bn ($50m). Prashad said the success of the cover could be gauged from the claims ratio that was currently about 110% of premiums collected. â€œSince we have been bundling weather covers with rural health covers, we have not been making any losses,â€ he said. â€œWe have a combined claims ratio of 94%.â€
The weather/farm covers were also reinsured, with Swiss Re one of the major reinsurers. This was in addition to the 20% mandatory cession to GIC, the national reinsurer. So far, all the reinsurance support has been on a facultative basis. This implies that the reinsurer has the option of accepting or rejecting the risks. But neither GIC Re nor Swiss Re have been deterred thus far by the high claims ratio.
â€œThanks to the reinsurance support and our experience in the rural market so far, we are planning to expand the coverage of our farm reinsurance cover to 10% of our gross premium accretions,â€ said Prashad.
Shirish Nadkarni is a freelance journalist.