In recent years India has become a major emerging market for the international re/insurance community. Neil Mathews outlines its attractions and the opportunities.

The insurance market in India is currently in the throes of radical change. For nearly three decades, general insurance business in India was under the complete control of four government-owned insurance companies.

After much deliberation, the market finally opened for competition from December 2000 following the introduction of the Insurance Regulatory & Development Authority Act (1999). The Indian government has also de-linked the four public sector companies from holding company General Insurance Corp of India (GIC) to operate as independent entities.

Along with China, India is seen as one of the few remaining growth markets in the world. It is now the fourth largest economy, but compared to more established insurance markets, insurance penetration in India remains low. At the end of 2000, insurance premiums as a percentage of GDP amounted to 0.55% compared with the US at 4.28% and Japan at 2.22%.

India has a population of over one billion. Such sheer numbers, and yet a fraction of these insured, have made India a market with tremendous opportunity for the insurance industry. Foreign insurers are now tapping into this potential because their home markets have reached close to saturation levels. Another important factor is the economics of the insurance market, which enables the spreading of risk in a country that is relatively stable geographically and politically.

Market expansion

In addition to the four public sector insurance companies, the Insurance Regulatory & Development Authority (IRDA) has so far issued licences to eight private general insurance companies to enable them to develop and transact insurance business in the country. Such growth is encouraging more and more players to explore the huge market potential that India has to offer, helping to expand the fledgling insurance industry.

With the erstwhile monopoly of state-owned companies now up for grabs, private operators, both local and global, are launching innovative ideas to regroup the market. Many new products have been introduced such as trade credit, directors & officers (D&O) and special port packages. All new products, policy wordings, rating structure and background development research need the approval of the IRDA, but some new products are being introduced under the 'file & use' rule which stipulates that if no response is received within 30 days of submission to the IRDA, the proposer is entitled to start marketing the product.

The Indian market is tariff driven. Fire, perils, engineering, workers' compensation and motor covers are strictly tariff rated. This is an impediment to the development of the market because of the high proportion of written premium in this segment. It is, however, the declared intention of the IRDA progressively to dismantle the tariff controls over the next three to five years. Other classes such as liability, marine and a number of miscellaneous classes are not tariff rated. Also, because of their size and complexity, 'mega-package' policies fall outside the (fire & perils) tariff regulations and are therefore open to non-admitted insurers. By definition, they are operational property risks with an insured sum in excess of INR100bn ($2.2bn) at one location or probable maximum loss (PML) of more than INR10.5bn ($233m).

Brokers gain entry

Last year's introduction of broker registration opened the way for the entry of both foreign and domestic insurance brokers. By the end of last year, around 100 local broker licences had been issued and four international brokers had entered the market via the joint venture (jv) route. Aon was in the forefront of these new entrants, receiving a licence in March to set up a jv (Aon Global Insurance Services Ltd) with Global Insurance Services, a local company operating in the market for over 30 years, including over five years' experience handling Aon's global clients.

Many others who were interested have, however, deferred decisions to establish themselves in India due to the high degree of uncertainty surrounding broker regulations and the level of brokerage. It is also anticipated that there will be a shakeout of local brokers once the IRDA starts to enforce the strict infrastructure benchmarks and discipline with regard to unprofessional practices, such as rebating, in due course.

The development of the broker market is expected to add further impetus to progress in the Indian insurance market. In addition, the new insurance companies have brought with them good underwriting skills and technical know-how, as well as strong IT support. These, combined with their client-focused response and product innovations, have encouraged the formerly state-owned companies to improve their products and services

The opening up of the market to outside influences is also helping to increase risk management awareness. Traditionally, the Indian tariff-driven rating system has given no recognition for good risk management. Appreciation for risk management in state-owned enterprises has been particularly low but is much more evident among the multinational companies and large Indian corporations, and is steadily spreading.

Demand increases

As the primary market expands (premium income reached $3bn in the fiscal year to end of March 2003 and is predicted to double over the next five years), so demand for reinsurance is also rising. However, India's retention strategy is limiting opportunities for global reinsurers, and the GIC is the only professional reinsurer operating in the local market. The placing of reinsurance business from the Indian market is governed by the IRDA's reinsurance regulations, which stipulate a 20% compulsory cession to GIC. The rules also require that treaty and facultative business should first be offered to other local insurance companies in the market before being offered to international reinsurers.

The objective of retaining premium in the Indian market by curtailing the foreign exchange outflow means that reinsurance will largely remain the domain of the GIC, and obligatory cessions to the GIC and inter-company cessions amongst the four state companies are set to continue.

The GIC also manages the terrorism pool, which provides terrorism risk cover in India. The limit on a first loss basis per location is set at up to INR2bn ($44m) based on the total subscribed capacity and reinsurance arrangement. The primary companies can grant insurance coverage up to this amount. Beyond this limit, coverage can be obtained from the international market. The primaries do not carry the risk factor but act as reinsurers for the pool. All subscribers to the pool receive a balance at the end of each quarter in proportion to their contribution.

The challenges

A crucial issue for foreign investors hoping to tap the potential of the rapidly developing Indian insurance market is to ensure that their Indian partners are capable and willing to invest additional funds over the next few years. The existing players are trying their best to improve service and bridge the gap between them and the technologically savvy new players by implementing computerisation at a faster pace.

However, there are some issues faced by insurers, old and new alike, such as:

- convergence of banking and insurance;

- ever-changing technology;

- emergence of new distribution channels;

- changing customer perceptions;

- evolving regulations;

- e-banking and insurance; and

- emergence of new finance-linked products such as derivatives and catastrophe bonds.

Until the regulatory framework is finalised, there will continue to be an element of uncertainty as to how the Indian market will develop, although all the signs are good.

- Neil Mathews is Chief Executive Officer of Aon Global Insurance Services Pvt Ltd, Mumbai, India.