Indian Business Surveys

8/14/2019 Indian Business Surveys

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IND

IA2010ALLOYDSVIEW

June 2007www.lloyds.com/marketintelligence

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This document is intended for general information purposes only.

Whilst all care has been taken to ensure the accuracy of the information,

Lloyds does not accept any responsibility for any errors or omissions.

Lloyds does not accept any responsibility or liability for any loss to any

person acting or refraining from action as a result of, but not limited to,

any statement, fact, figure, expression of opinion or belief contained in

this document.

For enquiries relating to this report, please contact:

James Sutherland

Head of Operations

Lloyds Business Development Directorate

One Lime StreetLondon EC3M 7HA

United Kingdom

Telephone: +44 (0)20 7327 6883

Email: [email protected]

Filip Wuebbeler

Manager, Market Intelligence

Lloyds Business Development Directorate

One Lime Street

London EC3M 7HA

United Kingdom

Telephone: +44 (0)20 7327 6209Email: [email protected]

For information regarding Market Intelligence publications,

please contact: [email protected]

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QUESTIONS?

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Executive summary 5

The insurance environment in 2007 6

Looking forward to the market in 2010 7

Lloyds seeks to capitalise on Indian opportunities 7

Introduction 8Purpose 8

Methodology 8

Structure 8

Businessenvironment 9

Politics 9

Economy 12

The IndianNon-lifeMarket 2007 18

Products 21

Market players 24Distribution 30

Reinsurance 33

Class-by-class analysis 38

The IndianNon-lifeMarket 2010 44

Regulatory drivers 44

Growth drivers 45

Risk factors 47

Structural changes 47

Growth projection: scenario I simple extrapolation 50

Growth projection: scenario II accounting for price wars 51

Conclusion 55

Lloyds Indian liaison office 55

Bibliography 56

Glossary 59CO

NTENT

S

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KEY INFORMATIONOfficial Name Republic of India

Capital New Delhi

Population 1.10 billion (2006 est.) World Rank: 2

Languages English (official), Hindi 30% and 14 other languages

Area 3.29m sq km World Rank: 7

Climate Varies from tropical monsoon in south to temperate in north

business environmentGDP (2006) USD 4,042bn World Rank: 4

Real GDP growth rate (2006) 8.5%

GDP per capita (2006) USD 3,700 World Rank: 155

GDP (by sector) (2006) Agriculture: 20%

Industry: 19%

Services: 61%

Unemployment rate (2005) 7.8%

Public debt (% of GDP) (2005) 52.8%

Budget (2005) Revenues: USD 109.4bn

Expenditures: USD 143.8bn

Industries Textiles, chemicals, food processing, steel, transportation

equipment, cement, mining, software

insurance environmentPremium levels (2006) USD 6.0bn in 2006

Nominal annual

premium growth 13% (during 2006)

Premium density (2005) India: USD 4.4 per capita

(= premiums per capita) South & East Asia: USD 21.4 per capita

OECD Average: USD 1,106.2 per capita

Regulator Insurance Regulatory and Development Authority:

www.irdaindia.org

Main non-life industry

association General Insurance Council

Main life industry association Life Insurance Council

LLOYDSBUSINESSPremium levels (2006)* USD 94m Growth in 2006: 35%

Lloyds status Direct risks cannot be written, except in circumstances where there is no local market.

Reinsurance is permitted with an obligatory cession of currently 15% for all classes of business.

Lloyds agency network www.lloydsagency.com

CurrenciesCurrency abbreviations: USD = US Dollar, GBP = British Pound, INR = Indian Rupee, 1 Crore = INR 10m, 1 Lakh = INR 100k

Exchange rates: USD 1 = INR 44.1 (2005);

USD 1 = GBP 0.55 (2005)

For consistency, data is taken from the CIA World Factbook 2006, Sigma, Axco,

www.oanda.com and Lloyds

For compliance guidance, visit www.lloyds.com orcontact Lloyds International Trading Advice on +44 (0)20 7327 6677

Miscellaneous 11%PA& Health 14%

20%

Motor OD 28%

Engineering 6%

Marine Cargo 4%

Marine Hull 3%

Liability 2%

Aviation 1%

Motor TP 11%

India 2006:

USD 6.0bn*

*Lloyds Business Development estimate

Business Mix (2006)

* Gross written global premiums based on figures processed by Xchanging by processing year and country of

origin; based on Business Development calculations from Source: Lloyds, REG 258 Premiums Database,

(2007); average exchange used for the period of 2005-2006

http://www.irdaindia.org/http://www.lloydsagency.com/http://www.oanda.com/http://www.lloyds.com/http://www.homeowners-insurance-in-washington.tk/http://www.lloyds.com/http://www.oanda.com/http://www.lloydsagency.com/http://www.irdaindia.org/


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Executive summary 5

Despite political uncertainties, Indias economy is thriving.

Assisted by this growth, significant progress has been made in

the non-life insurance market since liberalisation, and the pace

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

1 EconomicgrowthdespitepoliticaluncertaintyWhilst India prides itself on being the worlds largest democracy, the

country is beset by political uncertainty. On the domestic front, Indias

United Progressive Alliance coalition is considered to be inherently

unstable. From an international perspective, relations with Pakistan are

viewed as a risk, due to ongoing tensions in Kashmir. Following the

implementation of reforms, Indias economy has been outperforming

other economic blocks with the notable exceptions of China and Russia,

and strong growth is predicted to continue over the medium term.

Factors that have enabled this strong performance include Indias

demographics, human capital, global integration, macroeconomic and

fiscal stability, and its diversifying industries. However, inefficiencies such

as infrastructure bottlenecks, the evolving regulatory environment and the

overburdened legal system hinder Indias economy in performing as well

as those of China and Russia.

2 Substantial reformprogress innon-lifeReform of the Indian non-life insurance market has progressed

substantially since market liberalisation began in 2001. Whilst

detariffication occurred in early 2007, the market remains heavily

regulated, and its growth is hindered by the 26% cap on foreign

ownership of insurers. Private insurers are relatively new entrants into the

Indian market, but they already share over one-third of the market and are

expected to increase their market share further as liberalisation continues.

3 Growthprojectionspoint towardshigh growthThe extent of the insurance market liberalisation process is the subject of

ongoing debate. Detariffication is likely to be associated with a period of

adjustment and predatory pricing. Already a sharp decrease in rates has

been seen as a result of the January 2007 detariffication process. While

it is difficult to project the behaviour of market players and responses of

the IRDA, in the medium to long term, these reforms are expected to

lead to more dynamic growth.

4 Lloyds is seeking tocapitalise on IndianopportunitiesThe opportunities presented by the Indian market are deemed to be too

significant for Lloyds to overlook. As such, Lloyds will be setting up a

liaison office in Mumbai in 2007. The objectives of the office will be to

inform potential clients about the benefits of Lloyds offering to the Indian

economy. Additionally, the office will help to raise Lloyds profile with

brokers, cedants, insureds and the media. Ultimately, Lloyds wants to

gain access to the direct insurance market in India.

Executive summary



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Executive summary 6

The insurance environment in 2007

The Indian insurance market cannot be understood except in the context

of its history of nationalisation and liberalisation. Reform of the Indian non-

life insurance market, which was nationalised in 1972, has progressed

substantially since the turn of the century, and received an additional

boost in 2007 with the detariffication of key classes of business.

Non-life premium income has increased by 106% since initial

liberalisation in 2000, consistently outstripping global growth, as

summarised by the indexed premium chart below. However, growth in

Indias non-life market appears to have slowed to 13% in 2006 down

from 18% in 2005.

Despite the welcome reforms between 2000 and 2006, the Indian non-life

market remains heavily regulated. Nonetheless, 2007 has so far been

one of the most exciting years for the Indian insurance industry, with

significant reforms taking place. Some key characteristics of the market

are listed overleaf.

Tariffs: Up until the end of 2006, tariffs remained in place across 70% of

the market.3 Rates for property and motor were detariffed at the

beginning of 2007. However, insurers will not be allowed to change the

terms and conditions for existing products for up to 15 months post-

detariffication in an effort to avoid confusion during the initial stages.

Public Sector Undertakings (PSUs): PSUs remain dominant with an

estimated market share of over 60%. However, this share is reducing as

a result of private sector competition.

26% FDI cap: Foreign entities must partner with an Indian entity in order

to form an insurer and are limited to a maximum 26% stake in the jointventure. While the current government has suggested increasing the FDI

cap to 49%, the timing of this change remains unclear as it is likely to

trigger further policy discussions within the centre-left government

coalition.

Agents: Around 80% of premiums are still distributed through the

traditional medium of the direct sales (or marketing) agent. Brokers have

failed to gain a significant market share largely due to regulations that

have put them in a disadvantaged situation.

Compulsory cessions: There is only one local reinsurer, the 100%

government-owned GIC. In April 2007, the proportion of compulsory

cession to the GIC was reduced from 20% to 15%.

despite liberalisationin2000, the indianmarketremainsheavy regulated

Non-lifepremiumincome increasedby106%between 2000and 2005

2006 figures are based on gross premium underwritten; figures are provisional and unaudited;

amalgamated through Lloyds Business Development calculations based on IRDA publications1 Swiss Re sigma database, Non-Life Insurance Premiums 1980-2005, (2006); IRDA,

various publications, (2007)2 Ibid3 NB: measured in terms of premiums transacted

CHART 1: Premium levels( (in billion USD) 1 CHART 2: Indexed premium levels (2000 = 100)2

0

1

2

3

4

5

6

7

1.9 2.12.2 2.2 2.3 2.4

2.63.1

3.74.1

4.8

6.0

1995 1996 1997 1998 1999 2 00 0 2 00 1 2 00 2 2 00 3 2 00 4 2 005 2006*

Nominalmarketpremiums(inbillionsUSD)

Average annual growth (1995-1999): +5% Average annual growth (2000-2006):+15%

Point of liberalisation

50

100

150

200

250

200520042003200220012000

India: +106%

World: +55%

World India

Indexednon-lifedirectpremium

levels(2000+100)



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Executive summary 7

Looking forward to the market in 2010

The Indian insurance market is likely to change significantly over the next

three years largely due to regulatory changes. In addition, premium growth

is being driven by other factors such as the growing consumer class,

increased foreign direct investment, infrastructure development, and an

increased awareness of catastrophe exposure. Despite singificant positivechanges, the insurance market must still face the challenge of poor

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

Several significant structural changes are expected in the market as a

result of the drivers discussed above:

Price competition has already begun to increase and is likely to continue

to do so for the next 18 to 24 months.

The practice of cross-subsidisation is likely to be phased out as risk-

based pricing is used increasingly for all products.

As Indian insurers build a profitable portfolio, they are likely to have

increased access to the international reinsurance markets.

Finally, rising demand for insurance is likely to be met by increased

capacity as foreign insurers look to access this growing market.

One conclusion is certain the Indian non-life market is set to grow

dramatically over the next few years. The simplest forecasts suggest that

premium income could double in five years to reach USD 11.6bn in 2010.

When the structural changes above are taken into consideration, this

growth becomes exponential, with relatively slow growth in 2007 rising to

rapid growth by 2010.

Lloyds seeks to capitalise on Indian

opportunities

In order to be best placed to take advantage of the forecast rise in

commercial non-tariff business, Lloyds is lobbying for improved access

to the Indian direct market.

Moreover, Lloyds is establishing a liaison office in Mumbai. From this

platform, Lloyds will seek to build relationships within the Indian market,

to promote collaborations between Lloyds and other market players,

and to act as a communication channel between Lloyds in London and

Indian companies.

the extentof futureliberalisation is thesubject ofanongoingdebate



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Introduction 8

Purpose

This report, which serves as a market intelligence piece, provides a

detailed background on the Indian non-life insurance sector. In addition to

analysing the key components driving todays market conditions, the

report takes account of changes likely to occur within the regulatory

environment in the next three years.

Methodology

The information upon which this report is based has been derived from a

wide range of both primary and secondary sources. Most of the facts and

figures originate from extensive desk research of an array of publicly

available information. This research is mainly quantitative in nature and

forms the backbone of this report.

In order to gain further insight into the findings highlighted by secondary

research, a series of interviews were held with industry professionals in

London, Delhi and Mumbai. These discussions provided soft, qualitative

intelligence that helped develop an understanding of the key dynamicsthat are likely to impact future developments in the Indian market and

enabled assessment of the likely level of future use of the London market

by Indian firms.

Structure

This report is structured into three interdependent sections:

1 BUSINESSENVIRONMENTThe opening section provides an overview of the dynamic growthcurrently being experienced in India. In particular, it highlights the most

important political and economic factors that are likely to influence the

countrys economic progress between 2007 and 2010.

2 the indiannon-lifemarket 2007This section provides information and analysis on the key components of

the Indian non-life market today. These components include: premium

income, products, competitors, reinsurance and regulation.

3 the indiannon-lifemarket 2010Premium growth projections are particularly challenging to compile due to

the large number of unknowns such as company strategy and policy

response. As such, this paper aims to simplify such growth projections by

offering two scenarios. Scenario I gives a simple constant growth

projection based on recent growth experience and Scenario II takes into

account the impact of detariffication.

Finally, this report then demonstrates how Lloyds has utilised its

research into the Indian insurance market by giving an overview of

Lloyds current two-pronged approach to capitalising on opportunities

arising from the Indian market.

INTR

OD

UCTION



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Business environment 9

Business environment

Politics

The efficiency of Indias

regulatory

environment is

questionable

India prides itself on being the world's largest democracy modelled on the British

parliamentary model. India is a large country, not only with regard to its size but also in

terms of culture, languages, religions and contrasting convictions. Much of the complexity of

Indias politics and regulatory environment is dictated by the difficulties of these competing

interests.

Regulatory environmentDespite its reputation, India performs well in terms of control of corruption, rule of law, and

voice and accountability, when compared to the regional average. However, this does not

disguise the fact that the country is often beset by political volatility, manifest by

comparatively low levels of political stability.

CHART 3: Governance indicators4 versus regional average(2005)5

0

25

50

75

Voice and Accountability

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

India Regional Average

Compared to regional

peers, India scores high

in terms of rule of la

w

and accountability

Notwithstanding the countrys heterogeneous society, there is an established and bind

institutional framework, which includes a legal system, capital market regulators a

banking supervisors. However, the efficiency and efficacy of these institutions is

questionable, and there are significant gaps within the Indian regulatory environment such

as the lack of data protection legislation.

ing

nd

ption,

r and

like corporate citizenship, market opportunities and

Narayana Murthy, Infosys Technologies, India, WEF Summit, (2004)

6In addition to relatively high levels of corru

there is a labyrinth of regulation caused by relations between the central and state

governments, which must be simplified if initiatives such as reform of the power sectothe development of special economic zones are to succeed. A major effect of these

challenges is to hinder the speed of legislative change, resulting in very slow legislature.

"We have to make our economic systems as transparent and as open as possible.

We must focus on vital issues

intellectual property rights."7

4 NB: The above chart depicts the percentile rank on each governance indicator. Percentile rankindicates the percentage of countries worldwide that rate below the selected country

5 Kaufmann, A., et al., Governance Matters V: Governance Indicators for 1996-2005, (2006)

6 KPMG, Indian Pharma Industry to Look Beyond the Generics Market, (June 2006)7 World Economic Forum, Assessing Indias Potential for Accelerated Growth, (2004), page 9



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Legal environment

India has an independent

judicial system that

resembles those of

Anglo-Saxon countries

India has an independent judicial system, with its concepts and procedures resembling

those of Anglo-Saxon countries. The Indian judicial system is a single integrated system of

courts, which administer both Indian and individual state laws. While the judicial process is

considered fair, a large backlog of cases and frequent adjournments can result in

considerable delay before a case is closed. However, matters of priority and public interest

may be dealt with expeditiously, and interim relief may be allowed in other cases, where

appropriate.

Although there is evidence to suggest that Indians are becoming more aware of litigation,

especially in motor third-party cases, the general level of liability claims awareness amongst

Indias population is low. Consequently, the demand for corresponding insurance protection

remains modest.

There is a large backlog

of cases clogging Indias

judicial process

Domestic politicsIn a dramatic turnaround in its fortunes, the Indian National Congress emerged as the

largest party following 2004s elections. This party formed a governing alliance, the United

Progressive Alliance (UPA), with a number of smaller regional parties, as well as utilisingthe support of a large bloc of communist parties known collectively as the Left Front. The

surprise result was attributed to the alignment of the incumbent government with the

countrys burgeoning middle classes and their interests rather than those of the mass rural

poor.Though unstable, Indias

current government is

expected to remain in

office

Indias turbulent politics are complex and often lead to short-lived administrations at national

and state level. There is also often a wide gulf between the commitments made by

governments and the measures that the legislature and bureaucracy can actually

implement. The UPA coalition is expected to remain in office even though the coalition is

viewed as inherently unstable and progress on economic reform is predicted to be erratic.

The pace of Indias economic liberalisation will be determined by the leaderships ability to

pursue the countrys social agenda. Legislative changes, however, tend to be passed very

slowly in India due to the bureaucratic and leadership hurdles that need to be overcome.

Moreover, Indias pluralist political system can complicate and thus further hinder the reform

process.

Foreign relationsIndias foreign relations have in the past been dominated by its difficult relationship with

Pakistan and, more recently, with Bangladesh. Indias relations with both the US and China

have, however, improved over the past few years.

Pakistan

Relations between India and Pakistan have always been viewed as poor, with the two

countries fighting three wars since partition in 1947 and narrowly avoiding a fourth in 2002.Relations, however, improved noticeably during the premiership of the Bharatiya Janata

Partys (BJPs)Atal Behari Vajpayee, who initiated peace talks with Islamabad.

Tensions have eased

between India and

Pakistan over Kashmir

India and Pakistan are now several years into a peace process that has made huge strides

in reducing tension, but it is based on a bargain both sides suspect the other of breaking:

that Pakistan will rein in the terrorists operating from its soil and that India will negotiate in

good faith over the future of Kashmir.8

Thus significant tensions still exist and the core issue

of Kashmirs status remains unresolved. It is argued, however, that until India is fully

reconciled to Pakistan, and until Pakistan has wrestled its own particular demons to the

ground, India will never achieve its full potential, either economically or geopolitically.

India will never achieve

its full potential

without a durable

solution in Kashmir

8 The Economist, Terror in Mumbai: Call this Peace?, (15 July 2006), pages 63-64



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Moreover, it is argued that neither of these two things can happen without a durable solution

in Kashmir.9

Bangladesh

Relations with Indias other large Muslim neighbour, Bangladesh, although largely warm,

started to deteriorate in 2001 when the BJP took power. Although not fully restored,

relations have somewhat improved under the current Congress Party-led government. Anissue of contention is that Bangladeshis feel that India plays the role of a big brother

towards its smaller neighbours. Nonetheless, both nations have co-operated on a number of

issues, such as flood warnings and preparedness.

China

Despite lingering suspicions remaining from the 1962Sino-Indian Warand continuing

territorial/boundary disputes in Kashmirand Arunachal Pradesh, Sino-Indian relations have

improved gradually. Both countries have sought to reduce tensions along the frontier,

expand trade and cultural ties, and normalise relations. In 2003, India formally recognised

Tibet as a part of China and, in 2004, China recognised Sikkim as a part of India.

The US sees its

relationship with India

as a counterbalance to

Chinas expanding

power

US

Indias link with the US is improving. The US administration led by president George Bush is

concerned that the fast-expanding economic power of China poses a threat to the US global

strategic dominance and, as a consequence, welcomes a closer relationship with India as a

counterbalance. In upgrading ties with India, it is significant that Mr Bush has avoided an

endorsement of Indias ambitions to gain a permanent seat on the United Nations (UN)

Security Council.10

UN Security Council

The question of Indias permanent membership on the UN Security Councilis a high and

pressing priority for New Delhi. All elements along the Indian political spectrum are united in

the belief that their countrys flourishing transition from colonialism, its successful incubation

of democracy amid incredible cultural and linguistic diversity, its large population and

growing economic prowess justify global recognition through membership in the most

important institution of international governance, the UN Security Council. Germany, India,

Japan and Brazil, known as the G4, and the African Union are amongst those lobbying for

coveted permanent member status. A working group on reform set up under the UN

General Assemblyin 1993 has made little progress on the matter, with a lack of consensus

over potential candidates for such membership, despite warnings from the previous

Secretary-General Kofi Annan that the lack of reform could weaken the councils standing in

the world.11

A permanent membership

on the UN Security

Council is a high priority

for India

India belongs to all the major international organisations, including the UN, International

Bank for Reconstruction and Development, International Labour Organization, International

Monetary Fund, World Health Organization, World Trade Organization (WTO) and the

Commonwealth.

9 The Economist, Bombs in Mumbai: Indias Horror, (15 July 2006), page 10

10 Ibid11 BBC News, Profile: The UN Security Council, (3 January 2006)

http://en.wikipedia.org/wiki/1962http://en.wikipedia.org/wiki/Sino-Indian_Warhttp://en.wikipedia.org/wiki/Kashmirhttp://en.wikipedia.org/wiki/Arunachal_Pradeshhttp://en.wikipedia.org/wiki/Sikkimhttp://www.homeowners-insurance-in-washington.tk/http://en.wikipedia.org/wiki/Sikkimhttp://en.wikipedia.org/wiki/Arunachal_Pradeshhttp://en.wikipedia.org/wiki/Kashmirhttp://en.wikipedia.org/wiki/Sino-Indian_Warhttp://en.wikipedia.org/wiki/1962


12/60


EconomyFor decades, India's economy underperformed relative to its potential. Socialist policies and

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

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

combination with additional external factors, led to a balance-of-payments crisis at the start

of the 1990s, which provided further stimulus for a wave of economic reforms.

For decades, Indias

economy

underperformed

relative to its potential

Following the implementation of these reforms, for which todays Prime MinisterManmohan

Singh is widely regarded as the architect, growth surged through to the mid-1990s and the

beginning of this decade with India outperforming other large economic blocks, with the

notable exceptions of China, throughout the whole decade and Russia in 2005.

CHART 4: Indexed nominal GDPs of major economies (1997 2006)12

100

150

200

250

300

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

IndexedNominalGDP(1

997=100)

India China US Euroland

The 2003 growth spurt in India was

led by the services sector; the

fastest-growing components of this

sector include trade, tourism,

transport, communications, andfinancial and business services.

Following reforms,

growth surged and

made a step change

upwards in 2002

In addition to the change in its economic development policies, Indias business

environment and the countrys growth prospects are influenced by a number of

characteristics. These characteristics demonstrate that whilst the economy is growing and

developing, it is still held back by inefficiencies and bureaucracy. These challenges will

need to be tackled if Indias economy is to continue to perform well in the future.

TABLE 1: Factors affecting Indias growth prospects

Favourable factors Unfavourable factors

Favourable demographics

Improving human capital

Globally integrating economy

Challenging but improving

macroeconomic and fiscal stability

A mix of sheltered manufacturing and

some competitive services sectors

Infrastructure bottlenecks

Evolving regulatory environment

Transparent but overburdened

legal system

12 Deutsche Bank Research, Country Infobase, (2007)



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Demographics

Indias working

population is projected

to grow significantly

Economic growth depends on, amongst other factors, having large pools of high-quality

labour supply. India has a young population of approximately 1.1 billion, the second-largest

in the world after China, increasing at roughly 1.5% per year.13

Latest figures from the UN

Population Division reveal that Indias working population is projected to grow significantly

over the next 15 years as highlighted by the chart below. This signifies that there will be asignificant growth in labour supply over the next 15 years.

CHART 5: Age group projections (2000 2020)14

34% 35% 36% 37%38%

0%

25%

50%

75%

100%

2000 2005 2010 2015 2020

Agegrou

pofpopulation(in%oftotal)

Age group 0 - 4 Age group 5 - 15 Age group 15 - 24

Age group 25 - 59 Percentage aged 60+

Research by the Boston Consulting Group reveals that India is set to have the largest

surplus working population (15 to 59 years of age) by 2020 when compared to all other

major economies as shown by the chart below. Whilst this may lead to new job creation, this

could also lead to greater unemployment and/or lower wages.CHART 6: Surplus working population by country in 202015

India is set to have the

Worlds largest

surplus working

population by 2020

-10.0 -9.0

-3.0 -3.0 -3.0 -2.0 -2.0-0.5

3.0

19.0

47.0

5.0

-17.0

-6.0

-30

-20

-10

0

10

20

30

40

50

60

US ChinaJapan

Russia

Germany

France

Spain

UK ItalyAustralia

BrazilMexico

Pakistan

India

Surp

lus

Work

ing

Popu

lation

(inm

illions

)

An estimated 210 million

Indians have been lifted

above the poverty line

Further research indicates that, between 1980 and 2000, an estimated 210 million Indians

were lifted above the poverty line (the threshold of which is USD 1.5 in earnings per day),

which is an impressive feat given that, during the preceding 20 years, the number of poor in

13 Deutsche Bank Research, India Rising: A Medium-term Perspective India Special, (2005), page 3

14 United Nations Populations Statistics, World Population Prospects 2004 Revision, (2004)15 The Boston Consulting Group, Indias New Opportunity 2020, (2005), page 11



14/60


India increased by about 93 million.16

As such, in 2000, 28% of the Indian population was

below the poverty line, as compared to 36% in 1994.17

This suggests that the outcomes of

Indias surplus population are likely to be positive.

Human capitalIndia possesses a large

pool of scientists, IT

specialists, technicians

and engineers

Nevertheless, economic growth does not merely depend on the quantity of labour available,

but increasingly on the quality of labour input. In this light, India still has a long way to go,

not least if compared with its regional peers. Even though India has comparatively low

levels of overall adult literacy of around 61%,18

the country produces a large number of

skilled workers in various fields. It possesses a large pool of scientists, trained Information

Technology (IT) specialists, technicians and engineers, many of whom speak English

fluently. There are roughly 380 universities and 1,500 research institutions around the

country, from which 200,000 engineers, 300,000 non-engineering technicians and 9,000

PhD students graduate annually.19 In other words, while there is yet to emerge a broad

class of highly skilled workers, there are islands of depth in particular sectors.

The Indian government is fully aware of the role that science and technology can play in

developing the countrys economy.

"You cannot be industrially and economically advanced unless you are

technologically advanced, and you cannot be technologically advanced unless

you are scientifically advanced."20

C. N. R. Rao, the Prime Minister's Science Advisor, (2004)

More than 100 IT and

science-based firms have

opened R&D Labs in India

during the last five

years

Tier one Indian IT providers such as Infosys, Wipro and TCS have continued to thrive

(reporting revenue growth of around 40% for the second quarter of 2006).21

Over the past

five years alone, more than 100 IT and science-based firms have opened research and

development (R&D) laboratories in India.22 India is also reported to be set to become the

regional hub for pharmaceutical R&D, manufacturing and exporting. 23

Globally integrating economyIndias trade volume as a

share of GDP is low in

contrast to other major

Asian countries

India has made significant inroads in opening its economy since it joined the WTO in 1995.

There are, however, still remnants of its inward-looking development strategy. Indeed,

Indias trade volume as a share of GDP is low in contrast to other major Asian countries,

and its import tariffs remain comparably high. Moreover, capital account restrictions, in

particular, those applying to foreign direct investment (FDI), are still numerous, although

recent policy directives are laying the ground for greater FDI.

With the debate about Indias emergence as a global leader in service exports

dominating the news, it may sometimes be overlooked that India remains a

relatively closed economy.24

Rodrigo de Rato, Managing Director of the International Monetary Fund, (2005)

However, the prospects for greater world integration are promising, since there is a political

consensus on the need to further liberalise trade and capital account restrictions. Moreover,

the size and potential for growth of the domestic market is one of the more important factors

16 World Economic Forum, Assessing Indias Potential for Accelerated Growth, (2004), page 117The Boston Consulting Group, Indias New Opportunity 2020, (2005), page 1118 World Bank, Education Profile India, (2005)19 Chaudhry, H., Trade in Higher Education, City University of Hong Kong20 New Scientist, India Special: The Next Knowledge Superpower, (2005)21 DNA, Indian IT Majors Outsmart Global Peers, (3 August 2006)22 New Scientist, India Special: The Next Knowledge Superpower, (2005)

23 KPMG, Indian Pharma Industry to Look Beyond the Generics Market, (June 2006)24 De Rato, R., Prospering in a Globalized Economy, (2005)



15/60


responsible for the strong interest of foreign investors in India. Recent discussions on

expanding trade agreements, with China, Singapore and Thailand for example, attest to

Indias resolve to gain further access to world trade. The recent lowering of duties for non-

agriculture products from 20% to 15% and the proposed further reduction in duties to 12.5%

for the 2006-2007 budget are steps towards opening the economy further.25

As India becomes a key part of the global supply chain, some of its companies will emergeas strong performers in the international market. Those that succeed will likely retain

elements of their traditional business cultures (such as low cost advantages) while also

adopting a more international outlook, exporting their best goods and services while

absorbing global best practice.

Challenging but improving monetary and fiscal stabilityInflation has declined in

recent years, but

increased fiscal

discipline is vital

Inflation has declined significantly in recent years, stabilising at a level of roughly 5% after

consistent double-digit inflation prior to the 1990s.26

But the monetary authoritys success in

maintaining relative price stability going forward will require improvements in fiscal policies.

Indias large fiscal deficit, a legacy of the expansionary fiscal policies pursued by the

government in the late 1980s, is acknowledged to be its ongoing weakness. Public deficits

since then have been very high at around 10% of GDP.27

Indias poor public finances28

have placed significant constraints on growth. The so-called

development expenditure, ie capital expenditure on areas such as infrastructure, has fallen

constantly as a percentage of GDP since the early 1990s. At the same time, non-

development expenditure, particularly interest on government debt, has risen continuously.

The government has taken some initial steps toward fiscal consolidation. Indeed, the Fiscal

Responsibility and Budget Management Actwas passed in 2002, with a goal of bringing

down total deficit and revenue deficit8to 3% and 0% of GDP, respectively, by 2008-2009.

29

The introduction of the national value added tax (VAT) system in April 2005 is also expected

to contribute to fiscal consolidation.

Infrastructure bottlenecks

There are severe

infrastructure

bottlenecks in India

As a consequence of persistent shortfalls in public revenues, public investment has fallen

continuously over the years, leading to severe infrastructure bottlenecks. Indeed, despite

having one of the most extensive transport systems in the world, this sector continues to

suffer from acute capacity and quality constraints. As such, growth is expected to hit severe

infrastructure constraints in the near future.30

China spent USD 260 billion or 20% of its GDP on power, construction,

transportation, telecommunications and real estate in 2002. In comparison, India

spent just USD 31 billion or 6% of GDP.31

Chetan Ahya, Chief Economist, Morgan Stanley, (2004)

India requires a total of

USD 150bn to finance its

infrastructure

development

The government is faced with tough choices in allocating investment resources. According

to Prime MinisterManmohan Singh, India requires a total of USD 150bn in the short term to

finance its infrastructure development (rail, airport and seaport). Given this resource

requirement, it is not possible to fully fund infrastructure development from the governments

25 India PR Wire, Customs Duty Reduced on Non-Agricultural Products: General Budget 2006-07,(February 2006)

26 Deutsche Bank Research, India Rising: A Medium-term Perspective India Special, (2005), pages 6-727 Ibid28 For detail see APPENDIX Macroeconomic Imbalances29 Deutsche Bank Research, India Rising: A medium-term Perspective India Special, (2005), page 6

30 FICCI, Infrastructure Transformations, (2005), slide 531 Hiscock, G., Infrastructure the Missing Link, (2004)



16/60


budgetary resources. Accordingly, the Indian government has introduced the facility of

viability gap funding to support public-private partnership initiatives in infrastructure sectors.

Infrastructure is one of three strategic high-priority areas for India (the others being the

public sector and agriculture). Lack of infrastructure is a key reason why Indias poorest

regions remain impoverished, and this has impeded the rapid expansion of manufacturing.

Service sector biasIndias service sector accounts for over 50% of the economy and, in recent years, has been

responsible for the majority of economic growth. There are a number of key characteristics

of the Indian economy that contribute to higher growth in its service sector compared to its

industry.

Firstly, highly restrictive labour laws have prompted industry to outsource activities so a

significant proportion of industrial growth is counted as service sector growth.

More profoundly, intrusive levels of market regulation and relatively high tariff structures

have deterred both domestic and foreign investment into industrial sectors, hindering the

growth of large-scale manufacturing companies geared towards exporting.

FDI growth has significantly lagged in comparison with other emerging markets such as

China, while growth in trade volumes relative to GDP has remained muted.

Finally, the financing demands exerted by recurring, large fiscal deficits have crowded out

private investment. As a result, Indias growth model has been unique, with declines in

the primary agricultural share of GDP absorbed by growth in services, while the

manufacturing sector has remained largely static.

Industrial sector

India has built up a

diverse industrialsector with major

industries

India has built up a diverse industrial sector with major industries, including automobiles and

auto ancillaries, iron and steel, aluminium, textiles and garments, pharmaceuticals,

chemicals and petrochemicals, oil and gas and other hydrocarbons, electricity,

telecommunications, IT and business process outsourcing (BPO) services, healthcare and

biotechnology. Today, the country is emerging as a leading sourcing base for global players

in auto and auto ancillaries, pharmaceuticals, IT and BPO services, research and

development, and engineering services.

However, the picture is far from uniform and is best understood when juxtaposing three

distinct sectors:

Global leader competitive IT and outsourcing sector

Indias Technology,

software and

outsourcing sector is

highly competitive

At the high end of Indias productivity spectrum is the IT, software and BPO sector. Initially

starting with back office services such as call centres and tax work, Indias outsourcing

platform has risen up the value chain and now includes research and development in high-

tech sectors such as biotechnology and pharmaceuticals. It is a big success story, having

created hundreds of thousands of jobs and billions of dollars worth of exports. As a new

sector and one whose potential the government failed to recognise early on it has

avoided stifling regulation. IT, software and outsourcing companies are exempt from Indias

labour regulations that govern working hours and overtime in other sectors. FDI has been

allowed to flow into the IT industry, whereas foreign investment is prohibited and/or

restricted in most other sectors. By 2002, it already accounted for 15% of all FDI in India.32

Without this foreign money, it is debatable whether the sector could have taken off.

Fast improving transforming but still sheltered automotive industry

In the middle of the spectrum is the auto industry, which has seen dramatic change since

the government began to liberalise it in the 1980s. FDI, which has been permitted since

32 Farrell, D., China and India: The Race to Growth - Sector by Sector, (2004)



17/60


1994, has made it possible for output and labour productivity to soar. Indeed, the industry

has been growing at a rate of approximately 30% and the industry exported USD 1bn in

2003-2004 compared to USD 760m in 2002-2003.33

Prices have fallen and, even as the

industry has consolidated, employment levels have held steady due to robust demand.

However, the continued tariff structure for finished cars continues to shelter domestic

automakers from global competition making the sector less efficient than it would

otherwise be.

Laggard burdened consumer goods markets

Indias consumer

electronic sector is still

burdened by tariffs,

making it uncompetitive

At the low end of the spectrum is the consumer electronics sector, which, despite the lifting

of FDI restrictions in the early 1990s, is still burdened by tariffs, taxes and regulations, with

the result that Indian consumer electronics goods can neither compete on price nor on

quality with international competitors. As a result of a total ban on FDI and extremely low

labour productivity and performance, Indias food retailing industry is considered to be the

least competitive sector in the subcontinent.

33 IndianAuto.com, Information on the Indian Automobile Industry, (2006)



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The Indian Non-Life Market 2007 18

The Indian Non-life Market 2007

The Indian non-life

market is ranked 27th

largest in the world

USD 4.85bn worth of premiums were written in the Indian non-life insurance market in 2005,

making India the 27th largest market in the world in terms of non-life premium.34

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

predominantly as a result of the Chinese economys greater urbanisation, number of

automobiles and emphasis on manufacturing. China also began its insurance liberalisation

process earlier. Nonetheless, Indias growth performance is very strong relative to that of

the world as a whole.

CHART 7: Indexed premium levels (2000 = 100)35

50

100

150

200

250

2000 2001 2002 2003 2004 2005

Indexednon-lifedirectprem

iumlevels(2000=100)

World India

India: + 106%

World: +55%

India is growing at

roughly twice the rate

of the total global

insurance market

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

contributory factor to this was the 9/11 attack on the World Trade Center. However, the

growth of non-life premiums in India has outstripped average global rates every year for thepast decade and has demonstrated a surge since market liberalisation in 2000.

CHART 8: Premium levels (in billion USD)36

1.9 2.12.2 2.2 2.3

2.42.6

3.74.1

4.8

3.1

6.0

0

1

2

3

4

5

6

7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

Nominalmark

etpremiums(inbillionUSD)

Point of liberalisation

Average annual growth (1995-1999): +5% Average annual growth (2000-2006): +15%

Liberalisation has led to

a marked increase in

Indias premium levels

34 Swiss Re sigma database, Non-Life Insurance Premiums - 1980-2005", (2006)35 Ibid Estimate: 2006 figures are based on gross premium underwritten in 1H 2006, which are provisional andunaudited; growth factor has been applied by company growth of PSU vs Private comparing 1H 2005 vs1H 2006; amalgamated through Lloyds Business Development Directorate calculations based on IRDApublications

36 Swiss Re sigma database, Non-Life Insurance Premiums 1980-2005", (2006); IRDA, variouspublications, (2007)



19/60

The Indian non-life market 2007 19

Despite outgrowing the global non-life market over the past decade, non-life penetration

levels in India remain extremely low at just 0.6%.37

Whilst low penetration in a developing

economy is to be expected, the Indian position falls well below that expected by Sigmas

S-Curve, which links non-life penetration to incomeper capita.

High regulation may be a

major reason for the

low level of insurance

penetration

A significant contributing factor in the disparity between Indias actual penetration / GDP per

capita and that expected by Sigmas research (The S-Curve Gap) is the highly protectionistregulatory position adopted by the government until reforms were adopted in 2000.

38

CHART 9: Penetration vs. GDP per capita The S-Curve (2003)39

0

1

2

3

4

5

6

1,000 10,000 100,000

Logarithmic scale of GDP per capita (in PPP USD)

Non-lifep

remiums(in%

ofGDP)

India

China

UK

US

Russia

Brazil

indonesiaS-Curve Gap

Non-life penetration

levels are lower in India

than would be expected

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

provide a strong platform from which to drive premium development in the Indian market

and, thereby, to close the countrys S-Curve Gap in the short to medium term.

Analysing the market todayThe current state of the Indian insurance market is so heavily influenced by the history of

nationalisation and liberalisation, that it cannot be understood outside of that context.

The remainder of this section will initially consider the historical development of the market

and then analyse the process of liberalisation in four main categories: products, market

players, distribution and reinsurance.

Finally, the impact of these liberalisation dynamics will be analysed on a class-by-class

basis. This will set the scene for looking forward to 2010 in the following section.

37 NB: Non-life Penetration = Non-life insurance premiums / GDP (expressed as a percentage)

38 See section on Regulation and Proposed Reform below39 Non-life premiums in % of GDP from Swiss Re sigma database, WWM Calculation



20/60

The Indian Non-Life Market 2007 20

Historical context

Colonial era

The first insurer in the

Indian market was

established in 1850

Indias first general insurance company, Triton, was established in 1950 and was owned

and operated by the British. In 1938, the Insurance Actwas passed. This was the first

legislation specifically dealing with the supervision of insurance companies. Prior to this,

general insurance firms had fallen under the broad auspices of the Companies Act (1866).

CHART 10: History of the Indian insurance market (1850 2007)

1850 2007

1999: Insurance Regulatoryand Development Authority Act

1938: InsuranceAct passed

1850: 1st insurancecompany created

Colonial era Nationalisation Liberalisation

1972: Insurance marketfully nationalised

1947

1947: Economicnationalisation begins

1991

1991: Economicliberalisation begins

2000: 1st privatecompanies licensed

2007: Remainingtariffs abolished

1994: Marine tariffsremoved

18501850 2007

1999: Insurance Regulatoryand Development Authority Act

1938: InsuranceAct passed

1850: 1st insurancecompany created

Colonial era Nationalisation Liberalisation

1972: Insurance marketfully nationalised

1947

1947: Economicnationalisation begins

1991

1991: Economicliberalisation begins

2000: 1st privatecompanies licensed

2007: Remainingtariffs abolished

1994: Marine tariffsremoved

Nationalisation

Following independence in 1947, the Indian government implemented an economic model

based on the Soviet system of national planning. Insurance was not seen as strategically

important and so was not initially nationalised. In 1950, the Insurance Act of 1938was

amended to set up a Tariff Committee, which fell under the control of the General Insurance

Councilof the Insurance Association of India the Tariff Committee was so influential that it

soon became known as the Rate Maker.

The non-life industry

was not initially

nationalised following

independence

The Tariff Advisory Committee (TAC) replaced the Tariff Committee by statute in 1968. The

new body was designed to be independent and scientifically driven in its rating approach.

However, post nationalisation in 1972, the independence of the TAC came into question

observers described the TAC as the handmaiden of the nationalised companies (senior

management of these companies took the most senior positions on the TAC) as rates did

not necessarily reflect market price.

The non-life market was

eventually nationalised

in 1972 following many

years of tariff-settingBy 1972, general insurance in India was fully nationalised. Each of the 107 general

insurance companies in India was assigned to one of the four subsidiaries of the General

Insurance Corporation of India (GIC): National; Oriental; United India; and New India.

Liberalisation

In 1991, economic liberalisation began underManmaohan Singh. Three years later, the

MalhotraCommittee Report on the state of the Indian insurance industry was released. Itrecommended sweeping changes that would reactivate competition in Indian insurance.The market was

reopened to competition

in 2000 following an

influential report

These recommendations were put into practice via the Insurance Regulatory and

Development Authority Act(IRDA 1999). In particular, the monopoly previously enjoyed by

the GIC was removed. The act effectively reinstated the 1938 legislation. The following

year, the first licences were granted to private companies.

Detariffication began in 2005 with marine insurance, with rates for property and motor being

detariffed in January 2007. Rates for property and motor were scheduled to be detariffed at

the beginning of the year. However, insurers are not allowed to change the terms and

conditions for existing products until 2008 in an effort to avoid confusion during the initial

stages. The GIC reduced its compulsory session from 20% to 15% in April 2007.



21/60


ProductsThe subsequent section aims to give a brief overview of product dynamics, recent growth

experience, detariffication and potential future growth areas.

Detariffication will change the dynamics of the marketThe progress towards full detariffication of the non-life sector began in 1994 when insurance

tariffs on personal accident and bankers indemnity were dismantled. Between 1994 and

2006, some progress was made towards detariffication in marine insurance. Nevertheless,

motor, fire, workmens compensation and engineering risks remained tariffed accounting

for around two-thirds of premium. As of January 2007, all classes of business except for

motor third-party liability are no longer under price tariffs.

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

could be addressed separately. It is suggested that this final tariffed product will be

liberalised in 2008, although that has not yet been confirmed.

CHART 11: Detariffication roadmap (1994 2007)

Large properties with a total insured value of > USD 500m are freely priced, but must still gothrough a qualifying process before placement can be made outside India;

Workmens compensation and Public Liability (Act) only to be detariffed in January 2007* Some observers anticipate that some product controls, including price controls for Motor TP,

will remain in place but will be eventually withdrawn in April 2008

1994

Motor TP

Motor OD

Aviation

Liability

Engineering

Fire

Marine Hull

PA & Health

Marine Cargo

Aviation

Liability

Motor TP

Motor OD

Engineering

Fire

Marine Hull

PA & Health

Marine Cargo

Aviation

Liability

Motor TP

Motor OD

Engineering

Fire

Marine Hull

PA & Health

Marine cargo

April 2005 January 2007*

Tariffed

Detariffed

Large properties with a total insured value of > USD 500m are freely priced, but must still gothrough a qualifying process before placement can be made outside India;

Workmens compensation and Public Liability (Act) only to be detariffed in January 2007* Some observers anticipate that some product controls, including price controls for Motor TP,

will remain in place but will be eventually withdrawn in April 2008

1994

Motor TP

Motor OD

Aviation

LiabilityLiability

Engineering

Fire

Marine Hull

PA & Health

Marine Cargo

Aviation

Liability

Motor TP

Motor OD

Engineering

Fire

Marine Hull

PA & Health

Marine Cargo

AviationAviation

LiabilityLiability

Motor TP

Motor OD

Engineering

Fire

Marine Hull

PA & Health

Marine Cargo

Aviation

Liability

Motor TP

Motor OD

Engineering

Fire

Marine Hull

PA & Health

Marine cargo

AviationAviation

LiabilityLiability

Motor TP

Motor OD

Engineering

Fire

Marine Hull

PA & Health

Marine cargo

April 2005 January 2007*

Tariffed

DetariffedAll classes of business,

except for motor third-

party liability, are no

longer under price

tariffs

With the exception of insurance for large properties, the newly detariffed classes of

business are still subject to some product restrictions, and the terms and conditions of

existing products may not be altered. The regulator has argued that this is to prevent

confusion in the market and has indicated that all product restrictions will be removed by

April 2008. It is thought that insurers may be able to customise insurance products as early

as October 2007, although these would still be subject to IRDA approval.40

In addition to product restrictions, insurers are not permitted to drop the price of a product

by more than 49% in the case of f ire risks and 20% in the case of motor own damage

without the approval of the regulator.41 While this may not prevent a rise in price

competition, it will certainly create an administrative barrier to rapidly falling prices.

40 DNA, Made-to-order insurance by October, (2007)41 Lloyds Business Development, (2007)



22/60


Legacies of a tariffed product marketThe latest round of detariffication is more significant than it may appear at first. Although the

Indian insurance regulator (the IRDA) has been pursuing a policy of detariffication since

1994, around two-thirds of all non-life premiums in the Indian non-life market remained

tariffed until the beginning of 2007.

CHART 12: Tariffed vs. non-tariffed market by class (2006)42

India 2006:

USD 6.0bn

Liability 2%Aviation 1%

Marine Hull 3%

Marine Cargo 4%

Miscellaneous 11%

PA & Health 14%

Engineering 6%Motor TP 11%

Fire 20%

Motor OD 28%

Around two-thirds of

the Indian market

remained tariffed up

until the end of 2006

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

professional liability had been fully detariffed leaving the large mainstream classes such

as motor, fire and engineering tariffed. As the tariffs covered most of the market until very

recently, their effects dominated the market, influencing the pricing of even non-tariffed

products.

Sophisticated insurance buyers are aware that insurers profit f rom hitherto tariffed lines

such as fire and place demands on insurers to cut their rates in other ways.Cross-subsidisation and

product bundling were

used to cope with the

tariffed market

One method used by insurers to attract fire premiums has been the use of product

bundling. This activity sees insurers bundling together tariffed products with non-tariffed

products, with the insurer offering customers exceptional rates for their non-tariffed cover

(eg marine cargo cover for USD 1) in the hope that this loss-making line is cross-subsidised

by the tariff business and that they make a profit over the account as a whole.

Considerable growth despite tariffed marketA strategy of bundling and cross-subsidisation has enabled the Indian insurance market to

grow significantly in both tariffed (13%) and non-tariffed (15%) business when comparing

half year figures for 2005 vs. 2006.

42 Lloyds Business Development calculation



23/60


CHART 13: Tariff vs non-tariff growth (1H 2005 vs 1H 2006)43

231

144

15%

13%

0

50

100

150

200

250

Tariff Non-Tariff

Absolutepremiumgrowth(inmillionUSD)

12.0%

13.0%

14.0%

15.0%

R

elativepremiumgrowth(in%)

Indias non-tariffedmarket in the 1H 2006

expanded by USD 144m

(15%) when compared to

1H 2005

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

between 2005 and 2006. In particular, the non-tariffed classes of PA & healthcare, marine

hull and liability experienced high growth rates as summarised by the chart below.

CHART 14: Business classes premium and growth (1H 2006)44

17%

11%

28%

6%

10%

28%

10%

27%25%

2%0

200

400

600

800

MotorOD

Fire

PA&Health

Miscellaneous

MotorTP

Engineering

MarineCargo

MarineHull

Liability

Aviation

1H2006prem

ium

by

bus

inessc

lass

(inm

illion

USD)

0%

10%

20%

30%

40%

1H2006

annua

lgrow

thinprem

iums

(%)

43 Lloyds, Business Development calculation based on: IRDA, Journal, (2006 - 2007) 2006 figures are based on gross premium underwritten; figures are provisional and unaudited;amalgamated through Lloyds Business Development Directorate calculations based on IRDA

publications44 IRDA, Journal, (2006 - 2007)



24/60


Market playersCompetition was reintroduced in 2000 with the licensing of the first private companies.

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

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

competition to the insurance sector.

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

the spread of awareness about insurance and expanded the market, it was recognised

that their reach was still limited, the range of products restricted and the service to the

consumer inadequate.

Competition is seen as a

vital component in the

success of the Indian

non-life market

2. Secondly, it was felt that the rapid economic growth witnessed in the 1990s could not

be sustained without a thriving insurance sector.

3. Thirdly, it was recognised that the vast potential of India could only be achieved if

sufficient competition was generated and the Indian insurance sector was exposed to

global economic developments. The insurance sector was therefore opened to private

sector participation with provision for limited foreign equity participation in 2000.

The Indian general insurance market can be divided into three types of organisation: PSUs

private companies and special institutions. There are four PSUs, eight new private sector

companies, most of which are joint ventures with foreign insurers and two special

institutions (one of which, the Export Credit Guarantee Corporation of India Ltd, is solely

concerned with export guarantee products while the other is Chennai-based Star Health,

which is a standalone health insurance company.)

CHART 15: Premium levels vs. market share by segment (2006)45

19.4%

15.0%14.6%

13.9%

12.3%

4.8%

3.3%3.0%

1.2%0.8%

2.4%

0.1%

2.3%

6.9%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

NewIn

dia

Orien

tal

Nation

al

Unite

dIn

dia

ICICI-L

om

bard

BajajAllianz

IFF

CO-T

okio

Relian

ce

Gen

eral

Tata-AIG

Royal

Sun

daram

Ch

olam

an

dalam

HDF

CCh

ubb

ECGC

StarH

ealth

&

Allie

dIn

suran

ce

1H2006Writtenpremium(inbillionUSD)

0%

5%

10%

15%

20%

25%

Marke

tshare(in%oftotal)

Special

Institutions:

2.5%

Private

Companies:

34.6%

Public

Sector:

62.9%

Since liberalisation,

private companies havegained a 34.6% market

share

The PSUs remain dominant in the general insurance sector, with a combined market share

of 62.9%, while private companies had a combined market share of 34.6% in 1H 2006.

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

will be disregarded in the analysis below. The subsequent section is aimed at giving a high-

level overview of both PSUs and private companies, with a focus on comparative strengths

and weaknesses.

2006 figures are based on gross premium underwritten; figures are provisional and unaudited;amalgamated through Lloyds Business Development Directorate calculations based on IRDApublications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and

thus they are not included in the premium development bubble chart45 IRDA, Journal, (2006 - 2007)



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Public sector undertakings (PSUs)

The four public sector

insurers are located in

the major cities

The four major PSUs currently operating in the Indian general insurance market: National

(Calcutta); Oriental (Delhi); United India (Madras); New India (Bombay). In practice, the

PSUs tend to focus their efforts on maintaining a strong status and market position within

their local region rather than competing with one another. Although New India is generally

regarded as the most successful of the PSUs, the PSUs have the following commonchallenges:

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

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

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

than underwriting are at the forefront of their activities. This position is now no longer

sustainable, due to the phasing out of the tariff system during 2007.

Poor systems: The lack of competition in the Indian market, and the backing that the

PSUs receive from government, has meant that these insurers had hitherto faced lower

incentives to improve their levels of efficiency. Accordingly, sophisticated IT systems are

currently lacking in this environment most PSUs continue to operate at a paper-based

level. This is indicative of the inefficiency inherent within the Indian insurance market andprovides a reason for generally poor customer satisfaction.

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

the PSUs either fail to pay claims or take far too long to do so. This reinforces the general

publics perception of insurance as a tax rather than being of any economic value.Poor systems and the

loss of staff to private

insurers are key

reasons for the decline

of PSUs

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

currently experiencing, in conjunction with the higher monetary rewards on offer from

private sector players, is leading to significant levels of high-quality staff leaving the PSU

companies to join private competitors.

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

substantial exposure to the poorly performing motor third-party liability sector.

CHART 16: PSUs business class breakdown (1H 2006)46

1H 2006 Public Sector:

USD 1.7bn

Aviation 2%

Liability 2%

Marine Hull 3%

Marine Cargo 4%

Engineering 5%

Miscellaneous 10%

PA & Health 14%Motor TP 14%

Fire 19%

Motor OD 27%

The public companies

high exposure to motor

risks is A Cause for

Concern





26/60


Private companiesThe eight new private companies are growing fast. They are generally run by experienced

Indian managers and are strongly supported by foreign expertise. They are steadily building

their customer base and, over time, they are expected to acquire an ever larger share of the

market their share currently stands at 34.6%. Interviews in both London and India

revealed that the new private insurers collectively exhibited a number of strengths, these

included:

The eight private

companies have been

established since 2000

Small and flexible: The private firms have smaller and less disparate workforces than

the PSUs and are therefore able to respond quickly to changes in market conditions.Private companies have

been able to choose the

highest-calibre staff

from the PSUs

Good staff, systems, processes and data: Due mainly to their ability to pay higher

salaries, the private companies have been able to choose the highest-calibre staff from

the government-owned PSUs. The foreign partners involved in the new privately owned

Indian insurance ventures have ensured that high-quality systems and processes have

been implemented from the very beginning of their enterprise. This ensures that the

companies are run using international industry best practice standards to provide a

higher quality of data.

Greater focus on underwriting: Although the sales function of the private companies isstill extremely important to them, more emphasis is placed on maintaining sound

underwriting procedures and high-quality back office processes than is seen in the PSUs.The business models,

Customer service and

staff are stronger in

private companies

Strong claims-paying reputation: As a result of their greater efficiency and information

capture, the privately owned insurers operating in the Indian market have developed a far

better reputation than the PSUs for paying claims quickly and efficiently.

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

private companies have been able to build up a more favourable business mix. This is

due to the fact that PSUs are not allowed to decline certain unprofitable business such as

motor third-party.

CHART 17: Private companys business class breakdown (1H 2006)47

1H 2006

Private Companies:

USD 1.0bn

Marine Hull 3%

Aviation 1%

Liability 3%

Marine Cargo 4%

Motor TP 5%

Engineering 7%

Miscellaneous 8%

PA & Health 16%

Fire 23%

Motor OD 30%

Motor OD appears to

have been chosen as an

avenue for gaining

market share for

private companies





27/60


Foreign playersThe ability of foreign insurers to participate in the Indian non-life insurance market is

currently restricted to a 26% stake in a joint-venture vehicle with an Indian company. Even

with this relatively low level of foreign participation, many of the worlds largest insurers

(such as AIG, Allianz and RSA) have already entered the market. Despite their

disadvantaged position, foreign capital providers have been able to influence strategy,

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

differences between private companies.

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

American insurance giant AIG. The Mumbai-based Tata AIG intends to develop its retail

book but has stated that it is looking for quality of business rather than quantity it is not

prepared to compete on extremely low deductible business. It is estimated that Tata AIG

has employed 1,500 direct sales agents specifically to target this business. Additionally,

Tata AIG has embraced alternative channels that include bancassurance, corporate

agency, brokers and direct marketing, which contribute significantly to premium growth.

Tata is said to be a virtually silent partner in its venture with AIG.

ICICI-Lombard and IFFCO-

Tokio are aggressively

targeting personal

lines business

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

and IFFCO-Tokio are aggressively targeting personal lines business, the intention being to

grow market share quickly. Conversely, HDFC-Chubb announced that it intended to scale

back its personal lines business and focus instead on commercial business and liability

lines, particularly D&O. Since then, Chubb has exited from its Indian joint venture with

HDFC.

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

over-the-counter insurance products covering the health and home insurance sectors

exclusively for the banks customers. Bajaj Allianzs success is due to its extensive branch

network of more than 550 branches and more than 110,000 agents, which are estimated to

contribute around 70% of total premiums.

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

small and medium-sized enterprise (SME) business from Southern India.

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

business as well as strong brand recognition in financial lines.

New JVs in the pipeline

The IRDA approved in principle three new joint ventures in May 2007, DKV Apollo

Insurance, Future Generali Life, and Future General.48

The first is a joint venture between

Munich Res health insurance subsidiary and Apollo, a major Indian healthcare provider.

The others see Generalis successful entrance into both the life and non-life markets. There

are a further two stages of the application process before any of these companies are

considered operational. According to an article inAsia Insurance Post, Bharti Enterprises

and AXA announced that they have signed a Memorandum of Understanding to establish a

joint venture company to launch general insurance business in India.49 The joint venture,

which will be headquartered in Bangalore, is expected to commence operation in the

second half of 2007, subject to IRDA, FIPB and other statutory approvals.

Sompo Japan signed a joint venture agreement to establish a non-life insurance company

with state-owned banks, Allahabad Bank and the Indian Overseas Bank, as well as the

privately owned Karnataka Bank and the Dabur Investment Corporation in New Delhi.

Finally, Munich Re is looking to establish a joint venture through its primary insurance arm,

Ergo Versicherungsgruppe AG. Most recently, it has approached Larsen & Toubro and

HDFC after failing to secure a joint venture with Bank of Baroda.50

48 Asia Insurance Review, IRDA Approves Three More Insurers, (2007)

49 Asia Insurance Post, AXA joins forces with Bharti Enterprises for general insurance, (2007)50 Forbes, Munich res Ergo in talks with India L&T on insurance venture report, (2007)



28/60


Significant premium growth for private companiesWhen total figures are aggregated, the picture emerging is that IFFCO-Tokio, in particular,

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

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

quadrupled its premium underwritten when comparing the same periods. This was largely

due to the fact that the company is now driving its retail business having previously mainlyconcentrated on commercial lines. Conversely, HDFC Chubbs premium declined over the

same time period as summarised by the chart below.

CHART 18: Absolute vs. percentage growth (1H 2005 vs 1H 2006)51

79%

379%

48%30% 32%

24% 21% -5%

-40

0

40

80

120

160

ICICI-Lombard

Reliance

General

IFFCO-Tokio

BajajAllianz

TataAIG

Royal

Sundaram

Cholamandalam

HDFCChubb

1H2005vs

1H2006prem

iumgrow

th

-100%

0%

100%

200%

300%

400% 1H2005vs1H2006percentageprem

iumgrowth

Absolute premium growth (in million USD) Premium growth (in %)

Recent premium gr

has shown significant

variations

owthAbsolute premium

growth has been lead by

ICICI Lombard

Private companies are emerging as serious competitorsDespite the continued overall dominance of PSUs, private companies such as IFFCO Tokio,

are emerging as serious competition not only in quality of products and services but also in

terms of relative market size, which is illustrated best in the chart below.

CHART 19: Premium development by company (1H 2005 vs. 1H 2006)52

-200%

-100%

0%

100%

200%

300%

400%

500%

-100m -50m 0m 50m 100m 150m 200m

1H 2005 vs. 1H 2006 absolute premium growth (in USD)

1H2005vs.

1H2006premiumgrowth(in%)

Bajaj Allianz

New INdiaNational

ICICI-LombardIFFCO

Tokio

Tata AIG

Royal Sundaram

HDFC Chubb

Reliance General

Cholamandalam

Oriental

United

INdia

PSU Private companies

Legend

Size of bubble is equivalentto 1H 2006 premium levels

USD 75m

2006 figures are based on gross premium underwritten; figures are provisional and unaudited;amalgamated through Lloyds Business Development Directorate calculations based on IRDApublications; the IRDA classes ECGC and Star Health & Allied Insurance as specialised institutions andthus they are not included in the premium development bubble chart.

51 IRDA, Journal, (2006 - 2007)52 Ibid



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

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

CHART 20: PSUs vs. private companies class breakdown (1H 2006)53

0%

10%

20%

30%

40%

Motor

OD

Fire

PA

&H

ea

lth

MotorTP

Mis

cellan

eous

En

gin

eerin

g

Marin

eCa

rgo

Marin

eH

u

ll

Lia

bility

Avia

tion

1H2006businessclassbreakdown(in%

ofto

tal)

PSU Private companies

Private companies are

focusing on the more

profitable lines such as

Fire, Motor OD and PA &

Health

Potential growth areas for foreign companiesA small but significant portion of Indian business is also placed internationally. Some of the

key areas of growth for foreign companies writing Indian (re)insurance are discussed below.

Aerospace and Space: Aviation insurance demand is being driven by the opening up of

the local aviation market to private competitors. Space premium will continue to benefit

from the use of India as an alternative launch pad for space programmes.

Catastrophe reinsurance: The huge discrepancy between economic losses vs. insured

losses in recent tragedies has highlighted the need for catastrophe cover. As people and

business grow richer, it is expected that demand for this cover will increase. According to

the IRDA, India is said to be ranked among the top 50 countries suffering economic

losses due to natural disasters. Most of the losses are uninsured. In India, the penetration

of Catastrophe Insurance is under 0.5%, whereas in Turkey, it is to the tune of 17%.54

Foreign reinsurers are in demand because the GIC does not want to take on 100% of the

risk.

Mega and project risks: Risks with a total insured value above INR 15bn (USD 350m)

are outside the scope of the tariff market and are generally placed internationally. The

mega risk policy is a policy designed for big buyers of insurance, such as refineries and

other plants with heavy concentrations of risk. Due to limited capacity in India, these risksare typically insured only after reinsurance support is finalised. Under the mega risk

policy, these plant owners, instead of purchasing insurance at the tariff rates, could shop

around for the best deals in the reinsurance market. After striking the deal with the

Documents

Indian Business Surveys