Lloyd's Report On General Insurance in India

INDIA 2010 A LLOYD’S VIEW
June 2007
www.lloyds.com/marketintelligence
This document is intended for general information purposes only.
DISCLAIMER Whilst all care has been taken to ensure the accuracy of the information,
Lloyd’s does not accept any responsibility for any errors or omissions.
Lloyd’s 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.
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James Sutherland
Head of Operations
Lloyd’s Business Development Directorate
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London EC3M 7HA
United Kingdom
Telephone: +44 (0)20 7327 6883
Email: james.sutherland@lloyds.com
Filip Wuebbeler
Manager, Market Intelligence
Lloyd’s Business Development Directorate
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London EC3M 7HA
United Kingdom
Telephone: +44 (0)20 7327 6209
Email: filip.wuebbeler@lloyds.com
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5
CONTENTS Executive summary

The insurance environment in 2007
Looking forward to the market in 2010
Lloyd’s seeks to capitalise on Indian opportunities
Introduction
Purpose
6
7
7
8
8
Methodology 8
Structure 8
Business environment 9
Politics 9
Economy 12
The Indian Non-life Market 2007 18

Products 21
Market players 24
Distribution 30
Reinsurance 33
Class-by-class analysis 38
The Indian Non-life Market 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
Lloyd’s Indian liaison office 55
Bibliography 56
Glossary 59
KEY INFORMATION
Official 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 environment
GDP (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
Business Mix (2006)

insurance environment
Premium levels (2006) USD 6.0bn in 2006
Nominal annual
PA & Health 14% Miscellaneous 11%
premium growth 13% (during 2006)

Premium density (2005) India: USD 4.4 per capita
Motor TP 11%
Fire 20% India 2006: (= premiums per capita) South & East Asia: USD 21.4 per capita
OECD Average: USD 1,106.2 per capita
Engineering 6%
USD 6.0bn*
Regulator Insurance Regulatory and Development Authority:

Marine Cargo 4%
www.irdaindia.org
Marine Hull 3%
Liability 2%
Main non-life industry

Aviation 1%
association General Insurance Council

Motor OD 28%
Main life industry association Life Insurance Council

*Lloyd’s Business Development estimate
LLOYD’S BUSINESS
Premium levels (2006)* USD 94m Growth in 2006: 35%
Lloyd’s 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.
Lloyd’s agency network www.lloydsagency.com
Currencies
Currency 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 Lloyd’s
For compliance guidance, visit www.lloyds.com or contact Lloyd’s International Trading Advice on +44 (0)20 7327 6677
* Gross written global premiums based on figures processed by Xchanging by processing year and country of
origin; based on Business Development calculations from Source: Lloyd’s, “REG 258 Premiums Database”,
(2007); average exchange used for the period of 2005-2006
Executive summary 5
Executive summary
Despite political uncertainties, India’s 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 Economic growth despite political

uncertainty
Whilst India prides itself on being the world’s largest democracy, the
country is beset by political uncertainty. On the domestic front, India’s
United Progressive Alliance coalition is considered to be inherently
unstable. From an international perspective, relations with Pakistan are
viewed as a risk, due to ongoing tensions in Kashmir. Following the
implementation of reforms, India’s economy has been outperforming
other economic blocks with the notable exceptions of China and Russia,
and strong growth is predicted to continue over the medium term.
Factors that have enabled this strong performance include India’s
demographics, human capital, global integration, macroeconomic and
fiscal stability, and its diversifying industries. However, inefficiencies such
as infrastructure bottlenecks, the evolving regulatory environment and the
overburdened legal system hinder India’s economy in performing as well
as those of China and Russia.
2 Substantial reform progress in non-life

Reform 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 Growth projections point towards

high growth
The 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 Lloyd’s is seeking to capitalise on Indian

opportunities
The opportunities presented by the Indian market are deemed to be too
significant for Lloyd’s to overlook. As such, Lloyd’s 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 Lloyd’s offering to the Indian
economy. Additionally, the office will help to raise Lloyd’s profile with
brokers, cedants, insureds and the media. Ultimately, Lloyd’s wants to
gain access to the direct insurance market in India.
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
Non-life premium substantially since the turn of the century, and received an additional
income increased boost in 2007 with the detariffication of key classes of business.
Non-life premium income has increased by 106% since initial
by 106% between 2000
and 2005 liberalisation in 2000, consistently outstripping global growth, as
summarised by the indexed premium chart below. However, growth in
India’s non-life market appears to have slowed to 13% in 2006 – down
from 18% in 2005.
CHART 1: Premium levels( (in billion USD) 1 CHART 2: Indexed premium levels (2000 = 100) 2
Average annual growth (1995-1999): +5% Average annual growth (2000-2006): +15%
Indexed non-life direct premium levels (2000 + 100)

250
7
Nominal market premiums (in billions USD)
India: +106%
6 200
Point of liberalisation 6.0
5
4.8
4 150
4.1
3.7 World: +55%
3 3.1
100
2.4 2.6
2
1.9 2.1 2.2 2.2 2.3
1
50
2000 2001 2002 2003 2004 2005
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*
World India
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
despite liberalisation terms and conditions for existing products for up to 15 months post-
in 2000, the indian detariffication in an effort to avoid confusion during the initial stages.
• Public Sector Undertakings (PSUs): PSUs remain dominant with an
market remains
estimated market share of over 60%. However, this share is reducing as
heavy regulated
a result of private sector competition.
• 26% FDI cap: Foreign entities must partner with an Indian entity in order
to form an insurer and are limited to a maximum 26% stake in the joint
venture. While the current government has suggested increasing the FDI
cap to 49%, the timing of this change remains unclear as it is likely to
trigger further policy discussions within the centre-left government
coalition.
• Agents: Around 80% of premiums are still distributed through the
traditional medium of the direct sales (or ‘marketing’) agent. Brokers have
failed to gain a significant market share largely due to regulations that
have put them in a disadvantaged situation.
• Compulsory 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%.
2006 figures are based on gross premium underwritten; figures are provisional and unaudited;
amalgamated through Lloyd’s Business Development calculations based on IRDA publications
1 “Swiss Re sigma database, Non-Life Insurance Premiums – 1980-2005”, (2006); IRDA,
various publications, (2007)

2 Ibid
3 NB: measured in terms of premiums transacted

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 positive
changes, 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
the extent of future to do so for the next 18 to 24 months.
• The practice of cross-subsidisation is likely to be phased out as risk-
liberalisation is the
based pricing is used increasingly for all products.
subject of an
ongoing debate
• 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.
Lloyd’s seeks to capitalise on Indian

opportunities
In order to be best placed to take advantage of the forecast rise in
commercial non-tariff business, Lloyd’s is lobbying for improved access
to the Indian direct market.
Moreover, Lloyd’s is establishing a liaison office in Mumbai. From this

platform, Lloyd’s will seek to build relationships within the Indian market,
to promote collaborations between Lloyd’s and other market players,
and to act as a communication channel between Lloyd’s in London and
Indian companies.
Introduction 8
Purpose
INTRODUCTION 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 today’s market conditions, the
report takes account of changes likely to occur within the regulatory
environment in the next three years.
Methodology
The information upon which this report is based has been derived from a
wide range of both primary and secondary sources. Most of the facts and
figures originate from extensive desk research of an array of publicly
available information. This research is mainly quantitative in nature and
forms the backbone of this report.
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 dynamics
that 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 BUSINESS ENVIRONMENT
The opening section provides an overview of the dynamic growth
currently being experienced in India. In particular, it highlights the most
important political and economic factors that are likely to influence the
country’s economic progress between 2007 and 2010.
2 the indian non-life market 2007

This section provides information and analysis on the key components of
the Indian non-life market today. These components include: premium
income, products, competitors, reinsurance and regulation.
3 the indian non-life market 2010

Premium growth projections are particularly challenging to compile due to
the large number of unknowns – such as company strategy and policy
response. As such, this paper aims to simplify such growth projections by
offering two scenarios. Scenario I 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 Lloyd’s has utilised its
research into the Indian insurance market by giving an overview of
Lloyd’s current two-pronged approach to capitalising on opportunities
arising from the Indian market.
Business environment
Politics
The efficiency of India’s 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
regulatory
terms of culture, languages, religions and contrasting convictions. Much of the complexity of
environment is
India’s politics and regulatory environment is dictated by the difficulties of these competing
questionable interests.
Regulatory environment
Despite its reputation, India performs well in terms of control of corruption, rule of law, and
voice and accountability, when compared to the regional average. However, this does not
disguise the fact that the country is often beset by political volatility, manifest by
comparatively low levels of political stability.
CHART 3: Governance indicators 4 versus regional average

(2005) 5
Voice and Accountability

75
50
Control of Corruption Political Stability

Compared to regional 25
peers, India scores high
in terms of rule of law 0
and accountability
Rule of Law Government Effectiveness
India Regulatory Quality Regional Average
Notwithstanding the country’s heterogeneous society, there is an established and binding

institutional framework, which includes a legal system, capital market regulators and
banking supervisors. However, the efficiency and efficacy of these institutions is
questionable, and there are significant gaps within the Indian regulatory environment such
6
as the lack of data protection legislation. In addition to relatively high levels of corruption,
there is a labyrinth of regulation caused by relations between the central and state
governments, which must be simplified if initiatives such as reform of the power sector and
the development of special economic zones are to succeed. A major effect of these
challenges is to hinder the speed of legislative change, resulting in very slow legislature.
"We have to make our economic systems as transparent and as open as possible.
We must focus on vital issues like corporate citizenship, market opportunities and
intellectual property rights." 7
Narayana Murthy, Infosys Technologies, India, WEF Summit, (2004)
4 NB: The above chart depicts the percentile rank on each governance indicator. Percentile rank
indicates 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 India’s Potential for Accelerated Growth”, (2004), page 9
Legal environment
India has an independent 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
judicial system that
courts, which administer both Indian and individual state laws. While the judicial process is
resembles those of considered fair, a large backlog of cases and frequent adjournments can result in
Anglo-Saxon countries 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,
There is a large backlog especially in motor third-party cases, the general level of liability claims awareness amongst
of cases clogging India’s India’s population is low. Consequently, the demand for corresponding insurance protection
remains modest.
judicial process
Domestic politics
In a dramatic turnaround in its fortunes, the Indian National Congress emerged as the
largest party following 2004’s elections. This party formed a governing alliance, the United
Progressive Alliance (UPA), with a number of smaller regional parties, as well as utilising
the 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
country’s burgeoning middle classes and their interests rather than those of the mass rural
Though unstable, India’s poor.
current government is
India’s turbulent politics are complex and often lead to short-lived administrations at national
expected to remain in
and state level. There is also often a wide gulf between the commitments made by
office 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 India’s economic liberalisation will be determined by the leadership’s ability to
pursue the country’s 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, India’s pluralist political system can complicate and thus further hinder the reform
process.
Foreign relations
India’s foreign relations have in the past been dominated by its difficult relationship with
Pakistan and, more recently, with Bangladesh. India’s 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
Tensions have eased
countries fighting three wars since partition in 1947 and narrowly avoiding a fourth in 2002.
between India and Relations, however, improved noticeably during the premiership of the Bharatiya Janata
Pakistan over Kashmir Party’s (BJP’s) Atal Behari Vajpayee, who initiated peace talks with Islamabad.
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
8
good faith over the future of Kashmir. Thus significant tensions still exist and the core issue
India will never achieve of Kashmir’s 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
its full potential
ground, India will never achieve its full potential, either economically or geopolitically.
without a durable
solution in Kashmir
8 The Economist, “Terror in Mumbai: Call this Peace?”, (15 July 2006), pages 63-64
Moreover, it is argued that neither of these two things can happen without a durable solution
9
in Kashmir.
Bangladesh
Relations with India’s 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. An
issue 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 1962 Sino-Indian War and continuing
territorial/boundary disputes in Kashmir and 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 US

relationship with India India’s 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
as a counterbalance to
strategic dominance and, as a consequence, welcomes a closer relationship with India as a
China’s expanding
counterbalance. In upgrading ties with India, it is significant that Mr Bush has avoided an
power endorsement of India’s ambitions to gain a permanent seat on the United Nations (UN)
10
Security Council.
UN Security Council
The question of India’s permanent membership on the UN Security Council is a high and
pressing priority for New Delhi. All elements along the Indian political spectrum are united in
the belief that their country’s 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
A permanent membership important institution of international governance, the UN Security Council. Germany, India,
on the UN Security Japan and Brazil, known as the G4, and the African Union are amongst those lobbying for
Council is a high priority coveted permanent member status. A working group on reform set up under the UN
for India General Assembly in 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 council’s standing in
11
the world.
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: India’s Horror”, (15 July 2006), page 10
10 Ibid
11 BBC News, “Profile: The UN Security Council”, (3 January 2006)
Economy
For decades, India's economy underperformed relative to its potential. Socialist policies and
For decades, India’s
a powerful bureaucratic apparatus led to red tape that stifled entrepreneur-led development.
economy
With the collapse of the Soviet Union, a major reorientation of trade was needed. This, in
underperformed combination with additional external factors, led to a balance-of-payments crisis at the start
relative to its potential of the 1990s, which provided further stimulus for a wave of economic reforms.
Following the implementation of these reforms, for which today’s Prime Minister Manmohan
Singh is widely regarded as the ‘architect’, growth surged through to the mid-1990s and the
beginning of this decade – with India outperforming other large economic blocks, with the
notable exceptions of China, throughout the whole decade and Russia in 2005.
CHART 4: Indexed nominal GDPs of major economies (1997 – 2006) 12

300
Following reforms,
The 2003 growth spurt in India was
growth surged and 250 led by the services sector; the
Indexed Nominal GDP (1997 = 100)
made a step change fastest-growing components of this

sector include trade, tourism,
upwards in 2002 transport, communications, and
200 financial and business services.
150
100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
India China US Euroland
In addition to the change in its economic development policies, India’s business

environment and the country’s growth prospects are influenced by a number of
characteristics. These characteristics demonstrate that whilst the economy is growing and
developing, it is still held back by inefficiencies and bureaucracy. These challenges will
need to be tackled if India’s economy is to continue to perform well in the future.
TABLE 1: Factors affecting India’s growth prospects
Favourable factors Unfavourable factors
• Favourable demographics • Infrastructure bottlenecks
• Improving human capital • Evolving regulatory environment
• Globally integrating economy • Transparent but overburdened

legal system
• Challenging but improving
macroeconomic and fiscal stability
• A mix of sheltered manufacturing and

some competitive services sectors
12 Deutsche Bank Research, “Country Infobase”, (2007)

Demographics
India’s working 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
population is projected 13
in the world after China, increasing at roughly 1.5% per year. Latest figures from the UN
to grow significantly
Population Division reveal that India’s working population is projected to grow significantly
over the next 15 years as highlighted by the chart below. This signifies that there will be a
significant growth in labour supply over the next 15 years.
CHART 5: Age group projections (2000 – 2020) 14
100%
Age group of population (in % of total)
75%
34% 35% 36% 37% 38%
50%
25%
0%
2000 2005 2010 2015 2020
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 2020 15
60
India is set to have the 47.0
World’s largest
50
Surplus Working Population (in millions)
surplus working 40
population by 2020 30
19.0
20
5.0
10
3.0
0
-2.0 -2.0 -0.5

-3.0 -3.0 -3.0
-10
-9.0 -6.0
-10.0
-20
-17.0
-30
US Ch Ja Ru Ge Fra Sp UK Ita Au Br Me Pa Ind
ina pa ssi rm nc ain ly str az xic kis ia
n a an e ali il o tan
y a
Further research indicates that, between 1980 and 2000, an estimated 210 million Indians
An estimated 210 million
were lifted above the poverty line (the threshold of which is USD 1.5 in earnings per day),
Indians have been lifted
which is an impressive feat given that, during the preceding 20 years, the number of poor in
above the poverty line
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, “India’s New Opportunity – 2020”, (2005), page 11
16
India increased by about 93 million. As such, in 2000, 28% of the Indian population was
17
below the poverty line, as compared to 36% in 1994. This suggests that the outcomes of
India’s surplus population are likely to be positive.
Human capital
India possesses a large 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,
pool of scientists, IT
not least if compared with its regional peers. Even though India has comparatively low
specialists, technicians levels of overall adult literacy of around 61%,
18
the country produces a large number of
and engineers 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
19
PhD students graduate annually. 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 country’s 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 Tier one Indian IT providers such as Infosys, Wipro and TCS have continued to thrive
21
(reporting revenue growth of around 40% for the second quarter of 2006). Over the past
science-based firms have
five years alone, more than 100 IT and science-based firms have opened research and
opened R&D Labs in India development (R&D) laboratories in India.
22
India is also reported to be set to become the
during the last five regional hub for pharmaceutical R&D, manufacturing and exporting.
23
years
Globally integrating economy

India’s trade volume as a
India has made significant inroads in opening its economy since it joined the WTO in 1995.
share of GDP is low in There are, however, still remnants of its inward-looking development strategy. Indeed,
contrast to other major India’s trade volume as a share of GDP is low in contrast to other major Asian countries,
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 India’s 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 India’s Potential for Accelerated Growth”, (2004), page 1
17 The Boston Consulting Group, “India’s New Opportunity – 2020”, (2005), page 11
18 World Bank, “Education Profile – India”, (2005)
19 Chaudhry, H., “Trade in Higher Education”, City University of Hong Kong
20 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)
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
India’s 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%
25
for the 2006-2007 budget are steps towards opening the economy further.
As India becomes a key part of the global supply chain, some of its companies will emerge
as 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 stability

Inflation has declined in Inflation has declined significantly in recent years, stabilising at a level of roughly 5% after
recent years, but consistent double-digit inflation prior to the 1990s.
26
But the monetary authority’s success in
increased fiscal maintaining relative price stability going forward will require improvements in fiscal policies.
discipline is vital India’s 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
27
since then have been very high at around 10% of GDP.
28
India’s poor public finances 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 Act was passed in 2002, with a goal of bringing
8 29
down total deficit and revenue deficit to 3% and 0% of GDP, respectively, by 2008-2009.
The introduction of the national value added tax (VAT) system in April 2005 is also expected
to contribute to fiscal consolidation.
Infrastructure bottlenecks
As a consequence of persistent shortfalls in public revenues, public investment has fallen
There are severe
continuously over the years, leading to severe infrastructure bottlenecks. Indeed, despite
infrastructure
having one of the most extensive transport systems in the world, this sector continues to
bottlenecks in India suffer from acute capacity and quality constraints. As such, growth is expected to hit severe
30
infrastructure constraints in the near future.
“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 The government is faced with tough choices in allocating investment resources. According
to Prime Minister Manmohan Singh, India requires a total of USD 150bn in the short term to
USD 150bn to finance its
finance its infrastructure development (rail, airport and seaport). Given this resource
infrastructure requirement, it is not possible to fully fund infrastructure development from the government’s
development
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 6-7
27 Ibid
28 For detail see APPENDIX Macroeconomic Imbalances
29 Deutsche Bank Research, “India Rising: A medium-term Perspective India Special”, (2005), page 6
30 FICCI, “Infrastructure Transformations”, (2005), slide 5
31 Hiscock, G., “Infrastructure the Missing Link”, (2004)
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 India’s poorest
regions remain impoverished, and this has impeded the rapid expansion of manufacturing.
Service sector bias

India’s 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, India’s 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 India has built up a diverse industrial sector with major industries, including automobiles and
auto ancillaries, iron and steel, aluminium, textiles and garments, pharmaceuticals,
diverse industrial
chemicals and petrochemicals, oil and gas and other hydrocarbons, electricity,
sector with major
telecommunications, IT and business process outsourcing (BPO) services, healthcare and
industries 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

India’s Technology, At the high end of India’s productivity spectrum is the IT, software and BPO sector. Initially
software and starting with back office services such as call centres and tax work, India’s outsourcing
platform has risen up the value chain and now includes research and development in high-
outsourcing sector is
tech sectors such as biotechnology and pharmaceuticals. It is a big success story, having
highly competitive
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 India’s
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
32
restricted in most other sectors. By 2002, it already accounted for 15% of all FDI in India.
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)
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
33
2003-2004 compared to USD 760m in 2002-2003. 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

India’s consumer At the low end of the spectrum is the consumer electronics sector, which, despite the lifting
electronic sector is still 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
burdened by tariffs,
quality with international competitors. As a result of a total ban on FDI and extremely low
making it uncompetitive labour productivity and performance, India’s food retailing industry is considered to be the
least competitive sector in the subcontinent.
33 IndianAuto.com, “Information on the Indian Automobile Industry”, (2006)

The Indian Non-Life Market 2007 18
The Indian Non-life Market 2007
The Indian non-life USD 4.85bn worth of premiums were written in the Indian non-life insurance market in 2005,
th 34
making India the 27 largest market in the world in terms of non-life premium.
market is ranked 27th
largest in the world The Indian non-life market currently lags behind that of its main economic rival, China,
predominantly as a result of the Chinese economy’s greater urbanisation, number of
automobiles and emphasis on manufacturing. China also began its insurance liberalisation
process earlier. Nonetheless, India’s growth performance is very strong relative to that of
the world as a whole.
CHART 7: Indexed premium levels (2000 = 100) 35
250
Indexed non-life direct premium levels (2000 = 100)
India: + 106%
200
India is growing at
roughly twice the rate
150
of the total global
World: +55%
insurance market
100
50
2000 2001 2002 2003 2004 2005
World India
Worldwide non-life premiums have grown significantly over the past few years; a key
contributory factor to this was the 9/11 attack on the World Trade Center. However, the
growth of non-life premiums in India has outstripped average global rates every year for the
past decade and has demonstrated a surge since market liberalisation in 2000.
CHART 8: Premium levels ∗ (in billion USD) 36
Average annual growth (1995-1999): +5% Average annual growth (2000-2006): +15%
7
Nominal market premiums (in billion USD)
6
6.0
5 Point of liberalisation
Liberalisation has led to 4.8
4
a marked increase in 4.1
India’s premium levels 3.7
3
3.1
2 2.6
2.2 2.2 2.3 2.4
1.9 2.1
1
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*
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 and
unaudited; growth factor has been applied by company growth of PSU vs Private comparing 1H 2005 vs
1H 2006; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA
publications
36 “Swiss Re sigma database, Non-Life Insurance Premiums – 1980-2005", (2006); IRDA, various
publications, (2007)
The Indian non-life market 2007 19
Despite outgrowing the global non-life market over the past decade, non-life penetration
37
levels in India remain extremely low at just 0.6%. Whilst low penetration in a developing
economy is to be expected, the Indian position falls well below that expected by Sigma’s
‘S-Curve’, which links non-life penetration to income per capita.
A significant contributing factor in the disparity between India’s actual penetration / GDP per
High regulation may be a
capita and that expected by Sigma’s research (‘The S-Curve Gap’) is the highly protectionist
major reason for the 38
regulatory position adopted by the government until reforms were adopted in 2000.
low level of insurance
CHART 9: Penetration vs. GDP per capita – “The S-Curve” (2003) 39
penetration
6
US
UK
Non-life premiums (in % of GDP)
Non-life penetration 4
levels are lower in India

3
than would be expected
Russia
2
Brazil
China
1 indonesia
S-Curve Gap
India
0
1,000 10,000 100,000
Logarithmic scale of GDP per capita (in PPP USD)
Current insurance market reforms and continued high economic growth would appear to
provide a strong platform from which to drive premium development in the Indian market
and, thereby, to close the country’s S-Curve Gap in the short to medium term.
Analysing the market today

The 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 below
39 Non-life premiums in % of GDP from Swiss Re sigma database, WWM Calculation
The Indian Non-Life Market 2007 20
Historical context
Colonial era
The first insurer in the India’s first general insurance company, Triton, was established in 1950 and was owned
Indian market was and operated by the British. In 1938, the Insurance Act was passed. This was the first
established in 1850 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)
Colonial era Nationalisation Liberalisation
1850: 1st insurance 1947: Economic 1991: Economic 2007: Remaining

company created nationalisation begins liberalisation begins tariffs abolished
1999: Insurance Regulatory

and Development Authority Act
1850 1947 1991 2007
1938: Insurance 1972: Insurance market 1994: Marine tariffs 2000: 1st private
Act passed fully nationalised removed companies licensed
Nationalisation
Following independence in 1947, the Indian government implemented an economic model
The non-life industry based on the Soviet system of national planning. Insurance was not seen as strategically
was not initially important and so was not initially nationalised. In 1950, the Insurance Act of 1938 was
nationalised following amended to set up a Tariff Committee, which fell under the control of the General Insurance
independence Council of the Insurance Association of India – the Tariff Committee was so influential that it
soon became known as the “Rate Maker”.
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.
The non-life market was However, post nationalisation in 1972, the independence of the TAC came into question –
eventually nationalised observers described the TAC as the “handmaiden of the nationalised companies” (senior
in 1972 following many management of these companies took the most senior positions on the TAC) – as rates did
not necessarily reflect “market price”.
years of tariff-setting
By 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 under Manmaohan Singh. Three years later, the
Malhotra Committee Report on the state of the Indian insurance industry was released. It
The market was recommended sweeping changes that would reactivate competition in Indian insurance.
reopened to competition
These recommendations were put into practice via the Insurance Regulatory and
in 2000 following an Development Authority Act (IRDA 1999). In particular, the monopoly previously enjoyed by
influential report 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.
Products
The subsequent section aims to give a brief overview of product dynamics, recent growth
experience, detariffication and potential future growth areas.
Detariffication will change the dynamics of the market

The progress towards full detariffication of the non-life sector began in 1994 when insurance
tariffs on personal accident and bankers’ indemnity were dismantled. Between 1994 and
2006, some progress was made towards detariffication in marine insurance. Nevertheless,
motor, fire, workmen’s compensation and engineering risks remained tariffed – accounting
for around two-thirds of premium. As of January 2007, all classes of business except for
motor third-party liability are no longer under price tariffs.
Motor third-party liability has not yet been detariffed as it was thought that the poor pricing
could be addressed separately. It is suggested that this final tariffed product will be
liberalised in 2008, although that has not yet been confirmed.
CHART 11: Detariffication roadmap (1994 – 2007)
Aviation Aviation Aviation

Liability‡ Liability‡ Liability‡
PA & Health PA & Health PA & Health
All classes of business, Detariffed Marine Cargo Marine Cargo Marine cargo
except for motor third- Tariffed Marine Hull Marine Hull Marine Hull
party liability, are no Fire♣ Fire♣ Fire♣
longer under price
Engineering Engineering Engineering
tariffs
Motor OD Motor OD Motor OD
Motor TP Motor TP Motor TP
1994 April 2005 January 2007*
♣ Large properties with a total insured value of > USD 500m are freely priced, but must still go
through a qualifying process before placement can be made outside India;
‡ Workmen’s compensation and Public Liability (Act) 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
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
40
as October 2007, although these would still be subject to IRDA approval.
In addition to product restrictions, insurers are not permitted to drop the price of a product
by more than 49% in the case of fire risks and 20% in the case of motor own damage
41
without the approval of the regulator. While this may not prevent a rise in price
competition, it will certainly create an administrative barrier to rapidly falling prices.
40 DNA, “Made-to-order insurance by October”, (2007)

41 Lloyd’s Business Development, (2007)
Legacies of a tariffed product market

The latest round of detariffication is more significant than it may appear at first. Although the
Indian insurance regulator (the IRDA) has been pursuing a policy of detariffication since
1994, around two-thirds of all non-life premiums in the Indian non-life market remained
tariffed until the beginning of 2007.
CHART 12: Tariffed vs. non-tariffed market by class (2006) 42
Motor TP 11% Engineering 6%
PA & Health 14%
Around two-thirds of
the Indian market Fire 20%
remained tariffed up
India 2006:
until the end of 2006 Miscellaneous 11%
USD 6.0bn
Marine Cargo 4%
Motor OD 28%
Marine Hull 3%
Liability 2%
Aviation 1%
Until the end of 2006, only specialist commercial classes such as marine, aviation and
professional liability had been fully detariffed – leaving the large mainstream classes such
as motor, fire and engineering tariffed. As the tariffs covered most of the market until very
recently, their effects dominated the market, influencing the pricing of even non-tariffed
products.
Sophisticated insurance buyers are aware that insurers profit from hitherto tariffed lines
Cross-subsidisation and such as fire and place demands on insurers to cut their rates in other ways.
product bundling were
One method used by insurers to attract fire premiums has been the use of ‘product
used to cope with the
bundling’. This activity sees insurers bundling together tariffed products with non-tariffed
tariffed market 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 market

A 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 Lloyd’s Business Development calculation

CHART 13: Tariff vs non-tariff growth∗ (1H 2005 vs 1H 2006) 43
250 15.0%
231
15%
Absolute premium growth (in million USD)

200
India’s non-tariffed
Relative premium growth (in %)

14.0%
market in the 1H 2006 150
144
expanded by USD 144m

(15%) when compared to 100
1H 2005 13% 13.0%
50
0 12.0%
Tariff Non-Tariff
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

1H 2006 premium by business class (in million USD)
800 40%
1H 2006 annual growth in premiums (%)

600 30%
28% 28%
27%
25%
400 20%
17%
11%
200 10% 10% 10%
6%
2%
0 0%
Fire
Liability
Aviation
Motor OD
PA & Health
Motor TP
Engineering
Marine Hull
Miscellaneous
Marine Cargo
43 Lloyd’s, Business Development calculation based on: IRDA, “Journal”, (2006 - 2007)
∗ 2006 figures are based on gross premium underwritten; figures are provisional and unaudited;
amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA
publications
44 IRDA, “Journal”, (2006 - 2007)
Market players
Competition was reintroduced in 2000 with the licensing of the first private companies.
Foreign investment was also allowed at the same time, but limited to 26% ownership.
There were several reasons that prompted the Indian government to bring reform and
competition to the insurance sector.
1. Firstly, while the public sector insurance companies made an enormous contribution in
the spread of awareness about insurance and expanded the market, it was recognised
Competition is seen as a that their reach was still limited, the range of products restricted and the service to the
vital component in the consumer inadequate.
success of the Indian 2. Secondly, it was felt that the rapid economic growth witnessed in the 1990s could not
non-life market 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

Public Private
1.2 Special 25%
Sector: Companies: Institutions:
62.9% 34.6% 2.5%
1H 2006 Written premium (in billion USD)
1.0
19.4%
20%
Since liberalisation,
Market share (in % of total)

0.8
private companies have 15.0%
14.6% 15%
13.9%
gained a 34.6% market 0.6 12.3%
share 10%
0.4
6.9%
4.8% 5%
0.2 3.3% 3.0%
2.3% 2.4%
1.2%
0.8%
0.0 0.1% 0%
New India
Oriental
National
United India
ICICI-Lombard
Bajaj Allianz
IFFCO-Tokio
Reliance
Tata-AIG
Sundaram
Cholamandalam
HDFC Chubb
ECGC
Allied Insurance
General
Star Health &

Royal
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.
publications; the IRDA classes ECGC & Star Health & Allied Insurance as a specialised institution and
thus they are not included in the premium development bubble chart
45 IRDA, “Journal”, (2006 - 2007)
Public sector undertakings (PSUs)

The four public sector 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
insurers are located in
PSUs tend to focus their efforts on maintaining a strong status and market position within
the major cities their local region rather than competing with one another. Although New India is generally
regarded as the most successful of the PSUs, the PSUs have the following common
challenges:
• Sales focus (rather than underwriting): The tariff system, which has existed for a
generation, has resulted in the lack of a need for insurance companies to underwrite.
Additionally, PSUs have their own in-house sales agents for whom sales targets rather
than underwriting are at the forefront of their activities. This position is now no longer
sustainable, due to the phasing out of the tariff system during 2007.
• Poor systems: The lack of competition in the Indian market, and the backing that the
PSUs receive from government, has meant that these insurers had hitherto faced lower
incentives to improve their levels of efficiency. Accordingly, sophisticated IT systems are
currently lacking in this environment – most PSUs continue to operate at a paper-based
level. This is indicative of the inefficiency inherent within the Indian insurance market and
provides a reason for generally poor customer satisfaction.
• Poor claims-paying record: There is a general perception within the Indian market that
the PSUs either fail to pay claims or take far too long to do so. This reinforces the general
Poor systems and the
public’s perception of insurance as a tax rather than being of any economic value.
loss of staff to private
insurers are key • 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
reasons for the decline
private sector players, is leading to significant levels of high-quality staff leaving the PSU
of PSUs
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
Motor TP 14% PA & Health 14%
The public companies’

Miscellaneous 10%
high exposure to motor
risks is A Cause for
Concern Fire 19% 1H 2006 Public Sector:
USD 1.7bn Engineering 5%
Marine Cargo 4%
Marine Hull 3%
Aviation 2%
Liability 2%
Motor OD 27%
46 IRDA, “Journal”, (2006 - 2007)
Private companies
The eight new private companies are growing fast. They are generally run by experienced
The eight private
Indian managers and are strongly supported by foreign expertise. They are steadily building
companies have been
their customer base and, over time, they are expected to acquire an ever larger share of the
established since 2000 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:
• Small and flexible: The private firms have smaller and less disparate workforces than
Private companies have the PSUs and are therefore able to respond quickly to changes in market conditions.
been able to choose the
• Good staff, systems, processes and data: Due mainly to their ability to pay higher
highest-calibre staff
salaries, the private companies have been able to choose the highest-calibre staff from
from the PSUs the government-owned PSUs. The foreign partners involved in the new privately owned
Indian insurance ventures have ensured that high-quality systems and processes have
been implemented from the very beginning of their enterprise. This ensures that the
companies are run using international industry best practice standards to provide a
higher quality of data.
• Greater focus on underwriting: Although the sales function of the private companies is
still extremely important to them, more emphasis is placed on maintaining sound
The business models, underwriting procedures and high-quality back office processes than is seen in the PSUs.
Customer service and
• Strong claims-paying reputation: As a result of their greater efficiency and information
staff are stronger in
capture, the privately owned insurers operating in the Indian market have developed a far
private companies 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 company’s business class breakdown ∗ (1H 2006) 47
Miscellaneous 8%
PA & Health 16%
Engineering 7%
Motor OD appears to
have been chosen as an Motor TP 5%
avenue for gaining 1H 2006

Marine Cargo 4%
market share for Fire 23%
Private Companies:
private companies Liability 3%
USD 1.0bn
Marine Hull 3%
Aviation 1%
Motor OD 30%
47 IRDA, “Journal”, (2006 - 2007)
Foreign players
The ability of foreign insurers to participate in the Indian non-life insurance market is
currently restricted to a 26% stake in a joint-venture vehicle with an Indian company. Even
with this relatively low level of foreign participation, many of the world’s largest insurers
(such as AIG, Allianz and RSA) have already entered the market. Despite their
disadvantaged position, foreign capital providers have been able to influence strategy,
product focus and speed of growth. As a result of this influence, there are growing
differences between private companies.
Tata AIG is a joint venture (JV) between the multinational Indian conglomerate Tata and
American insurance giant AIG. The Mumbai-based Tata AIG intends to develop its retail
book but has stated that it is looking for quality of business rather than quantity – it is not
prepared to compete on extremely low deductible business. It is estimated that Tata AIG
has employed 1,500 direct sales agents specifically to target this business. Additionally,
Tata AIG has embraced alternative channels that include bancassurance, corporate
agency, brokers and direct marketing, which contribute significantly to premium growth.
Tata is said to be a virtually silent partner in its venture with AIG.
ICICI-Lombard and IFFCO- 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
Tokio are aggressively
grow market share quickly. Conversely, HDFC-Chubb announced that it intended to scale
targeting personal
back its personal lines business and focus instead on commercial business and liability
lines business lines, particularly D&O. Since then, Chubb has exited from its Indian joint venture with
HDFC.
Bajaj Allianz has formed a strategic alliance with Karnataka Bank to launch two co-branded
over-the-counter insurance products covering the health and home insurance sectors
exclusively for the bank’s customers. Bajaj Allianz’s success is due to its extensive branch
network of more than 550 branches and more than 110,000 agents, which are estimated to
contribute around 70% of total premiums.
Cholamandalam-Mitsui is based in Madras and continues to focus on the mid-market

small and medium-sized enterprise (SME) business from Southern India.
Royal Sundaram is also based out of Madras and is said to maintain a stable book of
business as well as strong brand recognition in financial lines.
New JVs in the pipeline

The IRDA approved in principle three new joint ventures in May 2007, DKV Apollo
48
Insurance, Future Generali Life, and Future General. The first is a joint venture between
Munich Re’s health insurance subsidiary and Apollo, a major Indian healthcare provider.
The others see Generali’s 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 in Asia Insurance Post, Bharti Enterprises
and AXA announced that they have signed a Memorandum of Understanding to establish a
49
joint venture company to launch general insurance business in India. 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
50
HDFC after failing to secure a joint venture with Bank of Baroda.
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 re’s Ergo in talks with India L&T on insurance venture – report”, (2007)
Significant premium growth for private companies

When total figures are aggregated, the picture emerging is that IFFCO-Tokio, in particular,
recorded spectacular growth figures of USD 148m (79%) during 1H 2006 vis-à-vis 1H 2005.
Furthermore, the jump in premium growth for Reliance General of USD 66m almost
quadrupled its premium underwritten when comparing the same periods. This was largely
due to the fact that the company is now driving its retail business – having previously mainly
concentrated on commercial lines. Conversely, HDFC Chubb’s premium declined over the
same time period as summarised by the chart below.
CHART 18: Absolute vs. percentage growth ∗ (1H 2005 vs 1H 2006) 51
160 400%
1H 2005 vs 1H 2006 percentage premium growth

379%
1H 2005 vs 1H 2006 premium growth

120 300%
Recent
Absolutepremium growth
premium
has shown
growth hassignificant
been lead by 80 200%
variations
ICICI Lombard 40 100%
79%
48%
30% 32% 24% 21%
0 -5% 0%
-40 -100%
ICICI-Lombard
Reliance
IFFCO-Tokio
Bajaj Allianz
Tata AIG
Sundaram
Cholamandalam
HDFC Chubb
General
Royal
Absolute premium growth (in million USD) Premium growth (in %)
Private companies are emerging as serious competitors

Despite the continued overall dominance of PSUs, private companies such as IFFCO Tokio,
are emerging as serious competition not only in quality of products and services but also in
terms of relative market size, which is illustrated best in the chart below.
CHART 19: Premium development∗ by company (1H 2005 vs. 1H 2006) 52
500%
Tata AIG
1H 2005 vs. 1H 2006 premium growth (in %)
Royal Sundaram
400%
Cholamandalam
HDFC Chubb
300%
Legend Reliance General
200%
Size of bubble is equivalent
to 1H 2006 premium levels 100%
IFFCO ICICI-Lombard
Oriental Tokio
≈ USD 75m 0%
United
-100% INdia
Bajaj Allianz
National New INdia
-200%
-100m -50m 0m 50m 100m 150m 200m
1H 2005 vs. 1H 2006 absolute premium growth (in USD)
PSU Private companies
publications; the IRDA classes ECGC and Star Health & Allied Insurance as specialised institutions and
thus they are not included in the premium development bubble chart.
51 IRDA, “Journal”, (2006 - 2007)
52 Ibid
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
40%
1H 2006 business class breakdown (in % of total)

30%
Private companies are
focusing on the more
profitable lines such as 20%
Fire, Motor OD and PA &

Health 10%
0%
Fire
Liability
Aviation
Motor OD
PA & Health
Motor TP
Engineering
Marine Cargo
Marine Hull
Miscellaneous
PSU Private companies
Potential growth areas for foreign companies

A 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
54
of Catastrophe Insurance is under 0.5%, whereas in Turkey, it is to the tune of 17%.
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 risks
are 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
reinsurer, the buyer would then strike a deal with a local insurance company that would
55
underwrite the risk on the back of reinsurance support.
53 IRDA, “Journal”, (2006 - 2007)

54 IRDA, “Journal – April 2007”, (2007), page 12
55 The Economic Times, “Companies may Share Higher Risk for Engg, Fire cover”, (2003)
Distribution
India has a full range of With the passage of a series of legislative reforms in recent years, the Indian insurance
market now has a full range of distribution channels. However, most of them still have some
distribution channels;
way to go before they start to make an impact in those market sectors in which they have
however, the direct
chosen to work. At present, the vast majority (around 70% to 75%) of all Indian non-life
agent remains dominant premiums are still distributed through the legions of on-the-ground direct sales agents (or
‘marketing’ agents) who are largely employed by the PSUs.
The vertically integrated structure of distribution in the Indian non-life sector is often
compared with the system found in Japan. This comparison holds true to the extent that
both countries’ policyholders buy the majority of their coverage directly from insurers via an
employee of the insurance organisation. However, a key difference between India and
Japan is that Indian insurance buyers are more price-sensitive than their Japanese
counterparts; Indian buyers are far more concerned with obtaining the ‘best’ deal.
The dominance of the direct marketing agent in India is expected to prevail over the medium
term. While bancassurance is gradually picking up as an alternative channel of distribution
to the traditional agency model, other low-cost direct channels – such as telephone and
internet – have yet to make a significant impact on the market.
Bancassurance has witnessed some growth since IRDA’s notification on Corporate Agency
regulations in October 2002, which allowed banks to act as an agent of only one life and
one non-life insurer. Overall, India is set to follow other Asian markets such as Singapore,
South Korea or Indonesia in which bancassurance partnerships are beginning to bear
positive results.
The challenges facing brokers

Brokerage in India is Brokerage in India is still in its infancy. In December 2006, there were 222 licensed brokers
56
(193 direct brokers, 4 reinsurance brokers and 25 composite brokers). However, the role
still in its infancy
of an insurance broker does not seem to have been properly understood or appreciated
because non-life market has hitherto largely been tariffed.
Brokers currently account for a small percentage of all premiums distributed in India and are
finding it difficult to grow and attract new business. This position is a concern for entities
such as Lloyd’s and is mainly caused by structural elements within the Indian market; the
following discussion outlines the main challenges facing brokers:
1. High set-up costs: The IRDA has made it mandatory for the insurance brokers to pay
Brokers face significant
a registration fee of INR 50 lakhs (USD 110k) in order to show commitment to the
cost disadvantages market and their clients. In contrast, registration costs for insurance agents are just INR
compared to Agents 250 (USD 6) per annum.
57
Brokers are also required to have professional indemnity
cover of three times their brokerage income, subject to a minimum of INR 50 lakhs
(USD 110k).
2. Sole trader competition: The vast majority of the 222 or so brokers currently operating
The Indian broker
in the Indian market are extremely small operations targeting small and medium-sized
market is dominated by
enterprises. These brokers currently have two distinct advantages over their corporate
small operations competitors in the Indian market. Firstly, their relatively small fixed cost base enables
targeting SME business them to intermediate business for commission levels that are as low as 1%. Secondly,
as insurance is not currently perceived to be a product of economic value, the deep
relationships that these brokers hold with their clients are deemed to be more important
than insurance expertise. So while internationally, the top ten brokers tend to be
Fortune 500 companies, in India the top ten brokers are currently either chartered
accountants or surveyor firms.
56 IRDA, “Report of the Expert Committee (on Brokers and Broker related issues)”, (2006), page 11
57 Kumar, S., “Changing scenario of Insurance Industry”, (2004), page 2
Clients have yet to be 3. Legacies of the tariff market: The fact that 70% of all Indian premium income has
hitherto emanated from tariffed products means that brokers have so far been unable to
made aware of the
demonstrate real value to clients. First of all, the tariff market did not enable brokers to
benefits that brokers demonstrate their value in ‘shopping around’ for the best deal. Clients have therefore
can bring to them understandably questioned the value of an ‘expert’ intermediary when the product that
they are purchasing is basically a commodity. While detariffication is changing these
dynamics of the broking community, it is likely to take significant time and resources to
ensure that clients understand the full benefits brokers can bring to them.
4. Activity restrictions: In addition to the above challenges for brokers, brokers are
currently unable to accept business or settle claims on behalf of insurers. The lack of
these value-added back office services is yet another barrier to clients purchasing their
insurance through brokers.
Brokers have so far had As a result of high set-up costs, sole trade competition, a long history of tariffs and certain
activity restrictions, brokers have had to focus their attention on niche sectors of the Indian
to focus their efforts on
market namely: non-tariff business, so-called mega risks and risks where a company’s paid-
niche segments up capital is below USD 3.5m.
Future developments
Over the medium term, Detariffication is likely to have two medium-term effects on distribution in the Indian market:
conditions are expected Gradual demise of the ‘marketing’ agent: The PSUs will need to readjust their business
to improve for brokers models to deal with the underwriting challenges posed by a detariffed market. In order to
maintain competitiveness, it is likely that their huge sales forces will need to be reduced.
Voluntary Retirement Schemes (VRS) have already been set up by the PSUs to cater for
the loss of sales jobs that detariffication is expected to cause.
In the short term, however, local private insurers do not appear to be prepared to wait for
However, there is a brokers to gain a foothold in the market. Furthermore, the take-up of the VRS offered by the
PSUs is reported to have been disappointing. Some private insurers have adopted direct
Chance that insurers
distribution strategies. ICICI-Lombard is utilising the extensive retail bank branch network of
will have created other its Indian partner to sell products via the Bancassurance channel, and Tata AIG has
distributors by then recently employed 1,500 direct marketing agents of its own. This situation may prove
difficult for organisations reliant on the broker channel because if these direct strategies
prove successful, the extent to which the private companies are prepared to support the
cause of brokers may reduce substantially.
Brokers will have to demonstrate value to clients: While the value of brokers lies to a
great extent in their skills in structuring a customised solution for their client, it will take
some time until this value proposition filters down to end customers. On the whole, the
market will take some time to allow brokers to establish a name.
MAP 1: Geographic broker concentration (2007)
TURKM. UZB.
TAJIKISTAN
AFGHANISTAN
Line of Chinese
CHINA
Indian claim
Control
Kabul line of
control
Islamabad
PAKISTAN
Delhi
NEPAL
New Delhi Kathmandu BHUTAN
Thimphu
Jaipur Lucknow
BANGLADESH
Dhaka
Ahmedabad Bhopal Kolkata
BURMA
Mumbai
Pune
Rangoon
Hyderabad Bay
of
Bengal
Arabian
Sea Number of Brokers by zone (Estimate)
Bangalore
Chennai
Northern Zone
35% Southern Zone
21%
Total number
SRI
of brokers:
LANKA
225
Colombo
Eastern Zone
0 200 400 Kilometers
8%
0 200 400 Miles Western Zone
36%
Reinsurance
The basic position of reinsurance in India is relatively clear:
There is only one local • Single local provider: There is a single local provider of reinsurance capacity, the GIC,
which is wholly owned by the Indian government. Reinsurance is not subject to a tariff.
reinsurer – the gic
• 15% compulsory session: Direct insurance companies operating in India were
statutorily compelled to cede 20% of their book to the GIC. Since April 2007, this has
been reduced to 15%, after which companies are free to make a commercial decision on
how much more of their business they are prepared to cede.
• GIC has right of first refusal: By law, companies should offer any additional
reinsurance to the GIC before seeking alternative markets, but in practice, this rarely
takes place.
• International reinsurance limited to a maximum of 10%: Surplus over and above the
domestic reinsurance arrangements class-wise can be placed by Indian insurers, subject
58
to a limit of 10% of the total reinsurance premium ceded, outside India. However, where
it is necessary in respect of specialised insurance to cede a share exceeding such limit to
any particular reinsurer, the insurer may seek the specific approval of the Authority.
Reinsurance buyers
Hardening rates have Following the hardening of international rates and the growing sophistication of the Indian
reinsurance buyer, there had been a trend towards the purchase of non-proportional
caused Indian buyers to
programmes in India until mid-2004.
purchase
non-proportional However, a combination of general rate-softening in the international markets and extensive
price-driven competition from the continental reinsurers in the local market has made
cover
proportional treaties attractive once again across the market. Reinsurance buyers in India
fall into two broad categories: the public companies (including the GIC on a retrocession
basis) and the private companies. The perceptions that international reinsurers have of
these two groups of buyers are significantly different.
Public companies: GIC and the PSUs

The GIC is the largest and most important reinsurance account in India and, due to their
continued dominance of Indian direct market, the PSUs also continue to be important
reinsurance buyers.
According to the 2005-2006 IRDA Report, the retention ratio – a measure of the companies’
ability to bear risks – differs markedly between PSUs. Traditionally, PSUs have retained a
significant component of their portfolio, although the net retention is driven by the respective
segment in which the premium has been underwritten. Overall, the net retention ratio of
PSUs for the period of 2005-2006 declined, with United India and Oriental retaining
considerably less than both New India and National, which both increased their retention.
As expected, across segments, the retention ratios also have varied significantly as
summarised by the chart overleaf.
58 IRDA, “General Insurance Regulations”, (2000)

CHART 21: Retention ratios of PSUs 59 CHART 22: Range of PSU retention ratios 60
78% 100%
76% 77%
76%
76%
74%
74%
74% 75%
Range of retention ratios (%)

Retention ratio (%)
72%
72%
71%
70% 69% 50%
68%
66% 25%
64%
New India National United India Oriental
0%
2004-2005 2005-2006 Miscellaneous Fire Marine
However, despite the size of the PSU accounts, leading international underwriters
expressed certain reservations about dealing with this business.
The public companies are • Poor data: The data provided by the Indian public companies is routinely described by
underwriters as “very poor”. This is mainly a result of the inadequacy of the IT systems
said to maintain poor-
employed by the public sector companies. This situation adversely affects the ability of
quality data and to
both brokers, who are less able to add value by means of actuarial capabilities, and
focus heavily on cost underwriters, who find it difficult to fully comprehend their exposure to risk. It should be
noted that gradual improvements are being made as clients and counterparties demand
quality, and an Indian risk management solutions model was launched in December 2006
by RMS. However, even with this progression, it is unlikely that the standards of public
sector data will reach ‘satisfactory’ levels in the near future.
• Cost focus: As found elsewhere in Indian insurance, there is an unrelenting focus on low
cost rather than economic value in the reinsurance purchasing practices of the public
companies. This focus is structurally supported by an annual tender process in which a
range of companies are invited to place their bids for a reinsurance programme. Buyers
speak of the “value placed on long-term relationships”, but in practice, a reinsurance
partner is highly likely to be dropped if it is not prepared to match the lowest price on a
tender. Many practitioners referred to the main policy used in assessing these tenders as
‘L1’ (or lowest one). This focus on cost is only likely to be changed over the medium to
long term. Clients will first need to be educated and accept that quality insurance cover is
a key part of a successful business enterprise.
However, The PSUs still However, despite these ongoing issues, there are good reasons for international reinsurers
to continue to focus on the public company’s portfolios. These accounts are expected to
remain the largest
continue to be India’s largest for a considerable time and their data provision is expected to
reinsurance buyers in improve with the increasing international competition in the direct market. Moreover, leading
the market international brokers are extensively used for the placement of Indian reinsurance
premiums. Guy Carpenter and Willis are said to be the largest producers for Lloyd’s.
Private companies
The reinsurance position of private sector companies operating in the Indian market differs
from that of their public sector competitors in three key ways.
• Smaller market but higher reinsurance utilisation: Firstly, the accounts are far smaller
but retention ratios tend to be lower. Again, depending on portfolios; for instance, HDFC
Chubb’s retained a higher portion than any other private insurers – largely due to a
significant component of its portfolio being motor.
59 IRDA, “Annual Report 2005-2006”, (2006)

CHART 23: Retention ratios of private companies 61
80%
60%
While the overall size of
Retention ratio (in %)

the reinsurance is
smaller for private 40%
companies, they tend to

have a higher utilisation
20%
0%
HDFC Chubb Royal Sundaram TAT AIG Bajaj Allianz IFFCO Tokio ICICI Lombard Cholamadalam Reliance
2004-2005 2005-2006
• Better quality of data: Secondly, the quality of data provided to reinsurers is of a far
higher quality than that provided by the publics.
• Less focus on insurance costs: Finally, there is slightly less focus on cost (and more
focus on relationship) in the reinsurance purchasing process.
London underwriters are not yet heavily involved in working on the reinsurance programmes
The private companies
of the private companies despite their greater degree of quality and professionalism. This is
are still young and thus mainly due to the size and stage of development of the private insurers in India. The small
use proportional treaty size of the private insurers means that only low levels of premiums are available from these
arrangements organisations and, therefore, there is little margin from which to pay for the relatively costly
process of purchasing protection from London. The fact that the organisations are young is
also an important barrier to London purchasing as they have tended to opt for proportional
treaty coverage, which is the stronghold of the GIC and the continental European
reinsurers. However, as these private insurers grow and develop their business in India –
which they are expected to do over the medium term – the reinsurance premiums available
from them will grow ever larger, and it is likely that their balance sheets will reach a point
where the purchase of non-proportional cover will become more of a realistic option.
Reinsurance sellers
The GIC
The GIC is 100% The GIC, the national reinsurance carrier, is backed 100% by the Indian government. The
GIC’s exceptionally strong position in the Indian market is further underpinned by the links it
government-owned and
maintains as a holding company for the PSUs. The GIC currently has a ‘BB’ rating
has an ‘A’ rating from 62
(Marginal) from Standard & Poor’s and was downgraded from an ‘A’ to an ‘A-’ by A.M.
a.m. best Best at the end of 2006.
63
Its monopoly position has enabled the GIC to build up a huge amount of capital and the
organisation is currently seeking opportunities to efficiently employ its assets. There is
current evidence of this activity as the GIC has recently built on its strength at home and
developed its presence across Asia, Africa and the Middle East. Sources suggest that the
GIC has ambitions to become the leading reinsurer in the region. In terms of products, the
GIC is seeking to develop into lines outside of its traditional proportional treaty
arrangements, which are being eroded by heavy competition from the large continental
reinsurers.

62 NB: An insurer rated ‘BB’ has MARGINAL financial security characteristics. Positive attributes exist,
but adverse business conditions could lead to insufficient ability to meet financial commitments
63 The Insurance Insider, “Best downgrades Indian state reinsurer”, (2 January 2007)
Primary insurers in the The compulsory cession rule does not always work in the GIC’s favour as the government-
run reinsurer has no choice but to accept the poorly performing motor liability cessions.
Indian market are
Given its dominant position, the GIC is confident that it will remain competitive in a freer
obliged to cede 15% of
market than currently exists in India, and has stated that it is in favour of both detariffing the
their risk to the GIC from Indian primary market and a gradual removal of the compulsory cessions.
April 2007 onwards
Although cedants express confidence in the GIC, they also have a desire to spread their
reinsurance exposure across more than one provider. Apart from the GIC, several foreign
reinsurers are involved in the Indian market.
Major continental reinsurers

Outside of the GIC, the continental reinsurers are the main markets used for the placement
Swiss Re and Munich Re
of proportional treaty business. However, over the past five years, the position taken by the
are strong in India due major continental providers has changed substantially. Following major losses in the late
to the high use of 1990s, the continentals appeared to have turned their backs on India and focused their
proportional treaties attention elsewhere; however, during the last two to three years, they have shown a
significant interest in redeveloping their position in India. Swiss Re (Mumbai), Munich Re
(Kolkata) and SCOR all now have ‘representative’ offices in India. They all continue to seek
opportunities to bolster their share of the Indian market and are cutting prices heavily to do
so. Growth in India appears to be of strategic importance to the large continental reinsurers
and, therefore, their parent companies are likely to absorb any losses made in the market
over the short to medium term.
All of the continental Munich Re had sought to form an onshore reinsurance venture with Indian partner Reliance;
this deal fell through in late 2004 as Reliance moved through a corporate restructuring and
reinsurers are now
Munich Re discovered that Reliance wished to be more than a simple ‘silent’ partner in the
aggressively targeting proposed operation. To counteract the requirement of a local partner, both Munich Re and
India Swiss Re are lobbying for full branch status for their local offices. This would enable them to
utilise the huge capacity of their head offices rather than putting up the USD 44m in capital
required to be a local reinsurer. However, this proposal has been pushed back strongly by
the IRDA and is unlikely to be implemented in the short to medium term. So for the time
being, Munich Re appears to be concentrating its activities in India on tapping into the fast-
growing life insurance markets. Munich Re’s Ergo has already established its presence in
India through a health insurance partnership with Apollo. Apollo has joined hands with DKV
64
International Health Holdings (part of Ergo group), which is Ergo’s health care brand.
London market
The London market is an The London market, and in particular Lloyd’s, still continues to play an important role in
important provider of Indian reinsurance. London tends to be perceived as the leader for the following categories
of business:
non-proportional
coverage to India • Specific and high-limit reinsurance coverage (facultative and excess of loss).
• Sophisticated and tailored products such as jeweller’s block, financial institutions,

professional liability (D&O / E&O).
London and Lloyd’s retain strong positions in the Indian reinsurance market despite not
having a local presence for several reasons: firstly, the common language shared by the
two countries; secondly, the legal systems are aligned and based on Anglo-Saxon common
law principles; and thirdly, education. Indian insurers are keen to work with their London
counterparts as London and Lloyd’s underwriters are perceived to be world leaders in
insurance, and deals made with London enable Indian companies to benefit from market-
leading knowledge. Finally, Indian buyers are said to enjoy the culture of the ‘deal-making’
environment of the London market.
64 The Economic Times, “Munich Re looks at Indian insurance segments”, (2007)

Other international markets

Regional markets, such Regional markets, such as Singapore, absorb some Indian reinsurance business, but these
as Singapore, are players are generally considered to be tier 2 options behind the continental markets and
London. This competition tends to occur once London has set up and underwritten an
considered tier 2
account for one or two years; there have been reports of significant price competition
reinsurance providers stemming from Western insurance companies operating out of Singapore. This cost focus is
certainly attractive to Indian buyers, but significant amounts of premium are not currently
being lost to regional centres. Bermuda is not a natural or traditional home for Indian
reinsurance and is not used much; however, it was noted that Bermuda would certainly be
considered if the rates were attractive.
Class-by-class analysis
The remainder of this section will consider each of the major classes in the light of the
liberalisation dynamics discussed above. This will be used as the basis of the forecasting in
the following section.
Motor
Sales of automobiles tend to have a significant influence on the level of non-life insurance
premiums in a developing country. The main reason for this situation is that motor insurance
is generally a compulsory product in most countries. The relationship between automobile
growth and non-life premium income is illustrated by the Chinese market. Between 1998
and 2002, automobile registrations in China grew by 141%; during the same time period,
non-life premiums increased by 68%. India is just entering a period in which car sales are
likely to grow exponentially; market leader Maruti Udyog reported a 22% increase in
domestic sales at 56,606 vehicles during September 2006 compared with 46,393 vehicles in
65
the same period the previous year.
The premium breakdown shows that the compulsory motor class plays a less significant role
The compulsory motor in the Indian market than in other developing territories. By comparison, the Chinese market
class plays a less consists of 61% motor premium.
66
The difference in contribution is reflected in the number
significant role in the of new car registrations in each of the countries. In 2005, China recorded 3.8 million new
67 68
Indian market car registrations whereas India recorded 1.3 million in the same year.
Motor third-party (TP) liability has been a famously loss-making business due to fixed,
very low pricing and to galloping, very high claims payouts. During 2003-2004, the motor TP
69
portfolio was estimated to have a claims ratio of 200% to 250%.
CHART 24: Motor TP ∗ absolute growth and market share – top five
players (1H 2005 vs 1H 2006) 70
Others 9%
15 Bajaj
New India
Allianz 7%
27%
12
United 1H 2006 PA & Health:
Premium growth (1H 2005 vs 1H 2006)
India 17% USD 294m
9 8
National
Oriental 21%
7
19%
6
4
3
3 2
0
Oriental ICICI Lombard IFFCO Tokio Bajaj Allianz United India
It has been common practice for this segment to be cross-subsidised by the motor own
damage (OD) premiums (which business is estimated to have a better claims ratio of about
80%). In particular, ICICI Lombard has been making significant progress in gaining market
share in motor OD business, growing by USD 60m between 1H 2005 and 1H 2006.
65 The Hindu Business Line, “Passenger car sales see robust growth in Sept”, (2006)
66 CIRC, “Yearbook of China’s Insurance 2005”, (2005)
67 US Department of Energy, “China’s new Car Registrations”, (21 August 2006)
68 Paul Tan’s Raves and Rants on the Automobile Industry, “Naza plans to set up CKD plant in India”,
(18 August 2006)
69 IRDA, “Journal – March 2005”, (2005), page 11
70 Ibid.
On the other hand, Baja Allianz is a significant player in the much less desirable motor TP
business. Yet even in this segment, ICICI Lombard has grown its business more in absolute
terms as summarised by the charts below.
CHART 25: Motor OD∗ absolute growth and market share – top five
players (1H 2005 vs 1H 2006) 71
70
New India
60 19%
Others 25%
60

50 1H 2006 Motor OD:
ICICI Lombard has grown USD 770m
National
United 18%
its motor business 40 India 10%
significantly – revealing ICICI

Lombard Oriental
an aggressive strategy 30 12% 16%
23
for market share
20 16
12 10
10
0
ICICI Lombard Reliance Bajaj Allianz Oriental IFFCO Tokio
Property
The IRDA splits the property class into fire and engineering. Fire has traditionally been the
Fire has traditionally
breadwinner of the Indian insurance market with claims accounting for approximately 30%
been the breadwinner of 72
in 2004. The typical customers for fire insurance are mainly large corporate customers,
the Indian insurance which demand successfully that their unprofitable risks such as health and marine cargo get
market a most favoured pricing status, the subsidy being hidden by the fact that the latter have for
some time been non-tariff classes of business.
CHART 26: Fire ∗ absolute growth and market share – top five players
(1H 2005 vs 1H 2006) 73
20 Others 30% New India

18%
17
1H 2006 Fire:
15
USD 556m
ICICI United
Lombard India 17%
10%
National Oriental
10 12% 13%
7 6 6
6
5
0
Reliance IFFCO Tokio Bajaj Allianz ICICI Lombard New India
71 Ibid.
72 IRDA, “Journal – March 2005”, (2005), page 11
73 Ibid.
Similar to motor, ICICI Lombard is the clear market leader among private companies for fire
Reliance has witnessed a
insurance. However, Reliance has witnessed a major growth in this class of business over
major growth in Fire the last year – making it the clear market leader in terms of absolute premium growth as
insurance during 1H 2006 summarised by the chart above.
For engineering insurance, which typically covers all types of risk associated with erection,
testing, machinery, plant and equipment, ICICI Lombard is the clear private company leader
– closely followed by Bajaj Allianz.
CHART 27: Engineering ∗ absolute growth and market share – top five
players (1H 2005 vs 1H 2006) 74
Others 27% United
India 16%
15
Bajaj 1H 2006 Engineering: ICICI

12 Allianz USD 154m Lombard
15%
13%
Oriental New India

9 8
14% 15%
7 7
6
6
0
ICICI Lombard Bajaj Allianz New India Reliance United India
PA & health
Group health and While corporate business until recently was largely about the manufacturing sector, the
economy is now shifting from manufacturing sector to services sector. This means that
liability insurance are
group health and liability insurance are becoming increasingly important for insurance
becoming increasingly
companies.
important for the Indian
CHART 28: PA & health∗ absolute growth and market share – top five
economy
players (1H 2005 vs 1H 2006) 75
50 Others 18%
42 New India
National 21%
40 12%
1H 2006 PA & Health:

USD 397m
Oriental
30
14%
ICICI
United Lombard
India 14% 21%
20
9
10 8 7
6
0
ICICI Lombard New India Reliance Oriental Bajaj Allianz
74 Ibid.
75 Ibid.
The fundamental causes of upward pressure on health care costs include the rapid
Rising health costs lie
progress of medical technology and the fact that patients are becoming more demanding
behind considerable
about health care services and ‘wants’ are expanding in relation to ‘needs’.
growth in health
While it is difficult to measure the extent of rising medical costs, observers suggest that
insurance premiums
health care costs are typically increasing at three to five times the rate of general price
inflation.
Even though health insurance is seen as becoming increasingly unprofitable for PSUs, due
to escalating healthcare costs, adverse selection, moral hazard and a low premium
structure, ICICI Lombard has clearly targeted this segment of the market as summarised by
current market share and growth figures above.
Marine
So far, Private Private companies have so far made little impact on the marine cargo markets as
companies have made customers continue to prefer dealing with PSUs.
little impact on the CHART 29: Marine cargo ∗ absolute growth and market share – top five
marine cargo market players (1H 2005 vs 1H 2006) 76
5 Others 26% Oriental

19%
4
1H 2006 Marine Cargo: New India
USD 97m 17%

However, recent Tata AIG 8%
3
growth performance
2.4 National United
indicates that private 2.1 14% India 16%
companies are gaining 2 1.7

1.5
market share 1.2
1
0
Bajaj Allianz Tata AIG IFFCO Tokio Oriental ICICI Lombard
While the market penetration for private companies in the marine cargo segment has been
comparatively low, some significant growth has been witnessed in the marine hull business
for private companies.
The entry of private companies is expected to benefit shipping companies as they will then
be in a position to obtain cheaper war risk cover from the international market compared
with the current rates being offered by PSUs.
As summarised by the chart below, IFFCO Tokio has recently gained a significant portion of
the market – controlling one-fifth of the total Indian marine hull market in 1H 2006.
76 Ibid.
CHART 30: Marine hull ∗ absolute growth and market share – top four
players (1H 2005 vs 1H 2006) 77
20 ICICI Others 11%

Lombard
14%
15.7 New India

14%
15 Oriental

1H 2006 Marine Hull:
23%
IFFCO Tokio gained a USD 84m
significant share of the United

Marine Hull Market with 10 India 18% IFFCO Tokio
major growth in 1H 2006 20%
5
3.3
1.4
0.5
0
IFFCO Tokio Oriental ICICI Lombard United India
Liability
Liability is a small Liability represents a small proportion of the total Indian market. However, private
companies such as ICICI Lombard and Tata AIG are well positioned to take advantage of
portion of the market…
this fast-growing segment of the market.
CHART 31: Liability∗ absolute growth and market share – top five
players (1H 2005 vs 1H 2006) 78
5 ICICI
Others 23% Lombard
23%
4 3.8
1H 2006 Liability:
USD 58m
…but growth rates are Oriental
Tata AIG
15%
significant and 3 12%
estimated to be around 2.3 New India United

13%
25% per annum 2
India 14%
1.6
1.2
0.9
1
0
ICICI Lombard Oriental Tata AIG United India Bajaj Allianz
Claims in this segment are believed to be very low compared to developed markets, with no
known claims exceeding USD 1m. India’s rapid economic development and, in particular, its
focus on trade is likely to drive growth in niche liability classes. For example, areas such as
professional liability, D&O and E&O are estimated to grow by 25% per annum over the next
five years, driven by the growth of professionals. In addition, the continued growth of Indian
exports, especially in the pharmaceutical and chemical industries, will drive demand for
product liability coverage.
77 Ibid.
78 Ibid.
The Indian Non-life Market 2010
Over the next three The Indian non-life market has experienced significant changes that are likely to influence
the country’s development of its insurance market in the medium to long term.
years, the Indian
insurance market is So far, the entry of a large number of Indian and foreign private companies has led to
likely to see its greater choice in terms of products and services for Indian consumers. A growing realisation
of the benefits and importance of sophisticated insurance and reinsurance tools has
development accelerate
broadened the pool of potential buyers of insurance.
Given this backdrop, the Indian insurance market has experienced considerable growth
since its liberalisation in 2000. Over the next three years, the Indian insurance market is
likely to see its process of maturation accelerate.
Regulatory drivers
Regulatory changes in the four areas discussed in the previous section – products, market
players, distribution and reinsurance – will drive change in the Indian insurance market in
the medium term. In some areas, such as detariffication, the majority of reform has already
taken place, although the consequences are yet to be seen. In other areas, while the reform
is promised, it is difficult to anticipate when it will occur. As a result, there is a lot of
uncertainty in the Indian insurance market. The four main areas of change are now
considered in turn.
Detariffication
The process of detariffication, first begun in 1994, has gradually moved the Indian market to
a position where the overwhelming majority of insurance is transacted without a tariff. As of
1 January 2007, tariff rates have been withdrawn from all lines of business except for motor
third-party (TP) liability. While hitherto, insurance professionals had limited exposure to
sophisticated technical pricing based on actuarial data analysis, in a detariffed market, this
is increasingly a necessity for businesses in order for them to remain profitable.
Foreign ownership
As discussed earlier, foreign ownership is currently restricted to 26%, although there are
plans to increase this limit. The typical structure adopted by the Indian government for the
phasing in of foreign-owned entities across other industries (such as construction and
pharma) has been as follows:
1. Phase I: Allow foreign entity to have 26% stake in joint venture.
2. Phase II: Increase foreign entity maximum stake from 26% to 49%.
3. Phase III: Increase foreign entity maximum stake from 49% to 74%.
4. Phase IV: Allow 100% foreign-owned entity to operate in market.
In January 2007, the In January 2007, the Indian government reiterated that it would introduce legislation to hike
the FDI cap in the insurance sector to 49%. No time limit has been set for taking a decision
Indian government
on it although consultations with the industry and stakeholders are underway. There is
reiterated its claim to
ample opposition from the left, but analysts expect that this change will be made effective in
increase the cap from the next one to two years.
26% to 49%
The effect of this change will be twofold. Firstly, it will increase the focus of the existing
private insurers operating within the Indian market. As discussed in the previous section, the
private companies are increasingly diverging on strategy as they are influenced by their
foreign partners. It is likely that increased foreign ownership will lead to differentiated
strategy, more niche players and a wider product range.
Secondly, it is expected to increase the supply of capacity in the market as new investors
will decide to enter the market. Indeed, a number of insurers have commented that, as soon
as foreign companies are allowed more than 26% ownership, they would move as quickly
as possible to participate in the market.
Broker distribution
The broker channel was recognised in 2002; again, foreign capital providers can take up to
a 26% stake in an Indian brokerage operation.
There is also no indication at the time of writing as to whether the constraints placed on
brokers, such as high set-up costs and activity restrictions will eventually be removed.
What remains clear, however, is the fact that in a detariffed market, the broker has more
opportunity to demonstrate value to both the customer as well as the insurer. Value-added
services can be in the form of consulting regarding risk management responsibilities as well
as more traditional insurance-related roles.
Compulsory cessions
In line with detariffication, there has been some progress in reducing the compulsory
cession to the GIC from 20% to 15%.
However, a complete abolishment of the remaining 15% compulsory cession to the GIC is
The 20% compulsory
unlikely to occur in the medium term. Although it would seem natural to liberalise this
cession has been
position as the broader non-life market begins to open up, the Indian government and
reduced to 10% in 2007 legislator reiterated their desire to retain insurance premium in India in the central legislation
of 2000, and there is no reason to believe that this position has since changed. In addition,
many local companies are happy with the automatic reinsurance support that they receive
from the GIC.
The PSUs are pleased that they are able to cede 15% of their poorly performing motor book
onto their parent whereas the growing number of private insurers are grateful for the
additional capacity that they receive from the GIC’s de facto proportional treaty coverage.
While a further reduction to 10% is expected in 2008, abolishing compulsory cessions
altogether is not at the top of the legislator’s agenda.
Growth drivers
Overall, sales of both commercial and retail products are expected to benefit from India’s
surging economic output over the medium term. Economists expect India’s output to grow
by around 6% per annum over the next ten to 15 years, and the political and business
79
environments are expected to stabilise further. The combination of this economic growth,
increased stability and the liberalisation of the non-life sector is expected to provide
premium growth in the range of 10% to 15% per annum over the short to medium term.
Personal lines insurance premium growth drivers:

Personal lines products Although probably not of immediate interest to Lloyd’s underwriters, a developing
are expected to develop economy’s initial growth in insurance penetration is often driven by personal lines products,
quickly as Indians grow especially motor cover as this tends to be compulsory. Indeed, India’s fast-developing
private insurers expect retail products to provide them with their main source of premium
wealthier
growth over the medium term.
79 Deutsche Bank Research, “India Rising: A Medium-term Perspective India Special”, (2005), page 3
The reason for their focus is as follows:
• Growing consumer class: The Indian consumer class is currently estimated to be

around 200 million and growing. However, even amongst this class of consumers, non-
life penetration remains extremely low. The reasons for the low penetration are twofold.
Firstly, most members of the consumer class have gained their wealth recently and,
therefore, have had little time to consolidate and protect their assets. Secondly, lack of
competition in the insurance market has led to mundane products and poor customer
service. These limiting factors are likely to decrease over the medium term.
Commercial insurance premium growth drivers:

Foreign investment and The widely acknowledged dynamism of the Indian economy is currently attracting global
attention. Commercial enterprise is likely to benefit from this, and the success of commercial
infrastructure
enterprise is likely to filter down to the general insurance sector. Reasons for this include:
development will drive
commercial premium
• FDI: Foreign direct investment in industry is often made with several requirements that
generally include adequate insurance cover. Sectors most likely to benefit from
investment in the medium term are IT, pharmaceuticals and manufacturing. Product
demand is likely include product liability (for exporters) and directors’ and officers’ liability
(D&O) cover.
• PPP infrastructure development: The quality of India’s ports, airports and railways
leaves much to be desired, and infrastructure development in the next few years is likely
to cost USD 150bn. Given the need for speedy infrastructure development and the shaky
state of its public finances, the Indian government appears to have embraced the concept
of Public Private Partnerships (PPP). Examples of PPP projects underway are the
Western Freeway Sealink project in Mumbai, which will cost around USD 560m;
development of a metro system in the cities of Ahmedabad and Gandhinagar in Gujarat
at a cost of USD 711m; and a series of gas-based power plants across Gujurat at a cost
of USD 800m per plant. Many more projects of this type are being scoped across India
over the medium term, and the support of specialist commercial insurers will be required
to ensure their success.
Quality of service and • Insurer quality and client education: Market-leading companies will expect market-
leading insurance cover. Household name insurers have already recognised this and
the high exposure to
have entered the non-life sector with Indian partners. Direct investment in the non-life
catastrophic loss will sector by foreign entities is expected to drive growth in insurance premium through
maintain demand increased quality of product, higher-quality customer service and increased customer
awareness of the economic benefits of purchasing sound insurance coverage.
• Catastrophe exposure: India is heavily exposed to natural catastrophe loss but is poorly
insured against such risks. For example, in 1999, India accounted for approximately 25%
80
of the world’s fatalities due to natural catastrophes; in 2001, this figure stood at 80%.
Events in recent years, such as the 2005 Kashmir earthquake (more than 87,000 dead in
India and Pakistan), the 2005 Mumbai floods (1,000 dead) and the 2004 Boxing Day
tsunami (18,045 dead), have proved that India remains one of the catastrophe centres of
the world. However, less than 15% of the damage caused is thought to have been
insured. According to government estimates quoted by the Times of India, economic
damage from the Tsunami has been estimated at INR 100bn (GBP 1.3bn). To date, the
four Indian public sector insurers have received 13,000 claims worth just INR 14bn (GBP
178m). In contrast, insured losses in the US following Hurricane Ivan (2004) totalled 55%
and insured losses following Hurricane Katrina (2005) are estimated to be up to 48% of
81
the total economic damage suffered.
80 Swiss Re, “No. 5, 2004: Exploiting the Growth Potential of Emerging Insurance Markets -
China and India in the Spotlight”, (2004)
81 USA Today, “Katrina Damage Estimate Hits $125B”, (September 2005)
The Mumbai flood has taken insurance companies by surprise, leading to two insurance
companies exhausting their reinsurance protection. In 2006, all insurance companies had
purchased more catastrophe reinsurance cover. With the increased reinsurance cover
purchased, Mumbai flood loss would be only 30% of the reinsurance cover purchased by
all the insurance companies put together in 2006-2007; as against 52% of the
82
reinsurance cover in 2005-2006.
One of the short-comings of the Indian insurance industry is the lack of credible data to
simulate potential loss from a natural catastrophe of a high severity. At best, insurance
companies are following an aggregate loss model whereby they assess the impact of a
natural catastrophe by analysing the severity of a single event applied to their portfolio.
Risk factors
Insurance analysts are excited about the prospects of the Indian market. However, there are
However, lack of reform
risks that may adversely affect the levels of growth in the Indian non-life market:
and negative customer
perception may act as a • Slow reform: Much of this growth prediction is based upon the liberalisation agenda set
out by the government and the regulator, the IRDA. Due to a number of competing
drag on growth
interests, it should be noted that there is significant potential for delay in this liberalisation
83
programme.
• Poor customer perception: Due to the poor levels of customer service provided by PSU
insurers and their failure to pay claims promptly, Indian assureds tend to perceive
insurance to be a tax (ie with no returns) rather than a product of genuine economic
value.
Structural changes
Combining the regulatory and growth drivers, there are a number of structural changes
that are likely to occur if risk factors such as a slow reforms and poor customer perception
are overcome.
Price competition is set to increase

While it is yet too early to verify the impact of the detariffed environment, competition is
A significant price war is
expected to manifest itself in prices, products, underwriting criteria, sales methods and
expected over the next
creditworthiness. As experience with other markets has shown, insurance companies are
few years expected to vie with each other to capture market share through better pricing and client
segmentation. Industry observers estimate that there is likely to be a significant price war,
which is expected to last for 18 to 36 months.
When marine hull insurance was completely detariffed, the stiff competition that followed led
to rates falling by 40 to 50%. Marine hull insurance premiums are, however, now expected
to rise back to the levels prevailing before detariffication occurred. Moreover, Indian
shipping companies are expecting to see strong demarcation and differentiation between
fleets of different ship owners. Factors such as claims history, maintenance condition and
average age of vessel are expected to strongly influence premium rates. General insurers
have predicted that premiums for older ships will increase by as much as 40% at renewal
this year, but that good shipping fleets with a no loss record, of which there are few in India,
84
are likely to get a 10% to 20% reduction in new premiums.
82 IRDA, “IRDA Journal”, (2007)

83 See section on Regulation and Proposed Reform below for greater detail
84 Insurance Day, “Hull Rates in India are Expected to Rise”, (27 April 2006)
Cross-subsidisation is expected to cease

In the initial phase of detariffication, the free pricing regime is expected to result in a decline
in growth. Other markets in which detariffication has occurred on a similar scale, such as
Japan, South Korea and Ireland, have shown that the first few years can witness a decline
of 20% in premiums for detariffed classes – leading to growth resuming only three years
after the lifting of pricing restrictions.
The fire class will no The issue of fire detariffication is of particular interest to insurers as they have hitherto used
the fire portion of an account to cross-subsidise the losses that they frequently experience in
longer serve as a source
motor and non-tariffed business classes. To put it differently, in the loss-making areas, the
of cross-subsidy for
premium rates are expected to increase to meet the losses, while premium rates are
motor business expected to come down in profitable portfolios such as fire and engineering.
As fire premiums are being detariffed, there is most likely going to be a competitive struggle
between the PSUs and the private insurers. It is believed that this is the reason why the
IRDA has placed an administrative burden on insurers wishing to reduce rates by more than
20%. Some commentators believe this will limit price competition, while others think it will
85
merely cause confusion in the market.
The public sector insurers in India have continued to push for motor detariffication as, for
many years, they have incurred losses in this mandatory insurance sector. State-owned
insurers have argued that since they handle more than 40% of the country’s motor
business, any delays in implementing the detariffication of this segment would hit the
companies’ profitability.
Risk-based pricing will increase

Rationalisation of Detariffication is expected to result in risk-based pricing of portfolios and therefore a
rationalisation of premium structures. While we can expect some level of unpredictability in
premium structures is
the market initially, experience from other countries that have gone through detariffication
expected shows that prices will stabilise to reflect the underlying risks and cost of capital, whereas
insurers’ underwriting efficiency will increase. For detariffication to be successful, stronger
solvency supervision will also be required as, without fixed tariffs, insurers’ results will
become more volatile. This will force out badly performing insurers that have hitherto placed
little emphasis on quality underwriting.
Building of profitable portfolios could help access to

reinsurance support
Currently, the Indian market has ample capacity for even the largest risks, due to inter-
company cessions of the PSUs, the market surplus treaties and facultative support from the
GIC. With detariffication, some reinsurers have expressed concern over the possible impact
of the ensuing ‘price war’, which could result in the revenues of primary insurers shrinking.
This, in turn, could lead to a deterioration in underwriting losses and a consequent
weakening of domestic retention capacities.
Some international reinsurers looking at the Indian market believe that it could take some
time for cedants to gather experience with the new situation and to find their minimum rates.
This is due to the fact that the primary reflex for reinsurers is to compete via price for new or
renewal business. Insufficient ratings, in turn, take at least a year to have an impact on the
companies’ results, since losses do not occur instantly. Accordingly, one ‘bad’ year is not
sufficient to change market behaviour. Market behaviour with respect to companies’ rating
approach is only likely to change after two or three years of negative results.
Yet, the consensus is that detariffication is a move that should ultimately benefit all
stakeholders. Even though tariffs help reduce volatility in the insurance industry and avoid
85 Willis, “International Alert: Indian Insurance Tariff Rates Withdrawn”, (January 2007)
irrational price competition, detariffication benefits policyholders and allows insurance

companies to better differentiate products and price risks appropriately.
The comfort of an anchor tariff rate has made the industry more transaction-focused. From
a reinsurer’s perspective, the transition toward a business-driven and profit-and-loss-driven
approach should be seen as a positive step. Those insurers that are able to demonstrate
their commitment to building profitable portfolios will enjoy positive reinsurance support.
Growing insurance demand will be met by increased capacity

Growth in insurance demand will need to be matched by increased supply of insurance
Growth in demand is
capacity. There is unlikely to be a shortage of capacity due to the global interest in India
expected to be more than from leading insurers. The three candidates for this capacity provision are as follows:
met by increased
1. Existing insurers (PSUs or privates) either by receiving additional capital from their
capacity
parent companies or via a capital-raising exercise, eg a PSU doing an initial public
offering (IPO).
2. New insurers that choose to join the market.
3. Heavier reliance on the global reinsurance market.
The most likely scenario is that all three of these groups will be involved in the evolution and
growth of the Indian non-life market to the extent that the government allows them to be.
The growth prospects in India are very real and understandably attractive to Western
insurance groups that are searching for growth outside of saturated, developed markets.
However, increased capital supply may depress prices to unrealistic levels in the short term.
Growth projection: scenario I – “simple extrapolation”

Having looked at the regulatory and growth drivers, we are now in a better position to
project premium levels for the Indian non-life direct market up to 2010.
We can build up a successively more complex scenario by starting with the most basic:
Constant premium growth

Scenario I: All Classes The most basic growth scenario that we can start with is a mere projection based upon the
ANNUAL AVERAGE GROWTH compound annual growth rate for the period of 2000 to 2006, which stood at 17%.
F
2000 - 2006 A
2007 - 2010 F
o
c o
r
This is a useful exercise in understanding the recent growth dynamics of the Indian
Ã t
u
a
Ã r
e
e
c
c
a
+ 17% CAGR l
+ 17% CAGR a
s
s
t
t
insurance market and its potential up until 2010. To put it into context, the Indian insurance
market in this scenario could expand by almost 100% to overtake today’s markets of Ireland
or Taiwan.
CHART 32: Scenario I – premium levels ∗ projection (in billion USD) 86
12 11.2
10
Non-life direct premiums (in billion USD)
8
If premium growth
continues according to 6.0
6
its historical average, 4.8
the Indian market is set
4
to nearly double by 2010
0
2000 2001 2002 2003 2004 2005 2006* 2007** 2008** 2009** 2010**
However, the scenario fails to take into consideration the considerable structural changes in
the market following detariffication of virtually all classes of business since January 2007.
∗ Estimate: 2006 figures are based on gross premium underwritten in 1H 2006, which are provisional and
unaudited; growth factor has been applied by company growth of PSU vs private comparing 1H 2005 vs
1H 2006; amalgamated through Lloyd’s Business Development Directorate calculations based on IRDA
publications
** Projection based on CAGR growth figure for 2000 to 2006 (17%)
86 “Swiss Re sigma database, Non-Life Insurance Premiums – 1980-2005", (2006); IRDA, various
publications, (2007)
Growth projection: scenario II – “accounting for price wars”

Adjusting for detariffication
In order to be prepared for a virtually complete detariffed market, Indian insurers have had
to pursue detailed analyses of risks based on occupation, sum insured and geographic area
to prepare for the new regime starting in January 2007.
Detariffication is likely The new regime is helping to eliminate the frictional costs associated with administering the
tariff and to allow market forces to determine individual risk appetite.
to be associated with a
period of adjustment However, as in any market, this is likely to be associated with a period of adjustment and
predatory pricing, and it may even include what some have termed a ‘blood bath’ for some
lines of business that have hitherto been excluded from the competitive pressures of market
forces.
Experience of other markets, and the marine cargo detariffing in India, suggests that the
initial period of detariffing will result in a considerable erosion of the premium base as
competition for good risks drives down rates. Having realised the potential for large rate
reductions, the IRDA has limited the level of rate changes for various classes.
IRDA: Fire and engineering rates may be reduced by up to 49% and motor rates by 20%. If an
DISCOUNT LIMITS insurer wishes to adopt rates lower than these ceilings, they will be required to file their
87
Fire Engineering Motor rates and wait the IRDA’s consideration. While this may not prevent the predicted ‘blood
Ã Ã Ã
bath’, it does create administrative costs associated with lowering rates substantially.
- 49% - 49% - 20%
However, this is merely an interim dispensation, which stands to be withdrawn with the
approval of the rates filed by the insurers under the “File and Use” system. Once new
products that have been filed for approval are cleared, IRDA limits for discounts are likely to
go up, but it remains unclear by how much this is likely to be. Even with a set limit for
discounts, some insurers are circumventing this directive by offering discounts that allow
premiums to drop. For instance, installation of fire extinguishing aids allowed for discounts
88
of anywhere between 2.5% and 15%.
The section below aims to give a reasonable overview of potential scenarios.
Motor
Fundamentally, in a detariffed environment, the motor insurance is priced on the risk factor
rating system (RFRS) model, which is widely used around the world. The premiums are
based on factors such as vehicle, driver, location and extent of use, occupation, accident
repair cost, liability, etc. With detariffing, the rating of the products should be based on the
risk profile of the customer. In the motor classes, the private cars segment is expected to
witness a premium reduction, while commercial vehicles are likely to see an increase in
premium.
Scenario II: Motor TP Motor third-party (TP) is traditionally considered an unprofitable sector and according to
RATE CHANGE the Times of India, rates would rise anywhere between 34% and 257% if the product was
89
2007 2008 2009 2010 detariffed. In 2007, the IRDA decided against a full detariffication of motor TP with the
Ã Ã Ã Ã hope that premiums for this class of business could be adequately increased. The IRDA has
+ 70% + 10% + 20% + 20%
proposed an initial increase of 150% in TP premium rates, which were later brought down to
70% once the transporters threatened to go on strike. For our scenario, we have used the
latest 70% rate increase for 2007 but have assumed that rates will rise again by a further
10% in 2008. This is likely to be the minimum rate increase if the product is detariffed and
the transport sector can no longer exert political pressure. Once markets have adjusted for
this 10%, discussions have revealed that there may still be room for a further 20% in both
2009 and 2010 in order to converge to the initially proposed increase of 150%.
87 IRDA Press Release, (2007)

88 Business Line, “Fire cover tariffs drop as free pricing kicks in”, (2007)
89 The Times of India, “Insurers free to fix premium”, (2007)
Motor own damage (OD) in contrast is profitable and being targeted by the private
Scenario II: Motor OD
RATE CHANGE
companies. In addition, the decision to pool all commercial TP premium could further
provide an incentive for private companies to target the more profitable OD sector. It is likely
2007 2008 2009 2010
Ã Ã
Ã Ã
that this will put downwards pressure on motor OD rates and the Times of India has
- 20% - 15% + 5% + 15% 90
predicted a 20% to 25% rate reduction in 2007.
91
For the first quarter of 2007, however, motor OD rates remained stable, although
commentators have suggested that they will be continually reviewed. As a result for our
scenario, we have used a relatively small rate reduction of 20% in 2007, followed by a
further smaller reduction in 2008. Rates are expected to rise again in 2009 and 2010.
Property
The local press has reported that insurers expected rate declines of between 15% and 30%
Scenario II: Fire
RATE CHANGE
for both fire and engineering products due to the generally profitable nature of the
92
business.
2007 2008 2009 2010
Ã Ã
Ã Ã
- 49% - 20% + 5% + 15% In the case of fire and engineering covers purchased by companies (ie excluding personal
home insurance), the IRDA has capped discounts in January at 49%. In addition, property
rates may be constrained by the price of catastrophe reinsurance purchased on the
international markets. It is likely that catastrophe business will become more differentiated
and location-specific – as opposed to zonal or country-wide rates under the tariff.
The drop in premium for the first quarter of 2007 – reputably as much as 50% – surpassed
Scenario II: Engineering 93
RATE CHANGE
insurers’ expectations. It is also anticipated that the rates will not recover for at least 18 to
24 months. For our scenario, we have assumed that rate for both fire and engineering will
2007 2008 2009 2010
Ã Ã decline by 49% in 2007 and by a more modest 20% in 2008, but will stabilise in 2009.
Ã Ã
- 49% - 20% + 5% + 15%
However, given that this sector has been massively underinsured to the tune of
approximately 35%, figures in the actual scenario will be adjusted for fire accordingly. In
addition, a buoyant economy is expected to result in considerable asset building and price
inflation, which is expected to mute and to some degree hide significant price adjustments
for fire following detariffication.
Health
Health insurance should shoot up 100% if insurers try to cover the current losses with the
Scenario II: Health same coverage, according to an article published by the National Insurance Academy.
94
RATE CHANGE However, the regulatory situation may allow only a moderate rise, and competition is likely
2007 2008 2009 2010 to push down prices in an effort to gain market share in one of the fastest-growing business
Ã Ã
Ã
+ 5% + 5% +/- 0% +/- 0% classes. Accordingly, our conservative estimate is that premiums may rise by a mere 5% in
2007 and a further 5% in 2008.
Marine
Scenario II: Marine Being fully detariffed, marine and aviation lines have made extensive use of overseas
RATE CHANGE capacity. Insurance professionals believe that premium may go up in the marine segment
2007 2008 2009 2010 has they have hitherto been subsidised to some extent by fire business. At the beginning of
Ã Ã
Ã
the year, the Times of India estimated that clients are expected to pay 10% more for goods
+ 7% + 5% +/- 0% +/- 0% 95
in transit under marine insurance cover.
Other classes of business, including liability, are not expected to have significant rate
movements as their pricing has been unaffected by the tariff system.

91 The Economics Times, “Detariffing drives down fire, engineering premia by 50%”, (2007)
93 The Economics Times, “Detariffing drives down fire, engineering premia by 50%”, (2007)
94 The Indian Express, “Detariffing will push up insurers’ costs”, (2006)
Forecasting growth by class
Using the assumptions detailed above, class-by-class growth has been forecast for 2007 to
2010.
In the first chart below, the 2006 growth rate per class has been used to extrapolate to 2010
premium levels. In the second chart, the same growth rate has been applied, but thereafter
adjusted for expected premium rate changes as summarised in the previous section.
CHART 33: Constant growth rates 96 CHART 34: Growth with rate changes ♣ 97
16 Aviation 16 Aviation
14 Liability 14 Liability
Marine Cargo Marine Cargo

12
Non-life direct premium (in billion USD)
12
Non-life direct premium (in billion USD)

Marine Hull Marine Hull
10 10
Motor TP Motor TP
8 8
Miscellaneous Miscellaneous
6 6
Engineering Engineering
4 Fire 4 Fire
2 PA & Health 2 PA & Health
Motor OD Motor OD
0 0
2006 2007* 2008* 2009* 2010* 2006 2007* 2008* 2009* 2010*
While this forecast is fairly crude, a few clear conclusions can be drawn from a comparison
between the two charts shown above. These conclusions are supported by the soft
intelligence discussed earlier in this report.
1. Slower growth in 2007

Firstly, premium growth in 2007 is much more modest when rate decreases are taken into
consideration. This reflects the general opinion that price wars in 2007 will eat into insurers’
premium bases.
2. Exponential growth from 2009 onwards

Secondly, the rate decreases early in the period clear the way for much more substantial
growth later on. As the insurance market adjusts to an open pricing structure, the model
predicts strong growth in 2009 and 2010 (between 24% and 30% respectively) under the
adjustable rate model.
While premiums will The total premium ends lower under the adjustable rate model (USD 12.6bn) than under the
constant growth model (USD 14.2bn), but higher than under the original premium
slow down initially,
extrapolation (USD 11.2bn), making the Indian market expand by a premium volume
there will be increased
equivalent to that of the total Norwegian market in 2005.
growth towards 2010…
This reflects our understanding of the dynamics of liberalisation:
…With the Indian market Detariffication will bring real benefits to both Indian consumers and the insurance
expanding by the size of industry over the medium term.
the Norwegian market While short-term price adjustments will lead to lower growth during the first one to two
between 2007-2010 years, premium growth is expected to gain momentum towards the end of this decade.
96 Lloyd’s Business Development calculation based on IRDA, “Annual Report 2005-2006”, (2006)
♣ Including adjustments for asset price building, asset price inflation and underinsurance for fire of 35%
for 2007
97 Lloyd’s Business Development calculation based on IRDA, “Annual Report 2005-2006”, (2006)
3. Changing product mix

Thirdly, the product mix changes significant when the expected rate changes are taken into
consideration.
Most noticeably in this model, motor third-party increases substantially, taking into
consideration the increasing rates. In the past, motor TP has been considered unattractive
due to low rates and high loss ratios. Provided the rates are allowed to rise to a competitive
level, this sector should become more attractive.
The chart below compares the current class breakdown with the forecast class breakdown.
CHART 35: Change in proportion of business mix (in %) 98
100% Aviation
Liability
Marine Cargo
75%
By 2010, India’s product
Engineering
mix is set to resemble
those of other major Marine Hull
50%
emerging markets Fire
Miscellaneous
25% PA & Health
Motor TP
Motor OD
0%
2006 2010
With regards to motor premium, in particular, the forecast more accurately reflects the kind
of breakdown we would expect to see in a developing insurance market such as India.
Motor business in total accounts for just less than 50% of total premium. Motor TP, which
typically drives the development of motor business in a developing economy, accounts for a
much more significant share.
In contrast to motor TP, the growth of the property classes, fire and engineering, has been
Motor and Health are
stunted by the price wars and by significantly higher growth in other classes. Even though
forecast to see the most
they have grown in absolute terms, their combined share is forecast to fall to 12% by 2010.
significant growth Apart from a significant adjustment for fire in 2007 of 35%, this model does not take into
consideration the expanding client base that may be attracted by lower premiums.
Finally, the other big winner is personal accident and health, which by 2010 will have
become the largest class after motor. Again this reflects current speculation that there is
considerable potential for growth here.
98 Lloyd’s Business Development calculation based on: Swiss Re sigma database, Non-Life Insurance
Premiums – 1980-2005", (2006); IRDA, various publications, (2007)
Conclusion 54
Continued strength in the broader economy and gradual reform in the
CONCLUSION 1
2
non-life sector are expected to combine to produce strong premium
growth in the Indian market over the next few years.
Whilst India currently remains a medium-sized non-life market, the

growth predicted over the medium to long term is attracting increasing
levels of foreign investment and competition. Many of the world’s largest
insurers such as AIG, Lombard and Allianz are present in the market.
The new private insurers are growing fast and have already developed a
combined market share in excess of 30%.
Leading international reinsurers such as Munich Re and Swiss Re are

3 aggressively targeting proportional treaty business. As the market is
gradually liberalised and becomes more mature, these private firms are
considered well placed to capture an even greater share of a fast-
growing market. The main risk to private insurers is the high likelihood of
sustained price competition as tariffs are removed from classes of
business such as fire and engineering, the impact of which have been
modelled and explained in this paper.
Lloyd’s liaison office

In order to capitalise on the insurance opportunities discussed in this
paper, Lloyd’s is seeking regulatory approval to establish a representative
(liaison) office in Mumbai, India. The objectives of this office will be to:
• Promote understanding of Lloyd’s and build Lloyd’s profile in India.
• Improve Lloyd’s understanding of the Indian insurance market.
• Promote amongst Lloyd’s members, the opportunities available to Lloyd’s
in India.
• Develop and manage Lloyd’s relationship with the Indian government.
It is expected that Lloyd’s liaison office will be registered in mid-2007.
Lloyd’s representative
In addition, Lloyd’s has already appointed its first General Representative
in India, Mr Shrirang V. Samant, whose contact details can be found below.
Shrirang V. Samant
General Representative, India
Lloyd’s
One Lime Street
London EC3M 7HA
United Kingdom
Mobile: +91 (0)98337 6001
Email: shrirang.samant@lloyds.com
Bibliography 55
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T
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Glossary 58
Glossary
ABI Association of British Insurers
IAR Industrial All Risks (Insurance)
AIA American Insurance Association
IMF International Monetary Fund
ALOP Advance Loss of Profit
IPO Initial Public Offering
ASEAN Association of Southeast Asian Nations
IRDA Insurance Regulatory & Development Authority
BJP Bharatiya Janata Party
IT Information Technology
BPO Business Process Outsourcing
LMA Lloyd’s Market Association
CAGR Compound Annual Growth Rate
MFN Most Favoured Nation
CBI Central Bureau of Investigation
MLOP Machinery Loss of Profits (Insurance)
CIA Central Intelligence Agency
MoF Minister of Finance
CL Consequential Loss (Insurance)
OECD Organisation for Economic Co-operation & Development
CVC Central Vigilance Commission
ONGC Oil and Natural Gas Corporation
D&O Directors’ and Officers’ (Liability)
PPP Public Private Partnerships
E&O Errors and Omissions (Insurance)
PSU Public Sector Undertaking
EAR Erection All Risks (Insurance)
R&D Research and Development
EIU Economist Intelligence Unit
TAC Tariff Advisory Committee
FDI Foreign Direct Investment
UN United Nations
GATT General Agreement on Tariffs & Trade
UPA United Progressive Alliance
GIC General Insurance Company of India
VAT Value Added Tax
GNI Gross National Income
WTO World Trade Organization
Since merchants first
met to insure their ships
at Edward Lloyd’s coffee
shop over 300 years ago,
nearly every aspect of
the way we do business
has changed. But one
constant is the bold
confidence proclaimed
by our motto, reflected
in both our unique
appetite for risk and our
worldwide reputation
for settling valid claims.
Lloyd’s is a registered trademark of the Society of Lloyd’s. © Lloyd’s 2007.

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Lloyd's Report On General Insurance in India

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INDIA 2010 A LLOYD’S VIEW

For enquiries relating to this report, please contact:

For information regarding Market Intelligence publications,

CONTENTS Executive summary

The Indian Non-life Market 2007 18

The Indian Non-life Market 2010 44

Business Mix (2006)

premium growth 13% (during 2006)

Regulator Insurance Regulatory and Development Authority:

Main non-life industry

association General Insurance Council

Main life industry association Life Insurance Council

1 Economic growth despite political

2 Substantial reform progress in non-life

3 Growth projections point towards

4 Lloyd’s is seeking to capitalise on Indian

The insurance environment in 2007

Indexed non-life direct premium levels (2000 + 100)

various publications, (2007)

3 NB: measured in terms of premiums transacted

Looking forward to the market in 2010

Several significant structural changes are expected in the market as a

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

Lloyd’s seeks to capitalise on Indian

Moreover, Lloyd’s is establishing a liaison office in Mumbai. From this

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

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

2 the indian non-life market 2007

3 the indian non-life market 2010

CHART 3: Governance indicators 4 versus regional average

Voice and Accountability

Control of Corruption Political Stability

Rule of Law Government Effectiveness

India Regulatory Quality Regional Average

Notwithstanding the country’s heterogeneous society, there is an established and binding

The US sees its US

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

made a step change fastest-growing components of this

India China US Euroland

In addition to the change in its economic development policies, India’s business

TABLE 1: Factors affecting India’s growth prospects

Favourable factors Unfavourable factors

• Favourable demographics • Infrastructure bottlenecks

• Improving human capital • Evolving regulatory environment

• Globally integrating economy • Transparent but overburdened

• A mix of sheltered manufacturing and

12 Deutsche Bank Research, “Country Infobase”, (2007)

CHART 5: Age group projections (2000 – 2020) 14

Age group of population (in % of total)

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

CHART 6: Surplus working population by country in 2020 15

-2.0 -2.0 -0.5

"You cannot be industrially and economically advanced unless you are

Globally integrating economy

Challenging but improving monetary and fiscal stability

Service sector bias

Global leader – competitive IT and outsourcing sector

Fast improving – transforming but still sheltered automotive industry

Laggard – burdened consumer goods markets

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

The Indian Non-life Market 2007

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

CHART 8: Premium levels ∗ (in billion USD) 36