CHAPTER – 1 INTRODUCTION

Insurance in India started without any regulation in the Nineteenth Century. It was a typical story of a colonial era: a few British insurance companies dominating the market serving mostly large urban centers. After the independence, it took a dramatic turn. Insurance was nationali ed. !irst, the life insurance companies were nationali ed in "#$%, and then the general insurance business was nationali ed in "#&'. (nly in "### private insurance companies have been allowed back into the business of insurance with a ma)imum of '%* of foreign holding. In what follows, we describe how and why of regulation and deregulation. +he entry of the ,tate Bank of India with its proposal of bancassurance brings a new dynamics in the game. -e study the collective e)perience of the other countries in Asia already deregulated their markets and have allowed foreign companies to participate. 1.1 Credit Insurance: Credit insurance improves (verall credit management .ractice and corporate value /ore than 01* of daily business2to2business transactions are on credit terms. +his is the most important form of short2term financing within the corporate sector. +rade debts are one of the main assets on most corporate balance sheets. +hey can represent up to 3$* of total assets. Credit management is therefore crucial for companies and can be an important strategic or competitive tool for capturing new business. Better credit terms improve supplier2customer relationships and signal financial health and 4reputation5. 6ranting a payment delay to customers can cause cash flow or financing difficulties for many firms, especially for small ones.

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1.2 What is credit insurance? Credit Insurance is a risk management product offered by governmental 7)port Credit Agencies and some private insurance companies to business entities wishing to protect their balance sheet asset, accounts receivable, from loss due to credit risks such as protracted default, insolvency, bankruptcy, etc. +rade Credit Insurance is similar to, and may include a component of political risk insurance which is offered by the same insurers to protect assets in foreign countries from loss due to currency issues, political unrest, e)propriation, etc. Credit insurance provides companies with coverage for outstanding receivables, protecting against risk of protracted default or insolvency of the buyer. !rom the selling company8s point of view there are three main advantages of buying credit insurance: 9isk +ransfer: ,ellers transfer the risk associated with default by their buyers to the insurance companies. Because credit insurers manage risks by holding diversified portfolios and back these risks with large amounts of e:uity, they are far more suited to assume the risks than the selling company. ,ervices: Credit insurance includes a large package of services. +hese include not only the continuous monitoring of the creditworthiness of the insured8s customers, but also servicing the account receivables, or suggesting payment and delivery conditions. In 7urope, the process of preparing the insurance contract can take up to a year before the credit insurer and the insured actually finali e their contract. !urthermore, the credit insurer supports the insured in debt collections. !acilitate !inancing: !irms with credit insurance are able to get better credit terms from banks. ,ome banks re:uire credit insurance before they provide financing.

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1. Hist!r": Credit Insurance was born at the end of nineteenth century, but it was mostly developed in -estern 7urope between the first and ,econd -orld -ars. ,everal companies were founded in every country; some of them also managed the political risk to e)port on behalf of their ,tate. Credit Insurance is a term used to describe both +rade Credit Insurance and Credit <ife Insurance. Credit <ife Insurance is a consumer purchase, often sold with a big ticket purchase such as an automobile. +he insurance will pay off the loan balance in the event of the death or the disability of the borrower. Although purchased by the consumer=borrower, the benefit payment goes to the company financing the purchase to satisfy a debt. +rade Credit Insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. +his product is not available to private individuals. (ver the 8#1s, a concentration of the +rade Credit Insurance market took place and four big companies became the main players of a market focused on -estern 7urope, but rapidly e)panding towards 7astern 7urope, Asia and the Americas.

1.# $ta%es t! the Internati!na&i'ati!n !( credit insurance: +here have been three stages to the internationali ation of credit insurance. In the first stage, credit insurers were mono liners, focusing almost e)clusively on domestic policyholders. +here was generally one domestic and one >often state2owned? e)port credit insurer in each country. A characteristic of credit insurance is that the risk is not the insured >the seller? but the insured8s customer >the buyer?. @ence, the local credit insurers mainly monitored the domestic risks and 3

e)changed information with the other foreign credit insurers when insuring e)ports. In a second stage, credit insurers insured foreign companies selling to buyers located in the credit insurer8s home country. +he insurer served foreign clients, but dealt with domestic risks. In the current stage, credit insurers sell insurance in several countries, which re:uires local e)pertise in these countries to monitor trade credit risk. +his is very challenging. for credit insurers since they are small compared to a typical global company. +o control monitoring costs, credit insurers have entered into local Aoint ventures with each other and have become closely aligned with or integrated by multilane insurers with foreign affiliates.

1.) Credit ris* +ana%e+ent: +he seller must evaluate the creditworthiness of prospective clients before deciding to trade with them. +he trade credit department adds value to its company by providing information to the marketing department on the credit :uality of targeted clients. In addition, the trade credit department can establish the ma)imum line of credit to be e)tended to a buyer. +he internal information costs increase with the heterogeneity of the client base. 7)ternal agencies 2 including credit insurers can provide country, sector and company2specific information. +he credit insurer has an information advantage over a single company since it has more information on company2specific behaviour on payments for receivables. +he information base covers more products over a longer time hori on than the single2company information base of a trade credit department. +rade credit departments can purchase credit information from credit insurers or other firms with company credit history databases. +he trade credit department must decide whether or not to self insure or transfer some of the trade credit risk. It provides value by managing the risk associated with the company8s accounts receivable. .art of the trade credit risk can be transferred to a credit insurer or to the capital market, via a credit derivative. Credit insurers are now beginning to provide non2traditional risk transfer products, such as B

the insured receives indemnification for every insured loss. e)cess of loss or catastrophe insurance?. the contract provides a layer of protection for losses beyond a certain level. By taking the whole portfolio of risks the insurer avoids insuring only bad risks or adverse selection.derivatives. the non2insured percentage. $ . +his type of cover is appropriate for firms that want to insure themselves against the risk of single large losses. +he amount of indemnification depends on the retention. not selected risks. +he deductible under a whole turnover for a proportional contract is usually between $* and '1*. In a proportional insurance contract. -hole turnover insurance covers the entire portfolio of receivables of a company.pecific account policies do not insure the whole portfolio. In a non2 proportional insurance contract >e. but protect the insured against a selected group of customers or a single transaction.e. but most of them now offer e)port as well as domestic credit insurance. i. . +he boundaries between e)port and domestic credit insurance are becoming blurred due to the internationali ation of companies. In the past.es !( Trade Credit Insurance: Credit insurance can be classified into domestic and e)port credit insurance. CHAPTER –2 T". credit insurance companies speciali ed in one type or the other.g.

ered -!r Trade Credit Insurance: 7)port credit insurance protects your foreign receivables against commercial and=or political risks which could result in non2payment of your invoices. riots. making it difficult or impossible to order your products without credit terms. bankruptcy? or protracted defaults >slow payment?. Cour foreign customers don8t need to be huge corporations or % . or fail to pay you for a variety of other reasons. natural disasters. suffer from currency devaluations. Creditworthy foreign companies. are going to e)pect the same terms from you. '. as well as currency inconvertibility. '. accustomed to buying on open account from their other suppliers. Cou can protect your foreign receivables against non2payment risks with an e)port credit insurance policy.' Ris*s C!. e)propriation. All of your e)port receivables can be insured under one multiple2buyer policy. . and changes in import or e)port regulations.g.anies: Cash in advance and letters of credit are no longer competitive terms in the international marketplace. or general economic conditions in your customer8s country. Commercial risks take the form of buyer insolvencies >e. run into cash flow problems. but what happens if you don8t get paidD Cour foreign customers could file bankruptcy. or in some cases you can purchase key2 buyer or single2buyer coverage. on the other hand. Cou need to e)tend competitive terms to grow your international business. and revolution." Need -!r Trade Credit Insurance t! the C!+.olitical risks include war. may face scarce capital and high interest rates. +hese problems could occur for many reasons.. such as fluctuations in demand. Cour customers in emerging markets.+he deductible depends on the :uality of the firm8s trade receivable accounts and is set such that the insured still has an incentive to efficiently manage its trade credit relationships.

any buyers can be considered as long as they are creditworthy.remiums are payable monthly. 9ates may be calculated as a function of your shipment volume. or in some cases simply your company8s own ledger e)perience. . +he cost is low. and your previous e)port e)perience. the price of the coverage is insignificant compared to the additional business you can win by e)tending competitive credit terms overseas. the spread of your buyer and country risks. as determined by financial information. 2. in most cases considerably less than the fees charged for letters of credit. & . -hether or not you pass this incremental e)pense on to your customers. C!st (!r Credit Insurance . country and buyer credit limits. typically a small fraction of one percent based on sales volume.remium rates are based on the terms you e)tend. or annually. or outstanding receivables. :uarterly. trade references.government agencies.

7)port credit insurance makes your international receivables more attractive to your bank or other lenders. increasing your market share and local brand recognition. and transfer inventory carrying costs overseas. make longer manufacturing runs. . >c? 6et /ore !rom Cour Eistributors: Negotiate stronger overseas representation by offering competitive terms to your foreign distributors. 0 .rovide incentives to keep more of your products in the supply chain.enetrate Cour +arget /arkets: (pen new markets which your company might otherwise perceive as too risky for e)tending credit terms. >d? 7nhance Cour Borrowing Capacity: (btain more favorable financing by including your insured foreign receivables in your borrowing base. .CHAPTER – -aci&itati!n !( Credit Insurance as $a&es !( -inancia& T!!&s >a? Increase Cour 7)port . Cou can assign policy proceeds to the lender of your choice. +he opportunity to establish markets are in emerging economies has never been greater.rofits: 6row your e)port sales by making it more economical for your foreign customers to purchase larger :uantities.hipping larger orders helps you negotiate better pricing from your suppliers. >b? .

though an e)pected increase in e)port growth is likely to improve its performance over the ne)t five years. Aside G+om e)tending the global reach of credit insurance.CHAPTER – # Credit Insurance /ar*ets: +he 7uropean credit insurance market has not e)perienced rapid growth in recent years. Asia and <atin America. (pportunities for credit insurers e)ist in the F. where the market penetration is lower.. credit insurers have additional opportunities to provide new services and products to additional and e)isting markets. # .

' billion. 6iven the internationali ation of many companies8 activities. and "$* in Asia.B In the past. followed by the F. domestic and e)port credit insurance have been viewed as distinct product lines. In contrast. +raditionally. +he largest regional market is -estern 7urope. with "'*. !or e)ample. -ithin -estern 7urope. !ormally. the subsidiary is ac:uiring e)port credit insurance. In "##0. the largest markets are 6ermany. the distinction between domestic and e)port sales has become less important. compared to B3* in the F. the "##0 share of the total non2life market for all of 7urope was 33*.CHAPTER –) W!r&d0ide credit insurance +ar*et -orldwide credit insurance premiums are estimated to be appro)imately F. with a market share of 0B*. a subsidiary of a 6erman company located in /e)ico and delivering goods to 6ermany might also buy credit insurance G+om 6ermany. whereas short2 and medium2term business is underwritten by the private sector. national governments have been involved in e)port credit insurance as a means to promote the local economy but today. appro)imately %1* of total credit insurance was related to domestic and B1* to e)port business. !rance and the FH +he prevalence of credit insurance in -estern 7urope is striking compared to other lines of business. most of the state activities are restricted to long2term e)port credit insurance. but for the 6erman credit insurer it is like domestic "1 .E B.

tatement of the problem Identification of information needed to solve the problem . +his type of research is also a grouping that includes many particular research methodologies and procedures. +he methods involved range from the survey which describes the status :uo. self2reports. • • • • • • • . the distinction becomes even less relevant because of the widespread geographic presence of many companies and the single currency. CHAPTER – 1 Research /eth!d!&!%": +he method of research used in the report is E7. surveys. the correlation study which investigates the relationship between variables. and tests.insurance. such as observations.C9I. -ithin the 7uropean /onetary Fnion. Eescriptive research is used to obtain information concerning the current status of the phenomena to describe Jwhat e)istsJ with respect to variables or conditions in a situation.election or development of instruments for gathering the information Identification of target population and determination Collection of information Analysis of information 6enerali ations and=or predictions "" . to developmental studies which seek to determine changes over time.+II7 97.7A9C@.

potential growth areas. which already has presence in reinsurance segment in India. industry portals. newspapers. government agencies. because of more and more new entrants in to the segment. new entrants. trade associations. Eistribution Channels L Broker distribution Channels . etc "' . present maAor players.2 /ain O23ecti. the regulatory framework and present bottlenecks L Eetariffication .1 In(!r+ati!n $!urces: Information has been sourced from books. As the Indian market is already facing stiff competition after the detariffication of Insurance in the year '111. and through access other databases. trade Aournals and white papers. 1. -ith booming Indian economy and a growth rate of 0* to #* annually and new sectors and industries are entering in and manifold increase in !EI to India.1. +he obAective of the report is to know the Indian non2life insurance market and the potential or market available for the non2life insurance products and services by '1"1.e !( the Research: As Coface is entering one of the worlds largest non K life insurance market. As more and more Indian companies are e)porting goods and services to many countries and even to the new countries and also the increase of imports from various countries. monitoring industry news and developments.

: Coface is a !rench /NC Company and worldwide largest provider of Credit Insurance and Credit /anagement . New 7ntrant to the Indian Non <ife Insurance /arket: A2!ut the c!+.an" and the %r!u.%11 employees serving 0$. It also offers local services in #3 countries through its partners in the Credit Alliance network. 1 C!(ace 5r!u.ystem? and staffed by more than B.ervices. It has over %1 years of e)perience in the field of credit insurance and credit management and more than 03. which represent over 01* of the worldwide trade. Coface8s mission is to facilitate global business2to2business trade by offering companies four product lines to help them manage.111 customers in ## countries across five continents. finance and protect their receivables >i. united by shared credit risk management systems >the Common 9isk .an" and the %r!u. %1 days or sometimes more to other companies in the course of their commercial relations?: "3 . Coface operates subsidiaries or branch offices in $0 countries.111 clients.CHAPTER – 4 A2!ut the c!+.e. 4. all credit granted for a period of 31 days.

tate guarantees for !rench e)ports.4. "##' Coface begins its international e)pansion into the Fnited Hingdom and Italy >with Iiscontea Coface?. and in Papan with Ne)i. It also forges international partnerships. the public2 sector credit insurer. "B . particularly in the area of corporate ratings in 9ussia Banking Association. It sets up the Credit Alliance network of credit insurers. '11B Coface ac:uires (rt from 9euters and combines this company8s e)pertise with that of Coface . "### Coface e)tends its service offering to factoring by setting up AHC! in 6ermany.2 Hist!r": "#B% Coface is founded as a specialised e)port credit insurance company. paving the way for ac:uisitions in 6ermany >AH Coface? and Austria >MHI Coface? in "##%. '11' Nate)is Ban:ues . managing its own products and .crl to become !rance8s leading credit information provider.opulaires becomes CofaceOs maAority shareholder. "##B Coface is privati ed. adding a worldwide insurable trade debt rating system to its credit information service. "##$ +he Credit Alliance network is e)tended to credit information. '111 Coface launches Nrating.

!rati!n !( India :i+ited 6EC5C8 is a company wholly owned by the 6overnment of India. 6overnment of India.er 6in 7 +i&&i!ns8 Consolidated turnover rose B. 6erling Hredit and %.) /a3!r D!+estic P&a"ers in Credit Insurance: "8 The E9. 4. Coface B. Atridius '. NC/ 4."31. 6overnment of India had initially set up 7)port 9isks Insurance Corporation >79IC? in Puly "#$&. it functions under the administrative control of the /inistry of Commerce L Industry. 7uler @ermes 3. It was transformed into 7)port Credit and 6uarantee Corporation <imited >7C6C? in "#%B and to 7)port Credit 6uarantee of India in "#03.3* to Q".0 million in '11B from Q". At constant group structure and e)change rates the increase in turnover came to ".# /a3!r Internati!na& P&a"ers in Credit Insurance: ". +his growth was distributed evenly between the first and second halves of the year.4. It is "$ .10B. It provides e)port credit insurance support to Indian e)porters and is controlled by the /inistry of Commerce. C!ns!&idated turn!.$ million the previous year.'*. Being essentially an e)port promotion organi ation. Eepartment of Commerce. 7)cluding the various prior year adAustments that had an adverse impact on '11B turnover. Credit 6uarantee Insurance Corporation $. 7)port Credit 6uarantee Corporation of India <imited was established in the year "#$& by the 6overnment of India to strengthen the e)port promotion drive by covering the risk of e)porting on credit. growth at constant group structure and e)change rates stood at '.#*.!rt Credit 5uarantee C!r.

reinsurance. thus helping them take informed investment decisions. BaAaA Allian 6eneral Insurance received the Insurance 9egulatory and Eevelopment Authority >I9EA? certificate of 9egistration on 'nd /ay. @aryana. ITGI's sound financial management has been achieved in a period of fast-paced growth. !" crores in #$$%-" to Rs. ICICI Bank is India8s second largest bank. banking.an" :i+ited is a Aoint venture between BaAaA !inserv <imited >recently demerged from BaAaA Auto <imited? and Allian . B? I--CO<TO=IO 5enera& Insurance 6IT5I8 is IndiaOs trusted insurance company.a3a3 A&&ian' 5enera& Insurance C!+. achieving a growth of B3 * over the last year. while !airfa) !inancial @oldings is a diversified financial corporate engaged in general insurance. '$&0 crore. &&%# crores in #$$"-$'. "1$ crores. '11" to conduct 6eneral Insurance business >including @ealth Insurance business? in India. Our GWP has grown from Rs. +he present paid2up capital of the company is 9s."11 crores marks in profit after ta) by generating 9s. '111 and has its head office in 6urgaon. 9eserve Bank of India. 3? . insurance claims management and investment management. 7C6C is the fifth largest credit insurer of the world in terms of coverage of national e)ports. ICICI <ombard 6eneral Insurance Company received regulatory approvals to commence general insurance business in August '11". "% . BaAaA Allian 6eneral Insurance maintained its premier position in the industry by garnering a premium income of 9s. It simplifies customerOs life by providing them tailor made products and :uality services. "%& crore and is the first company to cross the 9s. . a group company of !airfa) !inancial @oldings <imited. It is a Aoint venture between +he Indian !armers !ertili ers Co2operative >I!!C(? and its associates and +okio /arine and Nichido !ire 6roup. I+6I was incorporated on Eecember B. Both enAoy a reputation of e)pertise. BaAaA !inserv <imited holds &B* and the remaining '%* is held by Allian . the largest listed insurance group in Papan.7. <ombard Canada <td. -e are among India8s top three private2sector general insurance companies with "11 offices and a country2wide network of B01 e)clusive point of presence. '? ICICI :!+2ard 2 ICICI <ombard 6eneral Insurance Company <imited is a &B:'% Aoint venture between ICICI Bank <imited and the Canada based R '% billion !airfa) !inancial @oldings <imited.#11 crores and authori ed capital 9s. +he Company has an authori ed and paid up capital of 9s ""1 crores.managed by a Board of Eirectors comprising representatives of the 6overnment."111 crores. stability and strength. is one of Canada8s oldest property and casualty insurers.7. As on 3"st /arch '110. BaAaA Allian has made a profit before ta)es of 9s. insurance and e)porting community.

FH 6eneral Accident.hriram International Partner Allian @olding. FH 9oyal . FH "& . F. . FH Cigna.un Alliance. 6roup. . -I+@ !(97I6N . 6ermany American Int.rudential. Surich Insurance. Indian Partner Alpic !inance +ata CH Birla 6roup ICICI . FH -interthur Insurance.@I.A9+N79. .undaram !inance @industan +imes 9anba)y @E!C Bombay Eyeing EC/ . F.ANI7.INEIAN C(/.wit erland Commercial Fnion.wit erland .tandard <ife.

@ong <eong Assurance and A)a Behrad >/alaysia? and ATA Assure credit >!rance?. the following credit insurance companiesO Aoined as Credit Alliance: H7CIC >Ha akhstan?. F. 9eceivable management. FH 6io. 9eceivables management training. P 9othschild. "0 .Eabur 6roup Hotak /ahindra 6odreA . 6uarantee insurance.ource: F.1 CO-ACE . Eepartment of . Credit information and corporate ratings. !actoring.usiness :ines: ". Coface also offers three other business lines: ".. Chubb.tate !C '11"Country Commercial 6uide: India 4. 3. Credit insurance. F.tate.H /odi 6roup '1th Century !inance / A Chidambaram Iysya Bank Allstate. FH 6roup <egal L 6eneral. 3. Australia 6uardian 9oyal 7)change. B.. further e)tending the range of e)pertise offered by the network.anmar 6roup Cholamandalam . Australia Canada <ife /et <ife IN6 . '. '. In '11B. In !rance. public procedures management for e)port guarantees given by the !rench . I+6I and ICICI <ombard >India?.

!rt Di. Coface India offers ' product lines: • • Credit insurance> and Credit information.4. Its online credit reports are available at state2of2the2art database IC(N. -!cus UCour choice partner in /inimi ing Cour Business 9isks L /a)imi ing Cour BusinessO. @owever the e)pansion of activities from a local stage to the international arena is coupled with a larger number of more comple) decisions. Indian companies benefit from the e)pertise of a group operating in &1 countries. "# . +he company has pursued the development of local partnerships and fronting arrangements capable of offering domestic credit insurance to local companies and Indian subsidiaries of Coface 6roup partners in their markets. +his facilitates Indian and overseas clients to do business2to2business trade.4 C!(ace India +he changing face of the new India has opened a wide variety of opportunities for companies to develop their business operations.isi!n8 addresses the needs of today8s companies by providing full credit management solutions to build and protect business relationships +he companyOs core activities cover the entire cycle from customer profiling to credit reports and business information reports. +he Coface Info India 6Credit Re. +hrough Coface India Credit /anagement. many of which involve substantial risk.

reliable information. further e)tending the range of e)pertise offered by the network. As a result. 9e:uest information on any business. a company often has to make rapid decisions about the financial security of a potential trading partner. anywhere in the world • • • 9eceive reports via the Internet.? Pr!ducts and ser. reflecting the acceptable ma)imum level of e)posure on a single transaction: '1 . .!rt Coface IndiaOs approach to collecting and evaluating company information ensures that you the customer companies receive up2to2date. Coface reports are competitively priced and offer fle)ible service plans to meet clientOs needs.In '11B.ices: 1. Credit Re. and whether a company should grant a line of credit. The @ratin% sca&e CofaceOs simple. globally used rating scale indicates a companyOs financial soundness. @ratin% Credit assessment at the pace of business. 9eceive reports in various International languages 2.ervice Center for full support. email or fa) 9ely on Customer . whether they are around the corner or around the world. 4. the same high :uality information is received on the target companies. +he company may also need to demonstrate its creditworthiness to suppliers and customers. I+6I and ICICI <ombard >India? credit insurance company Aoined as Credit Alliance. +hese days.

Credit insurance +op .111 N R'1.!97 VB7 (thers +otal -'11$ revenue "&B& "B'" #'" "31 "'$ "'$ #% 'B' B01& 9ank " ' 3 B $ % & Country !rance Netherlands !rance .ortfolio Analysis and Eata 7)port. its online credit management tool.1* $* '" .111 NNN R"11.ices +hrough Cofanet.%* "#.%* '. you will be able to conveniently access both Nrating Credit (pinions and business credit reports 'B=&.pain Australia /arket .111 NN R$1.2 @ratin% Aua&it" :a2e& @elps in proving company8s creditworthiness on demand.111 NNNN R"11.layers 9anking in '11$ in Qm >"? . W CyC C(!AC7 C7.hare 3%.1 C!(anet $er. +he Vuality <abel program certifies reliability and improves the clientOs ability to negotiate better credit terms. Cofanet serves its clientOs with e)pedited efficiency.C7 AI6 /A.3* '#.9 R"1. -ith features such as . .'* '.pain F.&* '.A .111 and above >Customi ed Credit (pinion? 9atings are continually monitored so you always receive reliable information for accurate decisions. A+9AEIF.%* '.layer 7F<79 @79/7. Coface offers the following Nrating solutions: .

'#m s: km W!r&d Ran*: 4 9epublic of India New Eelhi ".u&ati!n :an%ua%es languages Area C&i+ate temperate in north 3. @indi 31* and "B other Iaries from tropical monsoon in south to '' ."1 billion >'11% 7.1 =e" In(!r+ati!n: O((icia& Na+e Ca.+.CHAPTER – ? N!n – :i(e Insurance /ar*et In India ?.? W!r&d Ran*: 2 7nglish >official?.ita& P!.

software ?.ir!n+ent: '3 .0* 9evenues: F. 7:uipment. chemicals. cement.E "B3.ir!n+ent: 5DP 62BB1? Rea& 5DP %r!0th rate 62BB18 5DP .0bn Industries: +e)tiles. transportation. mining.&11 W!r&d Ran*: 1)) W!r&d Ran*: # Agriculture: '1*.$* F. Industry: "#* .usiness En.E 3.ita 62BB18 5DP 62" sect!r8 62BB18 F.0* &. Insurance En. steel.er ca.E B.Bbn 7)penditures: F.&!"+ent rate 62BB)8 Pu2&ic de2t 6C !( 5DP8 62BB)8 .1B'bn 0.?.E "1#.ervices: %"* Une+.2 .ud%et 62BB)8 $'. food processing.

irdaindia. and the pace of change has stepped up in '11& as a result of detariffication.ita8 India: F. due to ongoing tensions in Hashmir.#.rogressive Alliance coalition is considered to be inherently unstable.E B. 6eneral Insurance Council association <ife Insurance Council ?. macroeconomic and fiscal stability.1bn in '11% N!+ina& annua& . (n the domestic front.akistan are viewed as a risk. relations with .ite . human capital.re+iu+ %r!0th "3* >during '11%? Pre+iu+ densit" 62BB)8 6D . !actors that have enabled this strong performance include IndiaOs demographics. IndiaOs Fnited .B per capita.2 $u2stantia& re(!r+ .outh L 7ast Asia: F. global integration.' per capita Re%u&at!r: Insurance 9egulatory and Eevelopment Authority www.e&s 62BB18 F.E ".er ca.org /ain n!n<&i(e industr": /ain &i(e industr" ass!ciati!n: ?.!&itica& uncertaint" -hilst India prides itself on being the worldOs largest democracy. !rom an international perspective.1 Ec!n!+ic %r!0th des. and its diversifying industries. significant progress has been made in the non2life insurance market since liberalisation."1%.E %. (7CE Average: F.r!%ress in n!n<&i(e 'B .Pre+iu+ &e.E '". the country is beset by political uncertainty.#. Assisted by this growth. IndiaOs economy is thriving.# $u++ar": Eespite political uncertainties.B per capita .re+iu+s . ?.

NON<:I-E PRE/IU/ INCO/E INCREA$ED . ?. but they already share over one2third of the market and are e)pected to increase their market share further as liberalisation continues. -hile it is difficult to proAect the behaviour of market players and responses of the I9EA. and its growth is hindered by the '%* cap on foreign ownership of insurers.rivate insurers are relatively new entrants into the Indian market.remium levels >in billion F. the market remains heavily regulated.r!3ecti!ns . 5r!0th . .ETWEEN 2BBB AND 2BB) +he insurance environment in '11& C@A9+: . Eetariffication is likely to be associated with a period of adAustment and predatory pricing.9eform of the Indian non2life insurance market has progressed substantially since market liberalisation began in '11". -hilst detariffication occurred in early '11&. in the medium to long term.#. Already a sharp decrease in rates has been seen as a result of the Panuary '11& detariffication process.E? C@A9+: Inde)ed premium levels >'111 X "11? '$ . these reforms are e)pected to lead to more dynamic growth.!int t!0ards hi%h %r!0th +he e)tent of the insurance market liberalisation process is the subAect of ongoing debate.E 1B1C .

as summari ed by the inde)ed premium chart below. consistently outstripping global growth. Non2life premium income has increased by "1%* since initial liberalisation in '111. @owever.ome key characteristics of the market are listed overleaf. Eespite <iberali ation in '111. '11& has so far been one of the most e)citing years for the Indian insurance industry.+he Indian insurance market cannot be understood e)cept in the conte)t of its history of nationalisation and liberalisation. which was nationalised in "#&'. and received an additional boost in '11& with the Eetariffication of key classes of business. insurers will not be allowed to '% . Y Tari((s: Fp until the end of '11%. the Indian non2life market remains heavily regulated. has progressed substantially since the turn of the century. growth in IndiaOs non2life market appears to have slowed to "3* in '11% K down from "0* in '11$. Nonetheless. . 9eform of the Indian nonlife insurance market. the Indian /A9H7+ 97/AIN. tariffs remained in place across &1* of the market. heavy regulated: Eespite the welcome reforms between '111 and '11%.3 9ates for property and motor were detariffed at the beginning of '11&. with significant reforms taking place. @owever.

this share is reducing as a result of private sector competition.u&s!r" cessi!ns: +here is only one local reinsurer. Y A%ents: Around 01* of premiums are still distributed through the traditional medium of the direct sales >or UmarketingO? agent. In April '11&. '& .: !oreign entities must partner with an Indian entity in order to form an insurer and are limited to a ma)imum '%* stake in the Aoint venture. Y Pu2&ic $ect!r Underta*in%s 6P$Us8: . the "11* government2owned 6IC. Y 21C -DI ca. Brokers have failed to gain a significant market share largely due to regulations that have put them in a disadvantaged situation. @owever.change the terms and conditions for e)isting products for up to "$ months post detariffication in an effort to avoid confusion during the initial stages. -hile the current government has suggested increasing the !EI cap to B#*..Fs remain dominant with an estimated market share of over %1*. the proportion of compulsory cession to the 6IC was reduced from '1* to "$*. Y C!+. the timing of this change remains unclear as it is likely to trigger further policy discussions within the centre2left government coalition.

In addition. +he simplest forecasts suggest that premium income could double in five years to reach F. the insurance market must still face the challenge of poor customer perceptions and the danger that the pace of reform will slow. they are likely to have increased access to the international reinsurance markets. • As Indian insurers build a profitable portfolio. with relatively slow growth in '11& rising to rapid growth by '1"1 '0 .rice competition has already begun to increase and is likely to continue to do so for the ne)t "0 to 'B months. • +he practice of cross2subsidisation is likely to be phased out as riskbased pricing is used increasingly for all products.everal significant structural changes are e)pected in the market as a result of the drivers discussed above: • .%bn in '1"1.E "". premium growth is being driven by other factors such as the growing consumer class. increased foreign direct investment. and an increased awareness of catastrophe e)posure.CHAPTER – F :!!*in% (!r0ard t! the +ar*et in 2B1B +he Indian insurance market is likely to change significantly over the ne)t three years largely due to regulatory changes. infrastructure development. (ne conclusion is certain K the Indian non2life market is set to grow dramatically over the ne)t few years. Eespite significant positive changes. • !inally. this growth becomes e)ponential. rising demand for insurance is likely to be met by increased capacity as foreign insurers look to access this growing market. -hen the structural changes above are taken into consideration. .

F.2 Re%u&at!r" en. /uch of the comple)ity of IndiaOs politics and regulatory environment is dictated by the difficulties of these competing interests.1 P!&itics India prides itself on being the world8s largest democracy modelled on the British parliamentary model. and voice and accountability. '# . manifest by comparatively low levels of political stability. rule of law.ir!n+ent is Auesti!na2&e: F.ir!n+ent Eespite its reputation. not only with regard to its si e but also in terms of culture. when compared to the regional average. @owever. languages. India performs well in terms of control of corruption. India is a large country. religions and contrasting convictions.The E((icienc" !( IndiaGs Re%u&at!r En. this does not disguise the fact that the country is often beset by political volatility.

" Narayana /urthy. which must be simplified if initiatives such as reform of the power sector the development of special economic ones are to succeed. We must focus on vital issues like corporate citizenship. Infosys +echnologies. "We have to make our economic systems as transparent and as open as possible.C!+. India. -7! . and there are significant gaps within the Indian regulatory environment such 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. @owever. capital market regulators a banking supervisors.ummit. market opportunities and intellectual property rights. A maAor effect of these challenges is to hinder the speed of legislative change. which includes a legal system. resulting in very slow legislature. >'11B? 31 .ared t! Re%i!na& Peers> India $c!res Hi%h in Ter+s !( Ru&e !( :a0 and Acc!unta2i&it" C@A9+: 6overnance indicatorsB versus regional average >'11$? Notwithstanding the countryOs heterogeneous society. the efficiency and efficacy of these institutions is :uestionable. there is an established and bind institutional framework.

the demand for corresponding insurance protection remains modest. with its concepts and procedures resembling those of Anglo2. a large backlog of cases and fre:uent adAournments can result in considerable delay before a case is closed. @owever.India Has Aninde. especially in motor third2party cases. 3" .endant Hudicia& $"ste+ That Rese+2&ence Thise O( An%&!< $a9!n C!untries : There Is a :ar%e . Conse:uently. Although there is evidence to suggest that Indians are becoming more aware of litigation. which administer both Indian and individual state laws.a)on countries. -hile the Audicial process is considered fair.ac*&!% !( Cases C&!%%in% IndiaGs Hudicia& Pr!cess: India has an independent Audicial system. where appropriate. +he Indian Audicial system is a single integrated system of courts. and interim relief may be allowed in other cases. matters of priority and public interest may be dealt with e)peditiously. the general level of liability claims awareness amongst IndiaOs population is low.

the Indian National Congress emerged as the largest party following '11BOs elections.et0een India and Pa*istan !. +he F.ected t! Re+ain in O((ice: D!+estic .otential without a Eurable .Th!u%h Unsta2&e> IndiaGs Current 5!. with a number of smaller regional parties. however.e Eased .A coalition is e)pected to remain in office even though the coalition is viewed as inherently unstable and progress on economic reform is predicted to be erratic. +he surprise result was attributed to the alignment of the incumbent government with the countryOs burgeoning middle classes and their interests rather than those of the mass rural poor. tend to be passed very slowly in India due to the bureaucratic and leadership hurdles that need to be overcome. +here is also often a wide gulf between the commitments made by governments and the measures that the legislature and bureaucracy can actually implement. +his party formed a governing alliance. the nited Progressive !lliance >F.ern+ent is e9.A?.!&itics: In a dramatic turnaround in its fortunes. <egislative changes. IndiaOs turbulent politics are comple) and often lead to short2lived administrations at national and state level. /oreover.er =ash+ir: India -ill Never Achieve Its !ull . as well as utili ing the support of a large bloc of communist parties known collectively as the "eft #ront.olution in Hashmir -!rei%n re&ati!ns: 3' . IndiaOs pluralist political system can complicate and thus further hinder the reform process. +he pace of IndiaOs economic liberalisation will be determined by the leadershipOs ability to pursue the countryOs social agenda. Tensi!ns Ha.

with Bangladesh.akistan has wrestled its own particular UdemonsO to the ground.akistan have always been viewed as poor. Bangladesh. 9elations. improved noticeably during the premiership of the $haratiya %anata Party&s >BP. although largely warm. It is argued. more recently. and China Pa*istan: 9elations between India and . took power. it is argued that neither of these two things can happen without a durable solution in Hashmir.an%&adesh: 9elations with IndiaOs other large /uslim neighbour. started to deteriorate in '11" when the BP.IndiaOs foreign relations have in the past been dominated by its difficult relationship with . and until .akistan are now several years into a peace process that has made huge strides in reducing tension. relations have somewhat improved under the current Congress Party2led government. with the two countries fighting three wars since partition in "#B& and narrowly avoiding a fourth in '11'. India will never achieve its full potential. IndiaOs relations with both the F.akistan and. that until India is fully reconciled to . /oreover. however. .ino2Indian -ar and continuing 33 . +hus significant tensions still e)ist and the core issue of HashmirOs status remains unresolved. either economically or geopolitically. however. India and . who initiated peace talks with Islamabad. but it is based on a bargain both sides suspect the other of breaking: that .akistan will rein in the terrorists operating from its soil and that India will negotiate in good faith over the future of Hashmir. China: Eespite lingering suspicions remaining from the "#%' .Os? !tal $ehari 'a(payee.akistan. Although not fully restored.

territorial=boundary disputes in Hashmir and Arunachal . e)pand trade and cultural ties. the N -ecurity Council. known as the 6B.radesh. its successful incubation of democracy amid incredible cultural and linguistic diversity. Both countries have sought to reduce tensions along the frontier. India formally recogni ed +ibet as a part of China and. A Per+anent /e+2ershi. with a lack of consensus over potential candidates for such membership. is improving. and normalise relations. including the FN. In upgrading ties with India. global strategic dominance and. it is significant that *r. welcomes a closer relationship with India as a counterbalance. . International "abour 1rganization. despite warnings from the previous . Papan and Bra il. In '113. !n the UN $ecurit" C!unci& Is a Hi%h Pri!rit" (!r India: +he :uestion of IndiaOs permanent membership on the N -ecurity Council is a high and pressing priority for New Eelhi. in '11B. 0ith India as a c!unter2a&ance t! ChinaGs e9. $ush has avoided an endorsement of IndiaOs ambitions to gain a permanent seat on the nited Nations + N. India belongs to all the maAor international organisations. administration led by president )eorge $ush is concerned that the fast2e)panding economic power of China poses a threat to the F.ofi !nnan that the lack of reform could weaken the councilOs standing in the world. International $ank for /econstruction and 0evelopment. International 3B .ecretary26eneral . India.!0er: IndiaOs link with the F. its large population and growing economic prowess Austify global recognition through membership in the most important institution of international governance.ino2Indian relations have improved gradually. The U$ sees its re&ati!nshi. All elements along the Indian political spectrum are united in the belief that their countryOs flourishing transition from colonialism. -ecurity Council. as a conse:uence.andin% . and the African Fnion are amongst those lobbying for coveted permanent member status. 6ermany. +he F. A working group on reform set up under the N )eneral !ssembly in "##3 has made little progress on the matter.

World 3rade 1rganization >-+(? and the Commonwealth. a maAor reorientation of trade was needed. -!&&!0in% re(!r+s> %r!0th sur%ed and +ade a ste. -!r Decades> IndiaGs Ec!n!+" Under. -ith the collapse of the . in combination with additional e)ternal factors. throughout the whole decade and 9ussia in '11$. +his. chan%e u. growth surged through to the mid2"##1s and the beginning of this decade K with India outperforming other large economic blocks. with the notable e)ceptions of China. which provided further stimulus for a wave of economic reforms.oviet Fnion. .s of maAor economies >"##& K '11%? 3$ .rime /inister *anmohan -ingh is widely regarded as the UarchitectO.0ards in 2BB2 C@A9+: Inde)ed nominal 6E. India8s economy underperformed relative to its potential.*onetary #und.e t! Its P!tentia& Ec!n!+": !or decades.ocialist policies and a powerful bureaucratic apparatus led to red tape that stifled entrepreneur2led development. for which todayOs . led to a balance2of2payments crisis at the start of the "##1s.er(!r+ed Re&ati. World 2ealth 1rganization. !ollowing the implementation of these reforms.

IndiaOs business environment and the countryOs growth prospects are influenced by a number of characteristics. it is still held back by inefficiencies and bureaucracy. F.!ra2&e -act!rs: Infrastructure bottlenecks 7volving regulatory environment +ransparent but overburdened system /acroeconomic and fiscal stability legal .In addition to the change in its economic development policies. +hese challenges will need to be tackled if IndiaOs economy is to continue to perform well in the future.ects -a. -act!rs a((ectin% IndiaGs %r!0th .!ura2&e -act!rs: Eemographics Improving @uman Capital 6lobally Integrating 7conomy Challenging but Improving 3% Un(a. +hese characteristics demonstrate that whilst the economy is growing and developing.r!s.

u&ati!n is . +his signifies that there will be a significant growth in labour supply over the ne)t "$ years."3 <atest figures from the N Population 0ivision reveal that IndiaOs working population is proAected to grow significantly over the ne)t "$ years as highlighted by he chart below.!. India has a young population of appro)imately ". amongst other factors. C@A9+: Age group proAections >'111 K '1'1? ) 3& .A /i) of sheltered manufacturing and competitive services sectors F.r!3ected t! %r!0 si%ni(icant&": De+!%ra.# IndiaGs 0!r*in% . increasing at roughly ".$* per year. the second2largest in the world after China.hics: 7conomic growth depends on." billion. having large pools of high2:uality labour supply.

!.ert" :ine C@A9+: . F.e the P!. '0* of the Indian population was below the 30 . in '111.9esearch by the Boston Consulting 6roup reveals that India is set to have the largest surplus working population >"$ to $# years of age? by '1'1 when compared to all other maAor economies as shown by the chart below.&us 0!r*in% .een :i(ted A2!.E ". -hilst this may lead to new Aob creation. during the preceding '1 years. As such.) India is set t! ha.e the W!r&dGs &ar%est sur.$ in earnings per day?. which is an impressive feat given that. an estimated '"1 million Indians were lifted above the poverty line >the threshold of which is F. between "#01 and '111.urplus working population by country in '1'1 !urther research indicates that. this could also lead to greater unemployment and=or lower wages.e .u&ati!n 2" 2B2B: An Esti+ated 21B /i&&i!n Indians Ha. the number of poor in India increased by about #3 million.

1 India . +here are roughly 301 universities and ". from which '11. as compared to 3%* in "##B. trained Information +echnology >I+? specialists. 311.ita&: Nevertheless. F. 7ven though India has comparatively low levels of overall adult literacy of around %"*.e O.$11 research institutions around the country.111 engineers.111 non2engineering technicians and #.ased -ir+s Ha.111 . not least if compared with its regional peers.ened RJD :a2s in India durin% the :ast -i. while there is yet to emerge a broad class of highly skilled workers.e Eears: 3# . JCou cannot be industrially and economically advanced unless you are technologically advanced. India still has a long way to go. and you cannot be technologically advanced unless you are scientifically advanced. In this light. technicians and engineers. the country produces a large number of skilled workers in various fields.poverty line. +he Indian government is fully aware of the role that science and technology can play in developing the countryOs economy.ecia&ists> technicians and en%ineers: Hu+an ca. +his suggests that the outcomes of IndiaOs surplus population are likely to be positive. It possesses a large pool of scientists.I /!re Than 1BB It and $cience<.!!& !( scientists> IT s. many of whom speak 7nglish fluently. economic growth does not merely depend on the :uantity of labour available. there are UislandsO of depth in particular sectors.!ssesses a &ar%e . In other words.hE students graduate annually.

+he recent lowering of duties for nonagricultural products from '1* to "$* and the proposed further reduction in duties to "'. the si e and potential for growth of the domestic market is one of the more important factors responsible for the strong interest of foreign investors in India.$* for the '11%2'11& budget are steps towards opening the economy further. it may sometimes be overlooked that India remains a relatively closed economy. /oreover. . /oreover. have continued to thrive >reporting revenue growth of around B1* for the second :uarter of '11%?. are still numerous. although recent policy directives are laying the ground for greater !EI. 9ecent discussions on e)panding trade agreements. attest to IndiaOs resolve to gain further access to world trade. and its import tariffs remain comparably high. IndiaOs trade volume as a share of 6E. the prospects for greater world integration are promising. those applying to foreign direct investment >!EI?. Indeed.ingapore and +hailand for e)ample. 4With the debate about India&s emergence as a global leader in service e5ports dominating the ne6s. B1 . +here are.7 @owever. with China. however. more than "11 I+ and science2based firms have opened research and development >9LE? laboratories in India. still remnants of its inward2looking development strategy. manufacturing and e)porting. (ver the past five years alone. since there is a political consensus on the need to further liberalise trade and capital account restrictions. '' India is also reported to be set to become the regional hub for pharmaceutical 9LE. Is :!0 In C!ntrast T! Other /a3!r Asian C!untries 5&!2a&&" inte%ratin% ec!n!+": India has made significant inroads in opening its economy since it Aoined the -+( in "##$. in particular. is low in contrast to other maAor Asian countries. IndiaGs Trade K!&u+e as a $hare !( 5d. -ipro and +C. capital account restrictions.+ier one Indian I+ providers such as Infosys.

the #iscal /esponsibility and $udget *anagement !ct was passed in '11'..in% +!netar" and (isca& sta2i&it": Inflation has declined significantly in recent years. e)porting their best goods and services while absorbing global best practice. +hose that succeed will likely retain elements of their traditional business cultures >such as low cost advantages? while also adopting a more international outlook. has risen continuously. +he so2 called Udevelopment e)penditureO. IndiaOs poor public finances'0 have placed significant constraints on growth. At the same time. by '1102'11#. Indeed.&ine is Kita& Cha&&en%in% 2ut i+. some of its companies will emerge as strong performers in the international market.As India becomes a key part of the global supply chain. ie capital e)penditure on areas such as infrastructure. nondevelopment e)penditure. a legacy of the e)pansionary fiscal policies pursued by the government in the late "#01s. . But the monetary authorityOs success in maintaining relative price stability going forward will re:uire improvements in fiscal policies. particularly interest on government debt. with a goal of bringing down total deficit and revenue deficit0 to 3* and 1* of 6E.'# +he introduction of the national value added ta) >IA+? system in April '11$ is also e)pected to contribute to fiscal consolidation. IndiaOs large fiscal deficit. I acknowledged to be its ongoing weakness. respectively. In(&ati!n has Dec&ined in Recent Eears> 2ut Increased -isca& Disci. +he government has taken some initial steps toward fiscal consolidation.ublic deficits since then have been very high at around "1* of 6E. stabilising at a level of roughly $* after consistent double2digit inflation prior to the "##1s. B" .r!. has fallen constantly as a percentage of 6E. since the early "##1s..

Accordingly. it is not possible to fully fund infrastructure development from the governmentOs budgetary resources. or 8:< of its )0P . the Indian government has introduced the facility of viability gap funding to support B' . this sector continues to suffer from acute capacity and :uality constraints.+ent: +he government is faced with tough choices in allocating investment resources. on po6er. transportation. growth is e)pected to hit severe infrastructure constraints in the near future.E "$1bn in the short term to finance its infrastructure development >rail. telecommunications and real estate in 8::8. construction.rime /inister *anmohan -ingh. despite having one of the most e)tensive transport systems in the world. According to . public investment has fallen continuously over the years. Indeed. Chief 7conomist. In comparison. As such.tanley. >'11B? India ReLuires a T!ta& !( U$D 1)B2n t! -inance Its In(rastructure De. 4China spent -0 89: billion .e&!.F. 6iven this resource re:uirement. airport and seaport?.” Chetan Ahya. leading to severe infrastructure bottlenecks.ere in(rastructure 2!tt&enec*s in India In(rastructure 2!tt&enec*s As a conse:uence of persistent shortfalls in public revenues. /organ .4 There are se. India spent (ust -0 => billion or 9< of )0P. India re:uires a total of F.

3.public2private partnership initiatives in infrastructure sectors. highly restrictive labour laws have prompted industry to outsource activities so a significant proportion of industrial growth is counted as service sector growth. has remained muted. As a result. B3 . '. hindering the growth of large2scale manufacturing companies geared towards e)porting. ". $er. / Z ore profoundly. while the manufacturing sector has remained largely static. and this has impeded the rapid e)pansion of manufacturing. large fiscal deficits have crowded out $. the financing demands e)erted by recurring. has been responsible for the maAority of economic growth. Z!inally. intrusive levels of market regulation and relatively high tariff structures have deterred both domestic and foreign investment into industrial sectors. B. absorbed by growth in services. while growth in trade volumes relative to 6E. in recent years. Z!irstly. +here are a number of key characteristics of the Indian economy that contribute to higher growth in its service sector compared to its industry. with declines in the primary agricultural share of 6E. IndiaOs growth model has been uni:ue. !EI growth has significantly lagged in comparison with other emerging markets such as China. Infrastructure is one of three strategic high2priority areas for India >the others being the public sector and agriculture?.ice sect!r 2ias: IndiaOs service sector accounts for over $1* of the economy and. private investment. <ack of infrastructure is a key reason why IndiaOs poorest regions remain impoverished.

erse Industria& $ect!r 0ith /a3!r Industries Industria& sect!r: India has built up a diverse industrial sector with maAor industries. including automobiles and auto ancillaries.(? services.( sector. As a new sector K and one whose potential the government failed to recognise early on K it has avoided stifling regulation. the picture is far from uniform and is best understood when Au)taposing three distinct sectors: IndiaGs Techn!&!%"> $!(t0are and Outs!urcin% $ect!r is Hi%h&" C!+. a Di.etiti. research and development. electricity. I+. I+ and B.ui&t U. +oday. software and BB . the country is emerging as a leading sourcing base for global players in auto and auto ancillaries. chemicals and petrochemicals. and engineering services.( services. having created hundreds of thousands of Aobs and billions of dollarsO worth of e)ports. @owever. I+ and business process outsourcing >B. pharmaceuticals. te)tiles and garments.India Has . software and B. telecommunications.e IT and !uts!urcin% sect!r: At the high end of IndiaOs productivity spectrum is the I+. pharmaceuticals. oil and gas and other hydrocarbons. healthcare and biotechnology.e 5&!2a& &eader – c!+. IndiaOs outsourcing platform has risen up the value chain and now includes research and development in high tech sectors such as biotechnology and pharmaceuticals. aluminum. iron and steel.etiti. Initially starting with back office services such as call centres and ta) work. It is a big success story.

@owever. the continued tariff structure for finished cars continues to shelter domestic automakers from global competition K making the sector less efficient than it would otherwise be. !EI has been allowed to flow into the I+ industry.33 . the industry has been growing at a rate of appro)imately 31* and the industry e)ported F. is still burdened by tariffs.e industr" In the middle of the spectrum is the auto industry. IndiaGs C!nsu+er E&ectr!nic $ect!r Is $ti&& . which has seen dramatic change since the government began to liberalise it in the "#01s. with the result that Indian consumer electronics goods can neither compete on price nor on :uality with international competitors. despite the lifting of !EI restrictions in the early "##1s.E "bn in '1132'11B compared to F.rices have fallen and. Indeed. !EI.3' -ithout this foreign money. which. which has been permitted since "##B.E &%1m in '11'2'113. whereas foreign investment is prohibited and=or restricted in most other sectors.etiti. By '11'.e :a%%ard – 2urdened c!nsu+er %!!ds +ar*ets: At the low end of the spectrum is the consumer electronics sector. -ast i+. employment levels have held steady due to robust demand.urdened 2" Tari((s> /a*in% It Unc!+.outsourcing companies are e)empt from IndiaOs labour regulations that govern working hours and overtime in other sectors. even as the industry has consolidated. ta)es and regulations. has made it possible for output and labour productivity to soar.r!. As a result of a total ban on !EI and e)tremely low labour productivity and B$ .in% – trans(!r+in% 2ut sti&& she&tered aut!+!ti. it is debatable whether the sector could have taken off. it already accounted for "$* of all !EI in India.

ared T! A%ents: B% . the following discussion outlines the main challenges facing brokers: . the role of an insurance broker does not seem to have been properly understood or appreciated because non2life market has hitherto largely been tariffed.anta%es C!+. @owever. B reinsurance brokers and '$ composite brokers?.performance. there were ''' licensed brokers >"#3 direct brokers. CHAPTER – 1B . Brokers currently account for a small percentage of all premiums distributed in India and are finding it difficult to grow and attract new business.r!*ers -ace $i%ni(icant C!st Disad. IndiaOs food retailing industry is considered to be the least competitive sector in the subcontinent. In Eecember '11%. +his position is a concern for entities such as <loydOs and is mainly caused by structural elements within the Indian market.r!*era%e in India is sti&& in its in(anc" +he challenges facing brokers: Brokerage in India is still in its infancy.

1. !irstly. +hese brokers currently have two distinct advantages over their corporate competitors in the Indian market.usiness 2.r!*ers Can . in India the top ten brokers are currently either chartered accountants or surveyor firms. the deep relationships that these brokers hold with their clients are deemed to be more important than insurance e)pertise. subAect to a minimum of IN9 $1 lakhs >F. . $!&e trader c!+. the top ten brokers tend to be #ortune ?:: companies.ene(its That .E ""1k?.E %? per annum. their relatively small fi)ed cost base enables them to intermediate business for commission levels that are as low as "*.rin% T! The+ B& . registration costs for insurance agents are Aust IN9 '$1 >F.o while internationally." $+a&& O. C&ients Ha.etiti!n: +he vast maAority of the ''' or so brokers currently operating in the Indian market are e)tremely small operations targeting small and medium2si ed enterprises.r!*er /ar*et Is D!+inated .$& Brokers are also re:uired to have professional indemnity cover of three times their brokerage income. The Indian .erati!ns Tar%etin% $+e .e /ade A0are O( the . c!sts: +he I9EA has made it mandatory for the insurance brokers to pay a registration fee of IN9 $1 lakhs >F. as insurance is not currently perceived to be a product of economic value.econdly. In contrast.E ""1k? in order to show commitment to the market and their clients. Hi%h set<u. .e Eet T! .

2 .r!*ers -uture de.. !irst of all.e&!. O.it" restricti!ns: Inddition to the above challenges for brokers. 11. a long history of tariffs and certain activity restrictions. it is likely to take significant time and resources to ensure that clients understand the full benefits brokers can bring to them.e -!r .+ents: B0 .E 3. -hile detariffication is changing these dynamics of the broking community. +he lack of these value2added back office services is yet another barrier to clients purchasing their insurance through brokers. brokers are currently unable to accept business or settle claims on behalf of insurers. #.e $! -ar Had T! -!cus Their E((!rts !n Niche $e%+ents: As a result of high set2up costs.r!*ers Ha. 11. so2called mega risks and risks where a companyOs paidup capital is below F. sole trade competition. brokers have had to focus their attention on niche sectors of the Indian market namely: non2tariff business. Acti.$m.er the /ediu+ Ter+> C!nditi!ns Are E9. :e%acies !( the tari(( +ar*et: +he fact that &1* of all Indian premium income has hitherto emanated from tariffed products means that brokers have so far been unable to demonstrate real value to clients.r!. Clients have therefore understandably :uestioned the value of an Ue)pertO intermediary when the product that they are purchasing is basically a commodity.ected T! I+. the tariff market did not enable brokers to demonstrate their value in Ushopping aroundO for the best deal.

!urthermore. +his situation may prove difficult for organisations reliant on the broker channel because if these direct strategies prove successful. H!0e.# . and +ata AI6 has recently employed ".? have already been set up by the .Eetariffication is likely to have two medium2term effects on distribution in the Indian market: 5radua& de+ise !( the M+ar*etin%G a%ent: +he .$11 direct marketing agents of its own. however. .e t! de+!nstrate . Ioluntary 9etirement .r!*ers 0i&& ha.ome private insurers have adopted direct distribution strategies. offered by the . it is likely that their huge sales forces will need to be reduced. the take2up of the I9.er> there is a Chance that Insurers Wi&& Ha.. In order to maintain competitiveness.a&ue t! c&ients: -hile the value of brokers lies to a great e)tent in their skills in structuring a customised solution for B# .Fs to cater for the loss of sales Aobs that detariffication is e)pected to cause.Fs will need to readAust their business models to deal with the underwriting challenges posed by a detariffed market.e Created Other Distri2ut!rs 2" Then: In the short term.Fs is reported to have been disappointing. the e)tent to which the private companies are prepared to support the cause of brokers may reduce substantially.chemes >I9.. ICICI2 <ombard is utilising the e)tensive retail bank branch network of its Indian partner to sell products via the Bancassurance channel. local private insurers do not appear to be prepared to wait for brokers to gain a foothold in the market.. 11.

companies should offer any additional reinsurance to the 6IC before seeking alternative markets. Hardenin% Rates Ha. there had been a trend towards the purchase of non2proportional programmes in India until mid2'11B.u&s!r" sessi!n: Eirect insurance companies operating in India were statutorily compelled to cede '1* of their book to the 6IC.urplus over and above the domestic reinsurance arrangements class2wise can be placed by Indian insurers. the 6IC. this rarely takes place.u"ers t! Purchase N!n<Pr!. Z1)C c!+. outside India.r!. Z5IC has ri%ht !( (irst re(usa&: By law. 9einsurance is not subAect to a tariff.ider: +here is a single local provider of reinsurance capacity. . where it is necessary in respect of specialised insurance to cede a share e)ceeding such limit to any particular reinsurer.their client. which is wholly owned by the Indian government.er Reinsurance 2u"ers: !ollowing the hardening of international rates and the growing sophistication of the Indian reinsurance buyer. There is !n&" !ne &!ca& reinsurer – the %ic Reinsurance: +he basic position of reinsurance in India is relatively clear: Z$in%&e &!ca& . $1 .!rti!na& C!. subAect to a limit of "1* of the total reinsurance premium ceded. (n the whole. after which companies are free to make a commercial decision on how much more of their business they are prepared. this has been reduced to "$*. but in practice.e Caused Indian .$0 @owever. ZInternati!na& reinsurance &i+ited t! a +a9i+u+ !( 1BC: .ince April '11&. the market will take some time to allow brokers to establish a name. it will take some time until this value proposition filters down to end customers. the insurer may seek the specific approval of the Authority.

although the net retention is driven by the respective segment in which the premium has been underwritten.. (verall. CHAPTER – 11 Pu2&ic c!+. the retention ratio K a measure of the companiesO ability to bear risks K differs markedly between . the net retention ratio of .. the . +he perceptions that international reinsurers have of these two groups of buyers are significantly different. which both increased their retention.. According to the '11$2'11% I9EA 9eport.Fs for the period of '11$2 '11% declined.. across segments.anies: 5IC and the P$Us +he 6IC is the largest and most important reinsurance account in India and. the retention ratios also have varied significantly as summarised by the chart overleaf C@A9+ : 9etention ratios of .. +raditionally. .@owever. a combination of general rate2softening in the international markets and e)tensive price2 driven competition from the continental reinsurers in the local market has made proportional treaties attractive once again across the market. As e)pected.Fs have retained a significant component of their portfolio. due to their continued dominance of Indian direct market.Fs also continue to be important reinsurance buyers. with Fnited India and (riental retaining considerably less than both New India and National.Fs. 9einsurance buyers in India fall into two broad categories: the public companies >including the 6IC on a retrocession basis? and the private companies.Fs $" .

P!!r data: +he data provided by the Indian public companies is routinely described by underwriters as 4very poor5.u2&ic c!+..i&" !n c!st: @owever..F accounts.anies are said t! +aintain .C@A9+: 9ange of . +his is mainly a result of the inade:uacy of the I+ systems employed by the public $' . despite the si e of the . leading international underwriters e)pressed certain reservations about dealing with this business.F retention ratios The .!!r Lua&it" data and t! (!cus hea.

there are good reasons for international reinsurers to continue to focus on the public companyOs portfolios. and underwriters. .anies: +he reinsurance position of private sector companies operating in the Indian market differs from that of their public sector competitors in three key ways. and an Indian risk management solutions model was launched in Eecember '11% by 9/. leading international brokers are e)tensively used for the placement of Indian reinsurance premiums. it is unlikely that the standards of public sector data will reach UsatisfactoryO levels in the near future.er> the P$Us $ti&& Re+ain the :ar%est Reinsurance . +his 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. C!st (!cus: As found elsewhere in Indian insurance.. despite these ongoing issues. there is an unrelenting focus on low cost rather than economic value in the reinsurance purchasing practices of the public companies.maller market but higher reinsurance utilisation: !irstly. the accounts are far smaller but retention ratios tend to be lower. who are less able to add value by means of actuarial capabilities. @owever.u"ers in the /ar*et: @owever. even with this progression. for instance. 12. +his situation adversely affects the ability of both brokers. /oreover. depending on portfolios. @E!C ChubbOs retained a higher $3 .1 Pri. It should be noted that gradual improvements are being made as clients and counterparties demand :uality. +hese accounts are e)pected to continue to be IndiaOs largest for a considerable time and their data provision is e)pected to improve with the increasing international competition in the direct market. H!0e. who find it difficult to fully comprehend their e)posure to risk. Again.sector companies.ate c!+. 6uy Carpenter and -illis are said to be the largest producers for <loydOs.

Whi&e The O.portion than any other private insurers K largely due to a significant component of its portfolio being motor. $B .econdly. the :uality of data provided to reinsurers is of a far higher :uality than that provided by the publics.anies> The" Tend T! Ha.etter Lua&it" !( data: .e a Hi%her Uti&i'ati!n C@A9+: 9etention ratios of private companies .era&& $i'e !( the Reinsurance Is $+a&&er -!r Pri.ate C!+.

which is the stronghold of the 6IC and the continental 7uropean reinsurers. The 5IC is 1BBC %!. Best at the end of '11%.ern+ent<!0ned and has an MAG ratin% (r!+ a. +he fact that the organisations are young is also an important barrier to <ondon purchasing as they have tended to opt for proportional treaty coverage.ri.tandard L . +here is current evidence of this $$ . and it is likely that their balance sheets will reach a point where the purchase of non2proportional cover will become more of a realistic option.+. there is slightly less focus on cost >and more focus on relationship? in the reinsurance purchasing process. therefore. is backed "11* by the Indian government. +his is mainly due to the si e and stage of development of the private insurers in India.ate c!+.r!.!rti!na& treat" arran%e+ents: <ondon underwriters are not yet heavily involved in working on the reinsurance programmes of the private companies despite their greater degree of :uality and professionalism. 2est Reinsurance se&&ers The 5IC: +he 6IC.oorOs and was downgraded from an UAO to an UA2O by A./. The .:ess (!cus !n insurance c!sts: !inally. the national reinsurance carrier. @owever. +he 6ICOs e)ceptionally strong position in the Indian market is further underpinned by the links it maintains as a holding company for the .anies are sti&& "!un% and thus use .Fs. as these private insurers grow and develop their business in India K which they are e)pected to do over the medium term K the reinsurance premiums available from them will grow ever larger.. Its monopoly position has enabled the 6IC to build up a huge amount of capital and the organisation is currently seeking opportunities to efficiently employ its assets. +he small si e of the private insurers means that only low levels of premiums are available from these organisations and. there is little margin from which to pay for the relatively costly process of purchasing protection from <ondon. +he 6IC currently has a UBBO rating >/arginal? from .

and has stated that it is in favour of both detariffing the Indian primary market and a gradual removal of the compulsory cessions.ri& 2BB4 On0ards: +he compulsory cession rule does not always work in the 6ICOs favour as the government run reinsurer has no choice but to accept the poorly performing motor liability cessions. the continental reinsurers are the main markets used for the placement of $% . Africa and the /iddle 7ast. . which are being eroded by heavy competition from the large continental reinsurers.ources suggest that the 6IC has ambitions to become the leading reinsurer in the region. In terms of products.activity as the 6IC has recently built on its strength at home and developed its presence across Asia. several foreign reinsurers are involved in the Indian market. Pri+ar" Insurers in the Indian /ar*et Are O2&i%ed T! Cede 1)C !( Their Ris* t! the 5ic (r!+ A. they also have a desire to spread their reinsurance e)posure across more than one provider. Although cedants e)press confidence in the 6IC. the 6IC is confident that it will remain competitive in a freer market than currently e)ists in India. Apart from the 6IC.!rti!na& Treaties: (utside of the 6IC. 6iven its dominant position. the 6IC is seeking to develop into lines outside of its traditional proportional treaty arrangements. $0iss Re and /unich Re Are $tr!n% in India Due T! the Hi%h Use !( Pr!.

therefore. @owever. .o for the time being.wiss 9e are lobbying for full branch status for their local offices. @owever. +o counteract the re:uirement of a local partner. they have shown a significant interest in redeveloping their position in India. +his would enable them to utilise the huge capacity of their head offices rather than putting up the F. during the last two to three years. however. A&& !( the C!ntinenta& Reinsurers Are N!0 A%%ressi. which is 7rgoOs health care brand. over the past five years.C(9 all now have UrepresentativeO offices in India. the position taken by the maAor continental providers has changed substantially.proportional treaty business. /unich 9e >Holkata? and . +hey all continue to seek opportunities to bolster their share of the Indian market and are cutting prices heavily to do so. $& . /unich 9e appears to be concentrating its activities in India on tapping into the fast growing life insurance markets.e&" Tar%etin% India /unich 9e had sought to form an onshore reinsurance venture with Indian partner 9eliance.E BBm in capital re:uired to be a local reinsurer. !ollowing maAor losses in the late "##1s. their parent companies are likely to absorb any losses made in the market over the short to medium term. both /unich 9e and . the continentals appeared to have turned their backs on India and focused their attention elsewhere. /unich 9eOs 7rgo has already established its presence in India through a health insurance partnership with Apollo. Apollo has Aoined hands with EHI International @ealth @oldings >part of 7rgo group?. this deal fell through in late '11B as 9eliance moved through a corporate restructuring and /unich 9e discovered that 9eliance wished to be more than a simple UsilentO partner in the proposed operation.wiss 9e >/umbai?. this proposal has been pushed back strongly by the I9EA and is unlikely to be implemented in the short to medium term. . 6rowth in India appears to be of strategic importance to the large continental reinsurers and.

iders: 9egional markets. Indian buyers are said to enAoy the culture of the Udeal2makingO environment of the <ondon market. the legal systems are aligned and based on Anglo2.ingapore. +his cost focus is certainly attractive to Indian buyers. .!re> are c!nsidered tier 2 reinsurance . +his competition tends to occur once <ondon has set up and underwritten an account for one or two years. education. the common language shared by the two countries.The :!nd!n /ar*et Is an I+. absorb some Indian reinsurance business.ingapore.pecific and high2limit reinsurance coverage >facultative and e)cess of loss?.!rtant Pr!. there have been reports of significant price competition stemming from -estern insurance companies operating out of . Bermuda is not a natural or traditional home for Indian reinsurance and is not used much. however. Re%i!na& +ar*ets> such as $in%a. but these players are generally considered to be tier ' options behind the continental markets and <ondon. still continues to play an important role in Indian reinsurance.ophisticated and tailored products such as AewellerOs block.era%e t! India <ondon market: +he <ondon market. !inally. and deals made with <ondon enable Indian companies to benefit from market leading knowledge.!rti!na& C!. <ondon and <loydOs retain strong positions in the Indian reinsurance market despite not having a local presence for several reasons: firstly.ider !( N!n Pr!. secondly. financial institutions.r!.a)on common law principles. but significant amounts of premium are not currently being lost to regional centres. and thirdly. Indian insurers are keen to work with their <ondon counterparts as <ondon and <loydOs underwriters are perceived to be world leaders in insurance. <ondon tends to be perceived as the leader for the following categories of business: • • . and in particular <loydOs. such as . professional liability >EL( = 7L(?. it was noted that Bermuda would certainly be $0 .

automobile registrations in China grew by "B"*. 1 .considered if the rates were attractive. CHAPTER – 12 C:A$$<. +he relationship between automobile growth and non2life premium income is illustrated by the Chinese market. +his will be used as the basis of the forecasting in the following section. non2life premiums increased by $# .E<C:A$$ ANA:E$I$: +he remainder of this section will consider each of the maAor classes in the light of the liberalisation dynamics discussed above.ales of automobiles tend to have a significant influence on the level of non2life insurance premiums in a developing country. +he main reason for this situation is that motor insurance is generally a compulsory product in most countries. Between "##0 and '11'. during the same time period.1 /!t!r: .

Euring '1132'11B.%1% vehicles during . /!t!r third<.3 million in the same year.%0*. China recorded 3. In '11$. The C!+.[ absolute growth and market share K top five players >"@ '11$ vs. the Chinese market consists of %"* motor premium. C@A9+ : /otor +. India is Aust entering a period in which car sales are likely to grow e)ponentially. By comparison.eptember '11% compared with B%.0 million new car registrations whereas India recorded ". very high claims payouts. portfolio was estimated to have a claims ratio of '11* to '$1*. market leader *aruti dyog reported a ''* increase in domestic sales at $%. the motor +.art" 6TP8 &ia2i&it" has been a famously loss2making business due to fi)ed.3#3 vehicles in the same period the previous year. "@ '11%? %1 . +he difference in contribution is reflected in the number of new car registrations in each of the countries.u&s!r" /!t!r C&ass P&a"s a :ess $i%ni(icant R!&e in the Indian /ar*et: +he premium breakdown shows that the compulsory motor class plays a less significant role in the Indian market than in other developing territories. very low pricing and to galloping.

It has been common practice for this segment to be cross2subsidised by the +!t!r !0n da+a%e 6OD8 premiums >which business is estimated to have a better claims ratio of about 01*?.E %1m between "@ '11$ and "@ '11%. BaAa Allian is a significant player in the much less desirable motor +.e strate%" (!r /ar*et $hare: C@A9+ : /otor (E\Z absolute growth and market share K top five players >"@ '11$ vs. business. ICICI :!+2ard has %r!0n its +!t!r 2usiness si%ni(icant&" – re.ea&in% an a%%ressi. growing by F. In particular.ert": %" . Cet even in this segment.2 Pr!. (n the other hand. "@ '11%? -ire has traditi!na&&" 2een the 2read0inner !( the Indian insurance +ar*et 1 . ICICI <ombard has grown its business more in absolute terms as summarised by the charts below. ICICI <ombard has been making significant progress in gaining market share in motor (E business.

which demand successfully that their unprofitable risks such as health and marine cargo get a most favoured pricing status.A L health\Zabsolute growth and market share K top five %' .!rtant -!r the Indian Ec!n!+" C@A9+ : . !ire has traditionally been the breadwinner of the Indian insurance market with claims accounting for appro)imately 31* in '11B.&' +he typical customers for fire insurance are mainly large corporate customers. C@A9+ : !ire \Zabsolute growth and market share K top five players >"@ '11$ vs "@ '11%? 5r!u.ec!+in% Increasin%&" I+. the subsidy being hidden by the fact that the latter have for some time been non2tariff classes of business. Hea&th and :ia2i&it" Insurance Are .+he I9EA splits the property class into fire and engineering.

7ven though health insurance is seen as becoming increasingly unprofitable for . due to escalating healthcare costs. 1 . ICICI <ombard has clearly targeted this segment of the market as summarised by current market share and growth figures above.anies are %ainin% +ar*et share C@A9+ : /arine cargo[ absolute growth and market share K top five players >"@ '11$ vs "@ '11%? %3 . H!0e.Fs..ri. observers suggest that health care costs are typically increasing at three to five times the rate of general price inflation.rivate companies have so far made little impact on the marine cargo markets as customers continue to prefer dealing with .er(!r+ance indicates that .Fs.ate c!+. moral ha ard and a low premium structure. adverse selection.er> recent %r!0th . /arine: ..ehind C!nsidera2&e 5r!0th in Hea&th Insurance Pre+iu+s +he fundamental causes of upward pressure on health care costs include the rapid progress of medical technology and the fact that patients are becoming more demanding about health care services and UwantsO are e)panding in relation to UneedsO -hile it is difficult to measure the e)tent of rising medical costs.Risin% Hea&th C!sts :ie .

some significant growth has been witnessed in the +arine hu&& business for private companies. As summarised by the chart below.Fs. +he entry of private companies is e)pected 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 . I((c! T!*i! 5ained a $i%ni(icant $hare !( the /arine Hu&& /ar*et 0ith /a3!r 5r!0th in 1h 2BB1 C@A9+ : /arine hull \Zabsolute growth and market share K top four players >"@ '11$ vs "@ '11%? %B . I!!C( +okio has recently gained a significant portion of the market K controlling one2 fifth of the total Indian marine hull market in "@ '11%..-hile the market penetration for private companies in the marine cargo segment has been comparatively low.

%$ .CHAPTER – 1 The Indian N!n<&i(e /ar*et 2B1B +he Indian non2life market has e)perienced significant changes that are likely to influence the countryOs development of its insurance market in the medium to long term.

such as detariffication. the Indian insurance market has e)perienced considerable growth since its liberalisation in '111. As of " Panuary '11&. has gradually moved the Indian market to a position where the overwhelming maAority of insurance is transacted without a tariff. +he four main areas of change are now considered in turn. market players. In other areas. the maAority of reform has already taken place. first begun in "##B. tariff rates have been withdrawn from all lines of business e)cept for motor third2party >+. 1#.? liability.1 Re%u&at!r" dri. there is a lot of uncertainty in the Indian insurance market.o far. although the conse:uences are yet to be seen.2 Detari((icati!n: +he process of detariffication. while the reform is promised. As a result.ers: 9egulatory changes in the four areas discussed in the previous section K products. 1#. In some areas. A growing reali ation of the benefits and importance of sophisticated insurance and reinsurance tools has broadened the pool of potential buyers of insurance. (ver the ne)t three years. it is difficult to anticipate when it will occur. the entry of a large number of Indian and foreign private companies has led to greater choice in terms of products and services for Indian consumers. the Indian insurance market is likely to see its process of maturation accelerate. distribution and reinsurance K will drive change in the Indian insurance market in the medium term.. 6iven this backdrop. %% .

hase I: Allow foreign entity to have '%* stake in Aoint venture. it is e)pected to increase the supply of capacity in the market as new investors will decide to enter the market. foreign ownership is currently restricted to '%*. although there are plans to increase this limit. B. +here is ample opposition from the left. the Indian government reiterated its claim to increase the cap from '%* to B#* In Panuary '11&. but analysts e)pect that this change will be made effective in the ne)t one to two years. !irstly. the private companies are increasingly diverging on strategy as they are influenced by their foreign partners.hase III: Increase foreign entity ma)imum stake from B#* to &B*. . No time limit has been set for taking a decision on it although consultations with the industry and stakeholders are underway. It is likely that increased foreign ownership will lead to differentiated strategy. +he effect of this change will be twofold. . .1#. more niche players and a wider product range. as soon as foreign companies are allowed more than '%* ownership. it will increase the focus of the e)isting private insurers operating within the Indian market. . '. the Indian government reiterated that it would introduce legislation to hike the !EI cap in the insurance sector to B#*.econdly.hase II: Allow "11* foreign2owned entity to operate in market. As discussed in the previous section. +he typical structure adopted by the Indian government for the phasing in of foreign2owned entities across other industries >such as construction and pharma? has been as follows: ".: As discussed earlier. . In Panuary '11&. -!rei%n !0nershi. Indeed.hase II: Increase foreign entity ma)imum stake from '%* to B#*. 3. a number of insurers have commented that. they would move as :uickly as possible to participate in the market. %& .

een Reduced T! 1BC In 2BB4 In line with detariffication. Ialue2added services can be in the form of consulting regarding risk management responsibilities as well as more traditional insurance2 related roles. abolishing compulsory cessions altogether is not at the top of the legislatorOs agenda.1#.r!*er distri2uti!n: +he broker channel was recognised in '11'. Although it would seem natural to liberalise this position as the broader non2life market begins to open up. and there is no reason to believe that this position has since changed. The 2BC C!+. such as high set2up costs and activity restrictions will eventually be removed. foreign capital providers can take up to a '%* stake in an Indian brokerage operation. +here is also no indication at the time of writing as to whether the constraints placed on brokers. -hile a further reduction to "1* is e)pected in '110. +he .Fs are pleased that they are able to cede "$* of their poorly performing motor book onto their parent whereas the growing number of private insurers are grateful for the additional capacity that they receive from the 6ICOs de facto proportional treaty coverage.# . again. however. the Indian government and legislator reiterated their desire to retain insurance premium in India in the central legislation of '111. %0 . In addition. many local companies are happy with the automatic reinsurance support that they receive from the 6IC.u&s!r" Cessi!n Has . a complete abolishment of the remaining "$* compulsory cession to the 6IC is unlikely to occur in the medium term. the broker has more opportunity to demonstrate value to both the customer as well as the insurer. is the fact that in a detariffed market. @owever. -hat remains clear.. there has been some progress in reducing the compulsory cession to the 6IC from '1* to "$*.

1#.) 5r!0th dri. @owever. nonlife penetration remains e)tremely low. lack of competition in the insurance market has led to mundane products and poor customer service. therefore.1 Pers!na& &ines insurance . +hese limiting factors are likely to decrease over the medium term. sales of both commercial and retail products are e)pected to benefit from IndiaOs surging economic output over the medium term. most members of the consumer class have gained their wealth recently and. . +he reason for their focus is as follows: 6rowing consumer class: +he Indian consumer class is currently estimated to be around '11 million and growing. increased stability and the liberalisation of the non2life sector is e)pected to provide premium growth in the range of "1* to "$* per annum over the short to medium term. %# . 1#.ers: (verall. have had little time to consolidate and protect their assets. especially motor cover as this tends to be compulsory. a developing economyOs initial growth in insurance penetration is often driven by personal lines products.+he combination of this economic growth.ers: Although probably not of immediate interest to <loydOs underwriters.ers: +he widely acknowledged dynamism of the Indian economy is currently attracting global attention.4 C!++ercia& insurance . even amongst this class of consumers. and the political and business environments are e)pected to stabilise further. IndiaOs fast2developing private insurers e)pect retail products to provide them with their main source of premium growth over the medium term.re+iu+ %r!0th dri. +he reasons for the low penetration are twofold. !irstly.econdly.1#. Indeed. 7conomists e)pect IndiaOs output to grow by around %* per annum over the ne)t ten to "$ years.re+iu+ %r!0th dri.

c8 Insurer Lua&it" and c&ient educati!n: /arket2leading companies will e)pect market leading insurance cover.artnerships >. CHAPTER –1# A $i%ni(icant Price War is e9. higher2:uality customer service and increased customer awareness of the economic benefits of purchasing sound insurance coverage. pharmaceuticals and manufacturing.roduct demand is likely include product liability >for e)porters? and directorsO and officersO liability >EL(? cover.er the Ne9t -e0 Eears 1).Commercial enterprise is likely to benefit from this.. airports and railways leaves much to be desired. 9easons for this include: a8 -DI: !oreign direct investment in industry is often made with several re:uirements that generally include ade:uate insurance cover. the Indian government appears to have embraced the concept of .E "$1bn.rivate .ected !.+ent: +he :uality of IndiaOs ports.1 Price c!+. Eirect investment in the non2life sector by foreign entities is e)pected to drive growth in insurance premium through increased :uality of product.ublic .. . and the success of commercial enterprise is likely to filter down to the general insurance sector.etiti!n is set t! increase: &1 .?. and infrastructure development in the ne)t few years is likely to cost F.e&!. 6iven the need for speedy infrastructure development and the shaky state of its public finances.ectors most likely to benefit from investment in the medium term are I+. 28 PPP in(rastructure de. @ousehold name insurers have already recognised this and have entered the non2life sector with Indian partners. .

2 Cr!ss<su2sidisati!n is e9. sales methods and creditworthiness. . such as Papan. (ther markets in which detariffication has occurred on a similar scale. but that good shipping fleets with a no loss record. the free pricing regime is e)pected to result in a decline in growth.ected t! cease: +he !ire Class -ill No <onger . competition is e)pected to manifest itself in prices. of which there are few in India. the stiff competition that followed led to rates falling by B1 to $1*.ubsidy for /otor Business. Industry observers estimate that there is likely to be a significant price war. /arine hull insurance premiums are. now e)pected to rise back to the levels prevailing before detariffication occurred. As e)perience with other markets has shown. In the initial phase of detariffication.erve as a . -hen marine hull insurance was completely detariffed.-hile it is yet too early to verify the impact of the detariffed environment.outh Horea and &" . !actors such as claims history. which is e)pected to last for "0 to 3% months. insurance companies are e)pected to vie with each other to capture market share through better pricing and client segmentation.ource of Cross2. products. however. 1). Indian shipping companies are e)pecting to see strong demarcation and differentiation between fleets of different ship owners. 6eneral insurers have predicted that premiums for older ships will increase by as much as B1* at renewal this year. underwriting criteria. are likely to get a "1* to '1* reduction in new premiums. maintenance condition and average age of vessel are e)pected to strongly influence premium rates. /oreover.

any delays in implementing the detariffication of this segment would hit the companiesO profitability. have shown that the first few years can witness a decline of '1* in premiums for detariffed classes K leading to growth resuming only three years after the lifting of pricing restrictions.Ireland. It is believed that this is the reason why the I9EA has placed an administrative burden on insurers wishing to reduce rates by more than '1*. 1). while premium rates are e)pected to come down in profitable portfolios such as fire and engineering. -hile we can e)pect some level of unpredictability in the market initially. +he issue of fire detariffication is of particular interest to insurers as they have hitherto used the fire portion of an account to cross2subsidise the losses that they fre:uently e)perience in motor and non2 tariffed business classes. . for many years. there is most likely going to be a competitive struggle between the . ..ricin% 0i&& increase: Eetariffication is e)pected to result in risk2based pricing of portfolios and therefore a rationalisation of premium structures. they have incurred losses in this mandatory insurance sector.re+iu+ structures is e9. &' . As fire premiums are being detariffed.tate2owned insurers have argued that since they handle more than B1* of the countryOs motor business. Rati!na&isati!n !( .ome commentators believe this will limit price competition. +he public sector insurers in India have continued to push for motor detariffication as. +o put it differently.Fs and the private insurers.ected: a8 Ris*<2ased . in the loss2making areas. while others think it will merely cause confusion in the market. the premium rates are e)pected to increase to meet the losses.

+his will force out badly performing insurers that have hitherto placed little emphasis on :uality underwriting. 1). the market surplus treaties and facultative support from the 6IC. some reinsurers have e)pressed concern over the possible impact of the ensuing Uprice warO. b? . Accordingly. due to inter company cessions of the .ome international reinsurers looking at the Indian market believe that it could take some time for cedants to gather e)perience with the new situation and to find their minimum rates. insurersO results will become more volatile. the Indian market has ample capacity for even the largest risks. stronger solvency supervision will also be re:uired as. +his. whereas insurersO underwriting efficiency will increase. !or detariffication to be successful. Insufficient ratings. take at least a year to have an impact on the companiesO results. one UbadO year is not sufficient to change market behaviour..ected t! 2e +!re than +et 2" increased ca. could lead to deterioration in underwriting losses and a conse:uent weakening of domestic retention capacities. in turn. in turn.r!(ita2&e . .acit" a? 6rowing insurance demand will be met by increased capacity: 6rowth in insurance demand will need to be matched by increased supply of insurance capacity.!rt: Currently. since losses do not occur instantly. access t! reinsurance su.!rt(!&i!s c!u&d he&.. -ith detariffication. which could result in the revenues of primary insurers shrinking. without fi)ed tariffs.# 5r!0th in de+and is e9. &3 .Fs. +his is due to the fact that the primary refle) for reinsurers is to compete via price for new or renewal business.ui&din% !( .e)perience from other countries that have gone through detariffication shows that prices will stabilise to reflect the underlying risks and cost of capital. /arket behaviour with respect to companiesO rating approach is only likely to change after two or three years of negative results.

b? 6rowth proAection: scenario I K 4simple e)trapolation: @aving looked at the regulatory and growth drivers. 2. @owever. +his is a useful e)ercise in &B . +he three candidates for this capacity provision are as follows: 1.F doing an initial public offering >I. +he growth prospects in India are very real and understandably attractive to -estern insurance groups that are searching for growth outside of saturated. +he most likely scenario is that all three of these groups will be involved in the evolution and growth of the Indian non2life market to the e)tent that the government allows them to be. @eavier reliance on the global reinsurance market.re+iu+ %r!0th: +he most basic growth scenario that we can start with is a mere proAection based upon the compound annual growth rate for the period of '111 to '11%. -e can build up a successively more comple) scenario by starting with the most basic: 1). we are now in a better position to proAect premium levels for the Indian non2life direct market up to '1"1.+here is unlikely to be a shortage of capacity due to the global interest in India from leading insurers..(?. which stood at "&*. eg a . .Fs or privates? either by receiving additional capital from their parent companies or via a capital2raising e)ercise.. 7)isting insurers >. developed markets.) C!nstant . increased capital supply may depress prices to unrealistic levels in the short term. New insurers that choose to Aoin the market.

the Indian insurance market in this scenario could e)pand by almost "11* to overtake todayOs markets of Ireland or +aiwan.E A$$OCIATED WITH A PERIOD OADHU$T/ENT 11. I( Pre+iu+ 5r!0th C!ntinues Acc!rdin% T! Its Hist!rica& A.era%e> the Indian /ar*et Is $et T! Near&" D!u2&e .understanding the recent growth dynamics of the Indian insurance market and its potential up until '1"1. CHAPTER – 1) DETARI--ICATION I$ :I=E:E TO .1 Ad3ustin% (!r detari((icati!n: In order to be prepared for a virtually complete detariffed market. Indian insurers have had to pursue &$ .cenario I K premium levels proAection >in billion F.E? @owever. +o put it into conte)t." 2B1B C@A9+: . the scenario fails to take into consideration the considerable structural changes in the market following detariffication of virtually all classes of business since Panuary '11&.

sum insured and geographic area to prepare for the new regime starting in Panuary '11&. it does create administrative costs associated with lowering rates substantially. the I9EA has limited the level of rate changes for various classes. !ire and engineering rates may be reduced by up to B#* and motor rates by '1*. 11.detailed analyses of risks based on occupation. this is likely to be associated with a period of adAustment and predatory pricing. @owever. and it may even include what some have termed a Ublood bathO for some lines of business that have hitherto been e)cluded from the competitive pressures of market forces. @aving realised the potential for large rate reductions. If an insurer wishes to adopt rates lower than these ceilings. +he new regime is helping to eliminate the frictional costs associated with administering the tariff and to allow market forces to determine individual risk appetite. they will be re:uired to file their rates and wait the I9EAOs consideration. 7)perience of other markets. -hile this may not prevent the predicted Ublood bathO.2 /!t!r third<. the I9EA decided against a full detariffication of motor +.0# In '11&. with the hope that premiums for this class of &% . 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.art" 6TP8 /otor third2party is traditionally considered an unprofitable sector and according to the +imes of India. as in any market. rates would rise anywhere between 3B* and '$&* if the product was detariffed.

9ates are e)pected to rise again in '11# and '1"1. !or our scenario. although commentators have suggested that they will be continually reviewed. In addition. (nce markets have adAusted for this "1*. motor (E rates remained stable. the decision to pool all commercial +. 11. +his is likely to be the minimum rate increase if the product is detariffed and the transport sector can no longer e)ert political pressure.ert": +he local press has reported that insurers e)pected rate declines of between "$* and 31* for both (ire and en%ineerin% products due to the generally profitable nature of the business. +he I9EA has proposed an initial increase of "$1* in +. /!t!r !0n da+a%e. As a result for our scenario. we have used the latest &1* rate increase for '11& but have assumed that rates will rise again by a further "1* in '110. followed by a further smaller reduction in '110. premiums could further provide an incentive for private companies to target the more profitable (E sector.business could be ade:uately increased. we have used a relatively small rate reduction of '1* in '11&. !or the first :uarter of '11&.# Pr!. 11. && . It is likely that this will put downwards pressure on motor (E rates and the +imes of India has predicted a '1* to '$* rate reduction in '11&. discussions have revealed that there may still be room for a further '1* in both '11# and '1"1 in order to converge to the initially proposed increase of "$1*. /otor own damage >(E? in contrast is profitable and being targeted by the private companies. premium rates. however. which were later brought down to &1* once the transporters threatened to go on strike.

according to an article published by the National Insurance Academy. the regulatory situation may allow only a moderate rise. are not e)pected to have significant rate movements as their pricing has been unaffected by the tariff system. the I9EA has capped discounts in Panuary at B#*. CHAPTER – 11 -ORECA$TIN5 5ROWTH . including liability. Insurance professionals believe that premium may go up in the marine segment has they have hitherto been subsidised to some e)tent by fire business. 11. property rates may be constrained by the price of catastrophe reinsurance purchased on the international markets. (ther classes of business.E C:A$$ &0 . Accordingly. our conservative estimate is that premiums may rise by a mere $* in '11& and a further $* in '110.) Hea&th: @ealth insurance should shoot up "11* if insurers try to cover the current losses with the same coverage. the 3imes of India estimated that clients are e)pected to pay "1* more for goods in transit under marine insurance cover. It is likely that catastrophe business will become more differentiated and location2specific K as opposed to onal or country2wide rates under the tariff. @owever.In the case of fire and engineering covers purchased by companies >ie e)cluding personal home insurance?. 11. At the beginning of the year.1 /arine: Being fully detariffed. and competition is likely to push down prices in an effort to gain market share in one of the fastest2growing business classes. In addition. marine and aviation lines have made e)tensive use of overseas capacity.

the '11% growth rate per class has been used to e)trapolate to '1"1 premium levels. a few clear conclusions can be drawn from a comparison between the two charts shown above. 14. the same growth rate has been applied.1. In the second chart. $&!0er %r!0th in 2BB4 &# . but thereafter adAusted for e)pected premium rate changes as summarised in the previous section. class2by2class growth has been forecast for '11& to '1"1. In the first chart below. C@A9+ : Constant growth rates C@A9+: 6rowth with rate changes -hile this forecast is fairly crude.Fsing the assumptions detailed above. +hese conclusions are supported by the soft intelligence discussed earlier in this report.

Chan%in% . +here -ill Be Increased 6rowth +owards '1"1] +he total premium ends lower under the adAustable rate model >F. but higher than under the original premium e)trapolation >F.remiums -ill . -hile short2term price adAustments will lead to lower growth during the first one to two years. -ith +he Indian /arket 7)panding By the . 14. premium growth is e)pected to gain momentum towards the end of this decade.econdly.E "'.'bn?. 2. -hile . the model predicts strong growth in '11# and '1"1 >between 'B* and 31* respectively? under the adAustable rate model. making the Indian market e)pand by a premium volume e:uivalent to that of the total Norwegian market in '11$.E "B.!irstly.low Eown Initially. . E9.r!duct +i9 01 . 14. As the insurance market adAusts to an open pricing structure. the rate decreases early in the period clear the way for much more substantial growth later on.'bn?.!nentia& %r!0th (r!+ 2BBF !n0ards . +his reflects the general opinion that price wars in '11& will eat into insurersO premium bases. premium growth in '11& is much more modest when rate decreases are taken into consideration.i e of the Norwegian /arket between '11&2'1"1 +his reflects our understanding of the dynamics of liberalisation: Eetariffication will bring real benefits to both Indian consumers and the insurance industry over the medium term.E "".%bn? than under the constant growth model >F.

the product mi) changes significant when the e)pected rate changes are taken into consideration. /ost noticeably in this model. . ." 2B1B> IndiaGs Pr!duct /i9 Is $et t! Rese+2&e Th!se !( Other /a3!r E+er%in% /ar*ets C@A9+ : Change in proportion of business mi) >in *? 0" . In the past. has been considered unattractive due to low rates and high loss ratios. motor +. +he chart below compares the current class breakdown with the forecast class breakdown. this sector should become more attractive. taking into consideration the increasing rates. motor third2party increases substantially.rovided the rates are allowed to rise to a competitive level.+hirdly.

14.# /!t!r and Hea&th Are -!recast T! $ee the /!st $i%ni(icant 5r!0th -ith regards to motor premium, in particular, the forecast more accurately reflects the kind of breakdown we would e)pect to see in a developing insurance market such as India. /otor business in total accounts for Aust less than $1* of total premium. /otor +., which typically drives the development of motor business in a developing economy, accounts for a much more significant share. !inally, the other big winner is personal accident and health, which by '1"1 will have become the largest class after motor. Again this reflects current speculation that there is considerable potential for growth here.

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CHAPTER – 14 $u%%esti!n:
Insurance companies are now sensing a huge opportunity in credit insurance, following the dispensation granted to them in the credit policy. .rivate and state2owned companies are now looking at growing their credit insurance portfolio which was at one time the e)clusive domain of the 7)port Credit 6uarantee Corporation of India >7C6C?. In monetary policy, 9BI had said, 4+o liberalise further the procedures relating to settlement of claims in respect of e)port bills, it is proposed to permit banks to write off, in addition to claims settled by 7C6C, the outstanding e)port bills settled by other insurance companies which are regulated by the Insurance 9egulatory Eevelopment Authority >I9EA?.5

+otal non2life insurance premium is e)pected to increase at a CA69 of '$* for the period spanning from '11021# to '1"12"". -ith the entry of several low2cost airlines, along with fleet e)pansion by e)isting ones and increasing corporate aircraft ownership, the Indian aviation insurance market is all set to boom in a big way in coming years. @ome insurance segment is set to achieve a "11* growth as financial institutions have made home insurance obligatory for housing loan approvals. @ealth insurance is poised to become the second largest business for non2life insurers after motor insurance in ne)t three years.

-ith a huge population base and large untapped market, insurance industry is a big opportunity area in India for national as well as foreign investors. India is one of the largest markets in the emerging insurance economies globally and is growing at 3'23B* annually. +his impressive growth in the market has been driven by liberali ation, with new players significantly enhancing product awareness 03

and promoting consumer education and information. +he strong growth potential of the country has also made international players to look at the Indian insurance market. /oreover, saturation of insurance markets in many developed economies has made the Indian market more attractive for international insurance players. +he general insurance business is e)pected to grow from F,E ".0 billion >"##0? to "' billion in '110. +he private companies would have an easier access to the general insurance business. +he market share of the newcomers will be B12$1* of the total market. +he cause for better market penetration for the new companies comes from the fact that it makes no difference for the insured to switch companies. Fnlike life insurance, it is not e)pensive to switch insurers. @owever, the lack of good data would hamper the newcomers.

+he insurance business in India is less than F,E R" billion at present >'111?. In the near term >three to five years?, it is e)pected to double in si e for two simple reasons. >"? Fnder the new regime, the reinsurance re:uirements are higher >as a percentage of total insurance business?. >'? .rivately run non2life insurance companies have a higher reinsurance re:uirement in the early years.

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CHAPTER –1? CONC:U$ION
It seems unlikely that the <IC and the 6IC will shrivel up and die within the ne)t decade or two. +he I9EA has taken a JslowlyJ approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects of the insurance business >with the probable e)ception of the disclosure re:uirements?. +he regulators always walk a fine line. +oo many regulations kill the incentive for the newcomers; too rela)ed regulations may induce failure and fraud that led to nationali ation in the first place. India is not uni:ue among the developing countries where the insurance business has been opened up to foreign competitors. we observe that the openness of the market did not mean a takeover by foreign companies even in a decade. +hus, it is unlikely that the same will happen in India, especially when the foreign insurers cannot have a maAority shareholding in any company. Continued strength in the broader economy and gradual reform in the non2life sector are e)pected to combine to produce strong premium growth in the Indian market over the ne)t few years.

-hilst India currently remains a medium2si ed non2life market, the growth predicted over the medium to long term is attracting increasing levels of foreign investment and competition. /any of the worldOs largest insurers such as AI6, <ombard and Allian are present in the market. +he new private insurers are growing fast and have already developed a combined market share in e)cess of 31*.

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