India Market. Non-Life Insurance Update. Introduction. In this issue. Industry statistics. Market update. Regulatory update. Distribution.

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1 India Market Non-Life Insurance Update India Issue 17 March 2011 Introduction We are pleased to circulate our latest quarterly newsletter on developments concerning the non-life insurance industry in India. The key development during the period is the regulator s proposal to place the motor third party pool on a healthy footing. The pool arrangement, effective since April 2007, has clocked a huge deficit, with a loss ratio of around 127 per cent and a recent actuarial valuation placing the potential losses at a higher level. Hopefully, the regulator s proposals for revising the third party tariff would receive the consent from the transporters lobby. The non-life industry continues to grow on healthy lines, with enhanced focus and innovative product features on the motor and health insurance segments. There are more innovations on the distribution front, including a surge in sales on the online format. There are sure signs of growing global interest in the Indian market, including the recent announcement of opening an India office by Berkshire Hathaway Inc, the global investment firm owned by high profile US investor Warren Buffet, as a corporate agent for Bajaj Allianz General Insurance Co. In this issue Industry statistics Market update Regulatory update Distribution Products Contact details We hope you continue to find the newsletter interesting and informative and we would welcome your comments and feedback. Towers Watson Risk Consulting, India Copyright 2010 Towers Watson. All rights reserved. towerswatson.com 1

2 Industry statistics April 2010 to February 2011 ICICI-lombard Bajaj Allianz IFFCO-Tokio Reliance General HDFC ERGO General Tata-AIG Royal Sundaram Cholamandalam Shriram General Future Generali Bharti AXA General Universal Sompo SBI General Raheja QBE Gross new premium income for private sector (in Rs millions) 0 10,000 20,000 30,000 40,000 50,000 April 10 to February 11 April 09 to February 10 During April 2010 to February 2011, the gross premium income of the private sector insurers registered a growth of over 24.7 per cent compared to the same period in FY The overall industry recorded a gross premium collection of Rs379 billion, registering a growth of 22.5 per cent year on year. ICICI Lombard maintained its position as the market leader amongst the private insurers, with a market share of 24.5 per cent. The company reported gross premium collection of Rs38.8 billion in the first eleven months of this fiscal, registering a growth of 29.2 per cent over the same period last year. Reliance General was the only private sector player to register a negative growth in the period under review. The company recorded a decline of 18 per cent in the premium income during the period. Gross new premium income for PSU companies (in Rs millions) New India United India National Insurance Oriental Insurance 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 April 10 to February 11 April 09 to February 10 Among the state-owned companies, New India continued to be the leading insurer with gross premium income of Rs63.7 billion during the period April 2010 to February The four state-owned companies remain the dominant players with a combined market share of a little over 58 per cent during the said period. Market update Market developments Bharti AXA General, which is currently capitalised at Rs4.6 billion, is planning to infuse an additional capital of Rs1 billion during this calendar year. The company is also targeting to double its health insurance business during this period, thereby increasing the contribution of health insurance segment from 17 per cent to 34 per cent of the company s total business. Cholamandalam MS General Insurance Company is reportedly aiming to close the current fiscal with gross written premium of Rs9.5 billion and a profit of Rs200 million, with Motor and health accounting for 60 per cent and 20 per cent of the total business, respectively. Universal Sompo General Insurance is targeting a premium collection of Rs5 billion for the next fiscal, having achieved a premium collection of Rs3 billion in FY The firm opened an agent training institute, inaugurated by the Finance Minister, in the state of West Bengal recently. According to reports, Tata AIG General Insurance Company witnessed a 34 per cent increase in direct premium during the first half of the year and a 23 per cent increase in the net earned premium over the corresponding period last year. The company also reported a decline in loss ratio by 9 per cent and a reduction in management expenses as a percentage of gross direct premium by 4 per cent during the said period. The state-owned UCO Bank which was earlier pursuing plans to enter the non-life insurance sector as a joint venture is said to have abandoned the plans. According to press reports, Kolkata based Magma Fincorp, which has filed its license application with IRDA for entering into a non-life insurance JV with HDI Gerling of Germany, is awaiting IRDA clearance. The regulator is said to have sought some clarifications from the Reserve Bank of India regarding the financial condition of the local promoter. With global reinsurance companies like Munich Re, Swiss Re and Lloyds backing out of providing re-insurance support to Indian companies for projects in sanctions-hit Iran, there are reports that a few Chinese and Russian reinsurance firms may fill the gap to some extent. Copyright 2010 Towers Watson. All rights reserved. towerswatson.com 2

3 The Shipping Ministry of India may set up an insurance cover for third party liabilities arising from ship operations, such as oil spills and damage to port property, with an initial corpus of about Rs20 million. Reports suggest that following the initiative taken by the four state owned general insurance companies to start a captive Third Party Administrator (TPA) as a joint venture, a total of 24 proposals were received of which nine players have been shortlisted, including overseas firms such as US-based Aetna International Corporation, United Health International and Cambridge Solutions, Paris-based Coris International and Abu Dhabi-based Nas United Healthcare Services. Amongst the Indian aspirants, a few leading IT companies as well as licensed TPA firms have also expressed interest to take the maximum proposed stake of 26 per cent in the proposed venture. Motor Insurance is set to be costlier as and when IRDA notifies the effective date for introduction of the proposed hike in third party insurance cover premium. The proposal is to hike the third party rates for car and bikes by 10 per cent and commercial vehicles by a whopping 80 per cent. The IRDA has commenced a consultative process with the trade body of truck owners, while the initial reports have suggested that the truck owners have predictably opposed any increase. Meanwhile, commercial vehicles that account for 29 per cent of the total vehicles insured are said to account for 75 per cent of third party liability claims. The government made a statement in Parliament that insurance companies would incur a loss of between Rs25-35 billion in the current fiscal year on account of motor insurance business, of which a substantial portion will be borne by the public sector companies. Also, a report submitted by independent actuary, Mr. K P Sarma, retained by IRDA to review the financial health of the motor third party pool, indicates that there may be a shortfall of Rs77.4 billion in terms of provisioning against claims by the pool. This has caused widespread dismay in the industry. The report is said to be based on the experience of time lag between the occurrence of accidents and the admission of claims, the provisioning practices adopted by insurers and others. The conclusions might have far reaching impact on the financials of the companies, including increased demand on shareholders to provide additional capital to provide for the losses. The industry has pleaded for a thorough analysis and verification of details. The regulator has also set up a committee to examine the scope for establishing a Declined Risk pool to mitigate the effects of the third party pool system existing at present. would now need to pay higher premiums towards the war risk cover and as such this would result in an increase in the freight costs as the ship owners would pass on the increased cost to their customers. As an aid to promote eco-friendly measures, the Pune Municipal Corporation has proposed a health and accident insurance scheme for about 6,000 rag pickers in the city of Pune engaged in door to door collection of dry garbage. The New India Insurance Company has proposed an insurance cover for a total premium of Rs0.5 million. According to reports, Board of Control for Cricket in India (BCCI) had taken an event cancellation cover and a cover against terrorism for the Cricket World Cup event being played in India and its neighbouring countries during February-April The total sum assured was said to be Rs2.46 billion and the premium was indicated to be in the range of Rs30-40 million. National Insurance Company provided the cover, with GIC of India providing the reinsurance support. The players were also covered under a group personal accident and medical insurance cover with a sum assured of Rs250 million each. Oriental Insurance Company was said to have provided the cover. According to reports, several rich temples in the country are seeking insurance cover to protect their wealth held in the form of gold and precious jewellery. In addition to assets, temples are also known to opt for insurance covers for priests and devotees while in some cases temples have also sought cover against terror attacks. Insurers have found it hard to value the jewellery and other artefacts, which in some cases date back 600 years. As per reports, the regulator has expressed concern over the mounting underwriting losses of public sector companies, which increased to Rs35 billion in the first six months of the current fiscal from Rs19.8 billion last year. In comparison, the 12 private insurers incurred an underwriting loss of Rs6 billion in the same period this year, up from Rs5.7 billion last year. The regulator has indicated that they would take a closer look at the way the PSU companies are pricing their policies. A consumer forum has recently ruled that in respect of insurance of goods in transit, the carrier is liable to settle damages suffered to household goods while shifting them from one place to another and that the liability would devolve on the insurer. The insured is not required to prove negligence on the part of the carrier to stake claim for such transit loss/damages, and he would only be required to provide evidence to support the fact that the goods transported were lost or damaged. Given the recent spate of pirate attacks in waters closer to India, marine insurers have expanded the exclusion zone for war risk covers, which would now include the entire Indian Ocean. The cargo ships transiting the Indian Ocean Copyright 2010 Towers Watson. All rights reserved. towerswatson.com 3

4 Regulatory update Clarification on guidelines on group insurance policies In January 2011, the regulator has clarified that under a group insurance policy, the group administrator or the manager is prohibited from collecting any amount other than the insurance premium from members of the group covered. Earlier the group manager was allowed to collect a service charge from the members subject to disclosure requirements. Portability of Health Insurance Policies The IRDA has made health insurance plans portable across the health insurance companies, in order to protect policyholders against discontinuity and consequential loss of Pre Existing Diseases (PED) cover. The regulator has issued orders for effecting portability effective from 1 July The credit from the period elapsed excluding the PED shall be carried forward to the new insurer. The accepting insurer shall provide cover at least up to the sum assured in the previous insurance policy. The request for porting the policy shall be completed as per the timelines prescribed by the regulator. Guidelines on outsourcing Under the guidelines issued recently, IRDA has defined core activities of insurers which cannot be outsourced. These include Investment, Underwriting and Policy servicing. The non-core activities that can be outsourced include tele-marketing, call centres, data entry, and internal audit. The regulator has also specified the disclosure and reporting formalities that need to be undertaken in case of outsourcing of non-core activities. Guidelines to be followed while entering into an outsourcing agreement with a service provider have also been listed. Creation of reserve for unexpired risk for health segment Based on the representation made by non-life insurance companies, the IRDA in February 2011 provided relief to the insurers by extending the relaxation in computation of Unexpired Risk Reserve for health segment, originally allowed for and extended till March 2010, for a further period of three years, subject to a few conditions specified in the said circular. IRDA sets up a committee on Electronic issuance of insurance policies A committee set up by the regulator on the above subject would review the legal implications, operational procedures, cost benefit analysis, and mechanics involved including changes in regulations required in introducing electronic issuance of insurance policies instead of paperbased system at present. Exposure draft on M&A transactions in nonlife business The regulator released an exposure draft, laying down the suggested framework for mergers and acquisitions of nonlife companies. Here is a brief outline of the draft: The concerned parties will be required to approach the regulator with a draft scheme of the transaction. Besides the insurance regulator, the parties would also need to seek approval of the Reserve Bank of India, and in the case of a foreign joint venture partner, the approval of the Foreign Investment Promotion Board would be required. The policyholders of the transferor entity would be given an exit option and would continue to enjoy the same terms and conditions under the existing policy. The regulator could appoint an independent actuarial consultant to carry out the actuarial valuation of the insurance business of the transacting parties. The companies will need to obtain the consent of the court for merger under the company law and file the court order with the Registrar of Companies. Standalone claim consultancies permitted According to reports, the IRDA has accepted the request of the Insurance Brokers Association of India to allow standalone claim consultants to operate in the market. Claim consulting is required in complicated claims where expert advisory services are required in the absence of proper explanation from brokers, agents or other existing intermediaries. Distribution Bharti AXA General Insurance Company has sought to expand aggressively in Tier II and Tier III towns and plans to set up an additional 100 single person manned offices at such centres. Additionally, the company plans to double its branches in the western region from 14 to 29 during the calendar year The western region is reported to have contributed 35 per cent of the new business premium of the company during January-November ICICI Lombard General Insurance Company is said to have chalked up an aggressive plan to promote online sales from which it gets approximately 5 per cent of its total sales. In terms of new business, travel insurance is the largest online selling product, while if renewals are also Copyright 2010 Towers Watson. All rights reserved. towerswatson.com 4

5 counted, travel, motor and health insurance contributed equally to the online premium collections for the company. Meanwhile, the company has introduced new online tracking features for customers including a facility to keep track of all the policies bought from the company held under a single account. Universal Sompo General Insurance Company has also reported that it has started selling travel insurance policies online and would likely extend the facility in the next fiscal to allow renewal of health and motor insurance policies online. According to reports, Berkshire Hathaway has planned to enter the Indian market as a corporate agent of Bajaj Allianz General Insurance. The company plans to focus on the motor insurance sector initially and then gradually expand to other insurance products. Products ICICI Lombard General Insurance Company Ltd has sought to play a more active role in offering weather based crop insurance and has received mandates from six state governments to offer the facility during the next rabi season ( ). Bharti AXA General Insurance has introduced a Road Side Assistance as add on cover for its motor insurance customers, to provide support in case of a vehicle breakdown or accident. The company is also open to providing this facility as a stand-alone product to customers who have motor insurance policies from other companies. The service will be launched in 1,500 locations across 22 states with over 3000 service providers through a partnership with AXA Assistance. Meanwhile, reports suggest that Bharti AXA is planning to introduce six new products soon, including a health insurance product for senior citizens. Bajaj Allianz General Insurance Company has introduced a Commercial Package Policy targeting small and medium business enterprises, covering all major risks under a single policy, including group personal accident and workmen s compensation cover for the employees. The policy offers aggregate sum assured levels of up to Rs990 million, making it suitable for both industrial and nonindustrial commercial enterprises. The company has also launched a suite of products for specially-abled people under the umbrella of Ability Insurance. The products encompass general, life, motor and health insurance categories. To simplify the purchase process, the features of the products are explained in an audio visual format with sign language as well as in Braille for the visually impaired. Copyright 2010 Towers Watson. All rights reserved. towerswatson.com 5

6 Contact details Towers Watson's Risk Consulting and Software team covers the length and breadth of India with over 25 associates based in Mumbai and Gurgaon. R Krishnamurthy Managing Director - Products, Distribution and Markets, India Ron Kozlowski Director of General Insurance Practice, Asia Vikas Newatia Director & Practice Leader, General Insurance Consulting, India Rajesh Sabhlok Senior Consultant, Risk Consulting, India s: rajagopalan.krishnamurthy@towerswatson.com ron.kozlowski@towerswatson.com Vikas.Newatia@towerswatson.com rajesh.sabhlok@towerswatson.com Mumbai 511/512, Solitaire Corporate Park Andheri-Kurla Road, Andheri East Mumbai Tel: 91 (22) Fax: 91 (22) Gurgaon 404B, 4th Floor, Centrum Plaza DLF Golf Course Road, Sector-53 Gurgaon Tel: 91 (124) Fax: 91 (124) Singapore Hong Kong 135 Cecil Street, Kai Centre Suites , Central Plaza #09-01, Singapore Harbour Road, Wanchai, Hong Kong Tel: (65) Tel: (852) Fax: (65) Fax: (852) The Indian Market Non-life Insurance Update has been prepared by Towers Watson for general information purposes only and does not constitute professional advice. The information, opinions and projections contained in this Newsletter are derived from various sources and have not been independently verified by Towers Watson. If you require professional advice or require any further information please contact any of the above named individuals. ABOUT TOWERS WATSON Towers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk, and financial management. With 14,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. For more information, please visit Copyright 2010 Towers Watson. All rights reserved. towerswatson.com 6