REINSURANCE LIBERALISATION IN INDIA: WILL IT MAKE INDIAN INSURANCE MARKET SUSTAINABLE ?

With huge opportunity in India and rapidly growing middle class and a comparatively low insurance density relative to other national economies, India constitutes an attractive market of the future for many re-insurance companies. The Insurance Regulatory & Development Authority of India gave approval to Reinsurance Group of America (RGA), which specialises in the life and health sector. Thereafter five more reinsurance companies have been granted final licence by the IRDAI. The companies are Swiss Re, Germany’s Munich Re and Hannover Re, France’s Scor and the locally incorporated ITI Reinsurance, which is part of the Fortune Financial Services group. This takes the tally of reinsurers in the country to six. Besides the six which have set up shop, Lloyds of London and Berkshire Hathaway’s General Reinsurance have completed the first stage of their application, while XL Reinsurance has received an in-principle nod. The entry of foreign reinsurers in India will result in insurance companies being able to provide more specialised covers to corporate, including liability risks and cyber risks. The move will also increase the country’s capacity to write large insurance policies. GIC Re, with a turnover of `18,435 crore in 2015/16, handles around 52 per cent of the total reinsurance business in the country. The rest is already spread across global reinsurers, but with many of them now expected to set up branches in India, the business is likely to get a big fillip. Following the amendment, IRDAI, in October 2015, released guidelines on the registration and operation of foreign reinsurers in India.

The reinsurance industry in India is estimated at Rs 20,000 crore. Until now, GIC Re (General Insurance Corporation of India) has had a monopoly for nearly 16 years after the industry was opened up. The reason for the sudden spurt in the number of multinational reinsurance companies coming to India is a change in legislation. The corporation did well this year in terms of top line because of growth in premium from non-life companies due to the government’s crop insurance scheme. Earlier, global reinsurance companies could do business within India only by incorporating locally as a joint venture where they would be minority partners. Under the amended insurance legislation, they can function as branches without having to incorporate locally in the same manner that foreign banks do business. Meanwhile, ITI Reinsurance has emerged the first private reinsurance company in India. The new company would have a capital base of Rs 500 crore and focus on all segments of non-life reinsurance. Reinsurance companies provide cover to domestic insurance companies and enable them to issue policies where the sum insured is larger than their own balance sheet. In addition, GIC will have a domestic competitor as well, which has been given clearance – ITI Re, owned by Fortune Financial Services. Market participants have greatly appreciated the openness and willingness IRDAI has shown to understand reinsurers’ challenges and create a welcoming environment for their entry.

 

INDIAN REINSURANCE SCENERIO:

The mandate to the Authority in respect of reinsurance lies in the provisions of Section 14(1)

and 14(2) Sub Section (f) of the IRDA Act, 1999 as well as Sections 34F, 101A, 101B and 101C of the Insurance Act, 1938. In addition, the Authority has framed regulations pertaining to re-insurance by both life and non-life insurers which lay down the ground rules for placing re-insurance with the re-insurers. Under the provisions of the Insurance Act, 1938, the “Indian re-insurer” entitle themselves to receive obligatory cessions as decided every year, from al the direct non-life insurers. The limits have been laid down in consultation with the Reinsurance Advisory Committee with the approval of Government of India. Every insurer needs a comprehensive and efficient re-insurance program to enable it to operate within the constraints of its financial strength. This is important to maintain the solvency of the insurer and to ensure that the claims are honoured as and when they arise. Hence the IRDAI has stipulated that every insurer shall obtain the approval of it Board for its reinsurance program.  The regulatory framework also provides for filing of the reinsurance program for a financial year with the Authority at least 45 days before the commencement of the said year. The insurers are further required to file the treaty slips or cover notes relating to the reinsurance arrangements with the Authority within 30 days of the commencement of the financial year. These measures highlight the importance attached to the existence of adequate and efficient reinsurance arrangements for an insurance company. It would be recalled that the solvency position of an insurance company is assessed on a “net of re-insurance” basis.

The Regulations also require that every insurer should maintain the maximum possible retention commensurate with its financial strength and volume of business. The guiding principles in drawing up the reinsurance program have been stated as under:

  1. Maximize retention within the country;
  2. Develop adequate capacity;
  3. Secure the best possible protection for the reinsurance costs incurred; and
  4. Simplify the administration of business.

IRDAI effected amendments to the Reinsurance Regulations, 2002 and notified the same in March 2013. The Insurers/reinsurers may place reinsurance business with insurers/reinsurers outside India, after taking into consideration their Credit rating, Claims experience, Claims paying ability and solvency margin. Accordingly, limit on the total reinsurance which an insurer could place with an insurer/ reinsurer outside India was prescribed by IRDAI. Further, in respect of reinsurance of Catastrophe risks, all insurers/reinsurers were mandated to ensure that the reinsurance arrangements in respect of catastrophe accumulations, using various realistic disaster scenario testing, are adequate and approved before filing the same is with the Authority along-with their reinsurance program. Due to ratification of Insurance Law amendment Act, 2015, the Reinsurance Regulations were amended.

 

INDIAN INSURANCE MARKET POISED TO GROW

The insurance industry in the country is set in the growth trajectory and is expected to grow significantly in the coming years due to rising financial literacy. The Indian insurance sector is set to mark a significant growth in the coming years. The lower level of penetration, favourable demography, initiatives like ‘Pradhan Mantri Jan-Dhan Yojana’ for enhancing financial inclusion, rising financial literacy along with increase in domestic savings consequent to rise in per capita income are expected to support the growth of insurance sector going forward. The favourable regulatory environment in the country is also expected to help in fuelling growth of the insurance sector. To provide insurance cover mainly to the below poverty line (BPL) households, the government has introduced some insurance schemes such as ‘Rashtriya Swasthya Bima Yojana’ (RSBY), ‘Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY). These schemes are expected to help in penetration of insurance sector in lower and lower-middle income population, which currently does not possess insurance cover. The insurance sector is expected to witness surge in the flow of foreign capital in the coming years given the relaxation of FDI norms. The introduction of point of sale (PoS) transactions for products like cattle or livestock insurance, agricultural pump sets insurance, fire insurance, crop insurance and government insurance schemes has helped to simplify the distribution network in small cities and villages, it noted. A range of insurance products under life and non-life insurance segments are expected to be sold through PoS persons, in turn improving insurance penetration. In the coming years, initiatives like extension of insurance portability facility to other insurance products, differentiated pricing on e-policies, customised health insurance policies among others are expected to fuel growth of the sector. With more companies entering the sector, competition as well as operational efficiency is expected to rise, which would raise the penetration in the country. Crop insurance has helped the non-life industry record a 32% growth in premiums the last fiscal year ended 31 March 2017 to over INR1 trillion (US$15.5 billion) for the first time, despite the absence of new large projects. The total premium income soared to INR1.27 trillion from INR963.76 billion for the previous financial year. In the overall non-life market, IRDAI data show that private sector insurers beat their state-owned rivals in GWP. Public general insurers collected INR676,897 million in FY2016-17, showing a 29% growth. Private non-life insurers, on the other hand, collected premiums of INR595,228 million reflecting a 36% increase. As part of the privately-held segment, standalone private health insurers collected INR58,598 million, or 41% more than in FY2015-16.

 

GLOBAL REINSURERS TO MAKE MARKET SUSTAINABLE:

It has taken 15 years for Lloyd’s to set up onshore operations in India. Lloyd’s write $220 million (Indian business) offshore in reinsurance lines. Coming onshore will increase the capacity of direct insurance company in India, particularly in specialist lines where India does not have the expertise. In terms of insurance penetration, India is at 0.7%, Asia Pacific is at 1.4% and developed counties on an average are at 6.1%. As far as financial stability and impact on macroeconomic terms are concerned, India does not have huge culture of insurance. Economy is growing at 7% and creating more risks. In terms of concentration of risks, the international reinsurance will stimulate better growth.  With liberalisation of Foreign Direct Investment norms for the sector, many foreign insurance firms have entered into India to explore the untapped potential of this industry. Lloyd’s are the largest offshore reinsurer for India. So far, Swiss Re (Switzerland), Munich Re and Hann- over Re (Germany), Scor Se (France) and Reinsurance Group of America (RGA) Life Re have passed all the three stages and set up their branches from February 2017. A few others, including Gen Re (part of Warren Buffett’s Berk- shire Hathaway Group) and XL Catlin, have already received final licence and started their operations. Axa (France) has also received partial licence. Lloyd’s of London, which is not a reinsurance company but an insurance and reinsurance market, is also set to enter (IRDAI has issued separate guidelines for Lloyd’s).

The government and regulator are very supportive. One issue that global reinsurers are looking to deal with is Indian regulations about order of preference. The best terms are offered to a domestic company and then it goes to other reinsurers. That will deter overseas investments in reinsurance.  Things will look to accelerate if order of preference is taken away quickly. The market conditions are becoming extremely competitive. For other major platforms in the world, China and Singapore, Lloyd’s have taken five-seven years to build up the platform. It is going to take a while. Most of reinsurance companies are the biggest competitors worldwide. They always wanted to operate service. In 2016, the domestic insurance industry witnessed few major announcements related to investment as well as entry of new players which is expected to accelerate growth of the sector going forward. Capital market discipline is beginning to come in. For example, GIC doing an IPO is a good thing because that means proper competitive market discipline coming to players so that they operate in a way to provide return to shareholders. The discipline of capital market is actually a very important driver. India is likely to have a healthy market if our capital market investors worried about return. In India, insurance industry has advantage because interest rates are 6%. But it is not sustainable.  When the domestic insurance industry embraces sophistication of risk adjusted pricing, they will see how they can make better results. At the moment, it is not there. Having more global players will mean they will end up in an industry that is more sustainable. Lloyd’s was in favour of remaining in the EU but democracy decided the other way and they set operation in onshore EU to write business seamlessly.

 

REINSURANCE LIBERALISATION IN INDIA:

India is a very attractive market. It may become the largest economy in the world. The country is seeing high growth and high rate of urbanisation. From risk mitigation point of view, the insurance penetration is low.  India’s growth in non-life growth is in double digits, but continuing to grow very fast. The economy is more resilient if it is well insured. By bringing in international reinsurance, industry is diversifying risk outside. The government is still putting restrictions on direct insurance. That is fine for the time being. The government needs to attract more capital to diversify risks outside. Global reinsurers are extremely enthusiastic about India.  They are making the case for full liberalisation. There is a question of sensible price. Lloyd’s will not come in and underwrite risks at low price. The scale of the opportunity is significant.  The regulations would be gradually liberalised. As far as domestic insurance is concerned, there is benefit in liberalising.  The global economy is subdued, with the exception of India. India’s growth rate is at 7.6%.  Indian government is business friendly and is trying to keep up growth. It is encouraging.

February 1, 2017 was a crucial day for Indian insurance: the day foreign reinsurance companies, for the first time, opened branch offices in Mumbai. It was the culmination of a process which began with the passing of the Insurance Laws (Amendment) Bill in March 2015, the same one which raised the cap on foreign insurers’ participation in joint ventures with Indian companies from 26 per cent to 49 per cent. Among its other clauses, it also permitted foreign reinsurers to set up wholly owned branches in India. Though foreign insurance companies have been in India since 2000 – in joint ventures, with a cap of 26 per cent equity – there were no reinsurance companies among them. The sole Indian reinsurer so far was the publicly owned General Insurance Corporation (GIC Re). On top of the preference list are Indian reinsurers that have a minimum credit rating from any of the internationally renowned credit rating agencies for the previous three years, which only applies to state-owned GIC Re, and thereafter, the branch office of a foreign reinsurer which shall maintain a minimum retention of 50 percent of the Indian reinsurance business. Global reinsurers are piling into India in search for growth, but this is likely to increase competition in an already soft market. Indian reinsurance business could previously be written from abroad. However, India’s regulator has now introduced regulations placing branches of foreign reinsurers at the top of a preference order setting out how Indian insurers are to cede business.

 

VOTE AGAINST CHANGE OF RULE:

All general insurers in the country mustered the courage to vote against a new rule which the government is pushing through and the regulator is reluctant to change.  The insurers fear that the new regulation – which gives foreign reinsurers the first right of refusal in obtaining business in India — would push up insurance premium, throttle competition and concentrate risks. In a nutshell, it would pinch policyholders as well hurt the bottom line of local insurance companies.  The participants overwhelmingly voted in opposing the regulation. The rule in question relates to the special right given to foreign reinsurers who open shop in India. In order to minimise risk, insurance companies buy covers (or insurance) from reinsurers with larger capital base. While general insurance companies welcome the government’s decision to open the doors to international reinsurers and make India a reinsurance hub, they are challenging the first right of refusal that these global firms would enjoy.  While buying a cover domestic insurance companies, according to the new rule, will have to first approach global reinsurers who set up shop in India, unlike the current practice where they fish around the globe for the best rate from hundreds of reinsurers. Also, if they refuse to accept the rate offered by a global reinsurer branch in India and find a better one from an offshore reinsurer, then the former has to be given the chance to match it.

Brazil is the only market where foreign insurers have such a right. Internationally it’s considered to be a flawed structure. Singapore offers some tax incentive but no special right. Reinsurance is a complex subject. The ministry may not have fully grasped the implications. The assurance that premium paid to reinsurers would remain within the country may have appealed to the ministry. But the downsides are far too many. Today, insurers shop around the world from 300 reinsurers to spread the cover, mitigate risk, and minimise cost. But a special right could tie them down with less than 10 companies which open branches here. It would discourage innovation and worsen client servicing. Till foreign reinsurers were allowed to open branch offices, the only way they could enter India was through equity participation of up to 26 equity stake in JVs. Reinsurance being a capital intensive business, no one did. Now IRDA has given license to leading reinsurers such as Munich Re, Swiss Re, Scor, Hannover Re, RGA and ITIBSE 1.45 % Reinsurance to open branch in India. The regulations are gazetted and the regulations are an outcome of very detailed consultative process involving all stakeholders.

CHALLENGES AHEAD:

Indian general insurance market is on a healthy growth phase achieving double-digit growth on a year-on-year basis. This will obviously warrant additional demand for reinsurance capacity as well as expertise in product innovation and development. The Indian insurance market always had a steady supply of reinsurance capacity from across the borders in addition to GIC Re. The market dynamics does not change with regard to capacity available except for the incremental capacity brought by global companies, proximity of servicing offices of foreign reinsurers and compulsory retention of business assumed, within India, at a particular level, by branches of foreign reinsurers. There are many challenges for them like:

 

  • The insurance sector in India is growing at a healthy clip – the life segment at 11.84 per cent in 2015/16, the non-life at 13.81 per cent – against a global average of 4 per cent and 3.6 per cent, respectively, in 2015. There are 54 companies operating – 24 in life insurance, another 24 in non-life, SIX dealing solely in health insurance, and GIC. But the absolute size of the market, at $71.78 billion, is small compared to developed countries, as is insurance density and penetration. The key challenge will be to offer the most relevant and innovative solutions for clients, develop new products and help them grow their businesses.

 

  • The retention ratios of Indian insurers – the portion of the risk they keep to themselves, rather than pass on to the reinsurer – are also relatively high, lowering the scope of reinsurance business. With private insurance only 15 years old, good quality, adequate data for pricing, modelling and underwriting of products is also lacking across the entire insurance value chain. Reinsurers need to work collectively to enhance underwriting standards, pricing and wording of policies. They also need to evolve a transparent dispute resolution mechanism to ensure that the Indian market flourishes in coming years.

 

  • Taxation is another worry for the foreign reinsurers, since there are a number of areas where clarity is yet to be provided – mechanisms for computing business profits of foreign branches, the service tax insurers will have to pay on reinsurance premium, the applicability – or otherwise – of service tax and Goods and Services Tax (GST) on reinsurance brokers, and more. Will Lloyd’s, as a reinsurance market, have to pay GST? To bring the Indian market in line with international norms and enable Indian reinsurers to compete on a level-playing field, the reinsurance business should not attract GST.

 

  • Global reinsurers have been attracted by the potential of the Indian market, but if they are taxed at around 40 per cent, as most foreign entities are – way higher than reinsurers in Singapore or the UAE – they may well limit their investment in India as well as scale down operations in the future if the global economy takes a hit. If the government wants to build a robust reinsurance industry, it has to think of some tax concessions. The doubt related to repatriation of surplus to the parent company by the branches has also not been fully resolved.

 

  • There is also the matter of the “order of preference” that IRDAI has prescribed. It has divided foreign reinsurance branches into two categories – those retaining at least 50 per cent of the reinsurance business they get (while passing on the remaining risk to their parent companies), and those retaining at least 30 per cent. Initially, IRDAI had ruled that the first choice of insurance companies should be an Indian reinsurer, but after strong protests from prospective foreign entrants, has put Indian reinsurance companies and foreign ones in the first category on par. Insurance companies can choose among any of them, but only after offering reinsurance to three companies in this category and being turned down can they move to the second category.

 

  • Cross-border reinsurance – or reinsurance with global companies that have not opened branches in India – will henceforth be allowed only after both categories of foreign branches within India have declined. Even so, much of the nitty-gritty related to “order of preference” has yet to be spelt out, and is being anxiously awaited by foreign reinsurers, who are wondering to what extent the hands of Indian insurers will be tied.

 

  • Global insurers have also been allowed to set up branch offices in special economic zones (SEZs) – called International Finance Service Centres (IFSCs) – but IRDAI has issued a separate set of eligibility criteria and guidelines for these. There is lack of alignment between the reinsurance regulations for the onshore market and the IFSC zone leading to lack of clarity. If India is to develop as a reinsurance hub, this needs to be sorted out.

Reinsurers can look at introducing innovative products to meet specific needs of specific clients. With IRDAI’s guidelines requiring every foreign reinsurer to initially invest at least `100 crore in the Indian branch, the opening up will bring in more foreign direct investment (FDI). It will also generate employment, lower reinsurance costs further as competition rises, boost investment in capital markets and offer new risk transfer solutions.  With foreign reinsurers bringing in their expertise, the primary insurance market is also expected to expand. The digital revolution and other major technological changes have increased the scope of insurance, with new kinds of covers – cyber liability, sharing economy-related liability, etc., – being developed worldwide, which the foreign entrants could bring to India as well. Their presence will gradually improve existing data collecting and modelling techniques, introduce global practices in risk management and claims management to benefit the entire industry and raise customer confidence. Foreign reinsurers will need to work closely with existing insurers and intermediaries to educate the market participants. Product innovation will be the key to their success. Leveraging technology to reach the mass market and training local talent should also be their goals. A strong underwriting backed approach is crucial for reinsurers as they don’t have the investment income advantage of primary insurers to guarantee sustainability. Reinsurers should also prepare to be patient. But once a reinsurance company has entered the market, it is extremely important for it to remain committed for the long term.

A number of insurance lines, currently at a nascent stage in India, are likely to grow following the entry of foreign reinsurers. Coverage for natural disasters remains extremely low, despite the floods and earthquakes of the recent past. Such cover is expected to increase, thereby reducing the financial hit – in paying compensation – the government takes following any such calamity. Similarly, taking liability insurance or the insurance companies, and even individuals take to bear legal costs in case they are sued – hardly exists in this country, but a beginning could well be made now. Liability insurance, as it operates in developed markets, can cover a company’s directors and senior officers for any errors or omissions inadvertently made, matters of product and public liability, product recalls, and more. Sectors such as liability, aviation and energy are likely to see significantly higher growth than others. Health, agriculture and micro insurance are other areas which will get a lot of interest from reinsurers. As the regulator allows introduction of new products like title insurance, new areas of growth for the reinsurers will open up. Some reinsurers sound a note of warning on getting too competitive in an already low-cost market. By providing innovative risk transfer solutions and other offerings, reinsurers can optimise an insurance company’s reinsurance buying. This would be a better way of bringing down reinsurance costs rather than competing through predatory pricing for traditional covers. Since the Indian market is relatively small and dominated by retail insurance, another pitfall could be that of reinsurers writing lines of business they would traditionally not have participated in, simply to justify their investment in India. Maintaining underwriting discipline will be a huge challenge in India, particularly against rising expenses.


About the Author

JAGENDRA KUMAR
Ex. CEO, Pearl Insurance Brokers
71/143, “Ramashram” Paramhans Marg,
Mansarovar, JAIPUR-302020


References:

  1. IRDA Annual Report 2015-16 ( Data contents)
  2. http://www.policyholder.gov.in
  3. Boston Consulting Group (BCG) Report
  4. http://www.moneylife.in/article
  5. http://www.businesstoday.in/magazine/features/extra-cover/story
  6. http://economictimes.indiatimes.com
  7. Newspapers & Journals