The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2017

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Greetings from India

Charlie Thomas

Narendra Modi, the first Indian prime minister to be born after India became independent from the United Kingdom, has been relentless in his task of modernising the country through privatisation and liberalisation of the economy.

Part of that economic drive has involved the radical alteration of India's foreign direct investment rules to allow more overseas investment in several industries. Modi's policies are aimed at stimulating India's economy, and one of the industries to feel the benefit of these changes is reinsurance.

Since the local regulator, the Insurance Regulatory and Development Authority (Irdai), was formed in 2000, it has set about transforming the Indian insurance market from a structure that only had four state-owned general insurance companies, one state-owned life insurer and one state-owned reinsurer, into a more dynamic market.

On the insurance side, the changes introduced by the watchdog have seen global insurance giants such as AIG, Allianz, Fairfax, Chubb, RSA, Tokio Marine and Standard Life, among others, enter the marketplace.

They also transformed the nature of the Indian insurance market, shifting it from a tariff-driven model to a free pricing regime. Fire, engineering and motor were de-tariffed under the regulator's guidance, while it maintained high solvency standards at domestic carriers.

"The underlying principle behind any of the regulator's decisions or measures has been purely to maximise insurance penetration in India and develop it into a more lucrative market," says Neeraj Das, regional practice head of the strategic client group at JLT India.

"The regulator has always been pro-active in monitoring the market and has intervened to uphold the sanctity and sanity of the marketplace."

More recently, the reinsurance market has become the latest segment to be galvanised, with Irdai agreeing to allow overseas reinsurers to apply for a licence to operate as an onshore carrier in India.

Swiss Re, XL Catlin, Munich Re, Scor, Hannover Re and Reinsurance Group of America have all been given permission to set up fully licensed R3 offices in India, along with Lloyd's.

So what's attracting all of these overseas carriers, and what risks should they be aware of?

Growth potential
India is widely recognised as the world's fastest growing economy at present. Real gross domestic product (GDP) growth was almost 7 percent for 2016.

For reinsurance, the future looks bright. Hitesh Kotak, CEO for the new Munich Re branch office in India, predicts that real premium growth across emerging Asia will average 9 percent in property and casualty each year until 2025. For India, the P&C estimates are even higher, at 9.2 percent, and if you include crop cover that figure increases to 11 percent.

"From our perspective, the picture is promising," says Kotak. "Two thirds of [India's] population is below 35 years of age, the GDP is services-dominated (56 percent) and the political environment is stable - all signs that insurance penetration will grow substantially in the future.

"If you convert these factors into reinsurance opportunities, we expect strong growth in the construction, energy, liability and agricultural segments, and also with new risks and trends such as cyber, autonomous cars, wellness, smart cities and more."

Michael Marx, managing director for Asia Pacific at Hannover Re, believes the increase in natural catastrophes hitting the market will lead nat cat coverage to grow over the next few years. The agricultural sector is also one to watch, driven by a change in government policy, he says.

The Pradhan Mantri Fasal Bima Yojana (Prime Minister's Crop Insurance Scheme) was launched by Prime Minister Modi on 18 February 2016. It envisages a uniform premium of only 2 percent to be paid by farmers for so-called Kharif (autumn) crops, and 1.5 percent for Rabi (spring) crops. The premium for annual commercial and horticultural crops will be 5 percent. It's likely that the risk will be carried by one insurer, with that risk then being reinsured by the newly enlarged market.

It's not just the overseas carriers sitting up and taking notice. ITI Re, India's first privately owned reinsurer, has just launched ahead of the all-important 1 April renewals season. ITI Re will begin writing Indian reinsurance business across property and casualty lines, before targeting other geographies in the coming years.

Under the current proposals, year one will see ITI Re focus on establishing a foothold in the Indian reinsurance market, before branching out into neighbouring countries in year two. The carrier is backed by a Mumbai-listed financial services company, Fortune Financial Services.

GIC Re, India's state-owned reinsurer, estimates that gross premium income in the Indian non-life insurance market has grown four-fold in the last decade, with a compound average growth rate of 15.6 percent.

Despite this, penetration remains low, at about 0.7 percent of GDP, but per capita the non-life side has grown steadily in recent years.

Brokers are also seeing an opportunity in India. The large global players have all had a presence for decades, and are particularly well integrated into the distribution chain for P&C and specialty. The general insurance market - which includes motor and private health - is less well penetrated, but many retail advisers are training in order to advise on general insurance business, and domestic start-ups are launching on a regular basis.


Lloyd's in India
When Lloyd's was granted its R3 approval on 19 January, chairman John Nelson hailed it as a "watershed moment" for the Corporation.

And while it's certainly another nice addition to the platforms in Singapore, China, Dubai and elsewhere, the decision to become an onshore reinsurer in India was also a defensive one, as Vincent Vandendael, chief commercial officer at Lloyd's, explains.

"We have more than $200mn of premium that could be affected by the order of preference rules, so it was important for us to get specific legislation for Lloyd's in India," he says.

Lloyd's own study reveals that the Indian reinsurance market is around $2.8bn, with 40 percent of that currently placed offshore. It's that 40 percent that's now at risk.

"But there is an opportunity as well. India is the fastest growing economy and major investments are planned in infrastructure. That's important for Lloyd's as it's tunnelling, roads, airports, investments in energy etc.

"The other element we found attractive is that there's $1bn of business in the facultative market, which we see growing at a double-digit rate over the coming years."

The timing of Lloyd's licensing was opportune - some 55 to 60 percent of Indian treaty business renews at 1 April, with a significant skew towards property treaty.

And while there are concerns over the profitability of the proportional business, the sorts of risks Lloyd's is looking at are likely to be more attractive for EC3's finest, according to Vandendael.

"The other thing to consider is the order of preference rules don't apply to retrocession. [Indian state-owned reinsurer] GIC Re is an important customer for Lloyd's. Of the $2.8bn in reinsurance, 46 percent goes to GIC Re and some of that is then reinsured."

The Indian market is likely to offer Lloyd's a warm welcome.

Alice Vaidyan, CEO of GIC Re, comments: "Lloyd's brings to India centuries of tradition and expertise in underwriting capabilities. I believe the Indian market will certainly benefit from the rich international experience Lloyd's brings in. We certainly hope that most participants in the Lloyd's London market will be part of Lloyd's operations in India."

And while everyone expects there to be a relatively limited impact this April, most predict that Lloyd's will enjoy a decent amount of success in the 1 April 2018 renewals window.

"I foresee a major impact on the next 1 April as they will not only have time to prepare for the treaties but would also have had their fair share of facultative requests coming their way during the year," says JLT's Das.

Looking ahead, Lloyd's will be hoping that the order of preference rules (see below) will be relaxed to create a more even playing field and allow more syndicates to join the Indian platform. At the time of writing, one unnamed syndicate had confirmed it would be on the platform in time for 1 April, with another handful understood to be assessing their options.

In addition, Lloyd's hopes it can develop the coverholder model on the ground in India. "We need to talk to the regulator first, but that would be the next step for us," Vandendael confirms.


Respect to the regulator
One thing all parties were agreed on was the helpful nature of Irdai. Everyone Insider Quarterly spoke to for this article describes the watchdog as approachable and pro-active, and said that it is regularly consulting the market through discussion groups or one-on-one meetings.

There is one major bone of contention, however. Under rules implemented by Irdai this year, cedants have to offer their reinsurance business to GIC Re, the state's reinsurer, before they can offer it to other carriers.

Those overseas carriers with R3 licences will then be offered the risks. ITI Re will be offered the business next - it is not in the same category as its global peers since it is required to report a minimum credit rating and maintain strong financial results for a historical period of three years. Following that, the business will be offered to other overseas carriers without an onshore licence.

To say the move is unpopular would be an understatement. And it's not just the carriers that are opposed to it. Indian (re)insurance brokers called for the abolition of the rule in January this year, claiming the proposed regulations are anti-competitive. The Insurance Brokers Association of India demanded the immediate repeal of the "regressive, anti-policyholder and anti-competitive" regulation.

However, some domestic players have endorsed it. Ashok SN, an underwriter for a life reinsurer, claims the order of preference is a "good idea to start with" and suggests it should remain in place for the first five years or so "to ensure the multinationals demonstrate the appetite for the kind of risks emanating from the market".

Alice Vaidyan of GIC Re, the obvious beneficiary from the rules, comments: "I believe the regulator has the best interest of policyholders at heart, and in the context of government philosophy of achieving macroeconomic objectives, particularly optimising retention within the country, I am inclined to believe that this is the best approach."

There is some good news for overseas reinsurers though - Irdai plans to review the process within a year, meaning the order of preference rules may not last for very long. The other thing to consider is that the rules don't apply to retrocession, so there is plenty of opportunity for overseas carriers to make their mark here.

Concerns for the future
It would be remiss not to consider the limitations of the country, and the potential risks it poses for those doing business there.

Click to enlarge Unlike in other emerging territories, many of the global reinsurers and brokers have been operating in India for decades, so they are well aware of the cultural differences in the Indian market. An emphasis on networking is key, and there is a distinct lack of data and modelling, which could cause headaches in the early years.

A far bigger concern though, is the profitability of Indian business. It's well known that loss ratios in much of India's reinsurance business is unattractive. AM Best published a report in February detailing that the combined ratio of the country's non-life insurers remained at 117 percent, with the pre-tax margin coming in at just 6 percent.

These figures are skewed by high motor and health loss ratios, which dominate the non-life market at present, although participants also noted an increase in the fire line's attritional loss ratio in 2016.

For Lloyd's and the other overseas reinsurers, sticking to P&C covers should help. Lloyd's Vandendael insists that the research the Corporation has done suggests the business its syndicates would look to write is profitable, though he declines to disclose any figures.

A cultural shift is also needed in the mindset of Indian insurance buyers. As GIC's Vaidyan points out: "The Indian market and economy needs to appreciate the role of insurance from the viewpoint of disaster mitigation and financing. Competition also has to evolve from a price-based focus to a coverage- and service-based focus."

This article was published as part of issue Spring 2017

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