PROFESSIONAL DEVELOPMENT COMPANY BILL INDIA

PROFESSIONAL DEVELOPMENT

he recent passage of Indias Company Bill represents a watershed. Back in the 1950s, as a young republic, India chose to tread the socialist path. Not surprisingly, there followed the nationalisation of the airline industry (1953); life insurance (1956); banks (1969) and general insurance (1972). It is ironic, then, that after the US, India has the highest number of listed companies, and the Bombay Stock Exchange (BSE) is the oldest in Asia. The last time company law was cast into an Act was the year when the life insurance industry came under state control (1956). Pushed against the wall in 1991, Indias political masters and economic czars were forced to liberalise the economy. Thanks to the initiatives undertaken then, the country discovered a newfound surge in its entrepreneurial energy. More than two decades later, an overhaul of company law was only logical and overdue as the economy mainstreams into capitalism and globalisation stares it in the face. The new Bill prescribes many things for the rst time board gender diversity, class action suits, corporate social responsibility and, last but not least, corporate governance. The response from the insurance fraternity ranges from muted to subdued. Thanks to the trigger, this will set into motion several threats and opportunities for insurers as well. One area that should receive most stimulus is professional indemnity (PI) and directors & ocers (D&O) liability. Take, for instance, D&O. Despite having the worlds second highest number of listed companies, the size of the Indian D&O market is merely equivalent to Australia in terms of number of policies. In terms of total D&O premium, the Australian market wrote AUS$270m last year, which is more than the gross written premium of the entire Indian liability class. Given the highly litigious nature of Australia, it is not fair to compare the two markets in terms of premium. However, given the potential number of new buyers and expected increased legal activity, this portfolio is set to grow signicantly.

NO TURNING BACK
As India moves inexorably towards a globalised, corporate-driven reality, Praveen Gupta assesses the opportunities and risks associated with its subsequent increased need for liability insurance products

globalisation, and multiple internal drivers are all furiously pumping the lifeblood of change. Lifestyle: Growing middle class; demographic dividend churns youthful population; increasing buying power and impinging global inuence; and openness to experiment. Awareness: An all-pervasive social media and an assertive mass media all operating on a virtual basis. This enlarges the canvas for libel and slander. Globalisation: Indian vendors are regularly sued for errors and omissions arising from their international contractual connections, with the information technology-enabled services industry being most prone. The learning is percolating within the overall environment. Undue exposure of some trades to the North American jurisdiction poses unique challenges. Intellectual property: The internet and accessibility via handheld devices suddenly unleashes both development and application of a vast hinterlands creativity across the global village. Similarly, cybercrime can result in farreaching damage and cause serious privacy intrusions like never before. The number of Indians accessing the internet via handheld devices today exceeds those accessing it through a desktop machine. Right to information (RTI): Growing disclosure and transparency driven by the RTI Act. Consumerism: Informed buyers demand choice and are beginning to hanker after quality and consistency. Functional consumer courts and a widening denition of services are facilitating a growing number of actions on account of faulty products and services. There are an increasing number of actions, on account of medical malpractice, against doctors and medical establishments. The media reports on a growing number of attacks on medical facilities by disgruntled customers. The Supreme Court of India recently awarded 1.1m as compensation to plainti in the medical negligence case of 15-year-old Anuradha Saha. Ms Saha was a non-resident Indian (NRI) employed with an Ivy League University. In what ways it will permanently impact the application of multipliers applicable in future decisions remains to be seen. However, one need not be an NRI to be eligible for large awards.

should not hoodwink us into a replication of the motor third-party (MTP) portfolio situation. There is a lot to learn from the porous, opaque world of MTP as it operates today. The starting point is insurers and brokers playing a major role in making all concerned aware of the risks impacting individuals and businesses across the spectrum of stakeholders. Then comes a solution in the form of a product. Apart from contract certainty, there is a pressing need for appropriate pricing. Customer expectation thanks to sustained inadequate pricing since the demise of price controls for tari products has set into motion unrealistic expectations across all classes, including liability.

The new Bill prescribes many things for the rst time board gender diversity, class action suits, corporate social responsibility and, last but not least, corporate governance
Because the liability class constitutes longtail contracts and if the insurers (and reinsurers) are not charging adequate premiums, they may not be around when the claims come. Importing a new product has its challenges, as it may be necessary to transplant pricing models and adapt these locally over a period of time as experience builds. The claims are generally slow to come and, in the interim, the portfolio will tend to look deceptively protable. The MTP pool eroded $2bn of capital in one stroke, calling for a review of solvency margins and an injection of fresh capital. Adventurous pricing, discounting and acquisition costs, with running ination, have set another timebomb ticking. PI and D&O liability are set to grow the fastest, with combined general liability in tow. All major professions and trades will have their contracts under the lens as the market and

Tort age
Apart from the governance and duciary push, one also needs to recognise several other drivers that are bound to change Indian society forever. As Indian society and businesses evolve, tort is bound to continue raising its head. That is symptomatic of progress, but at what price? External inuencers, in the form of

customers demand their pound of esh for any errors and omissions (E&O). As the Companies Act begins to settle and unfold, independent directors will be dicult to nd without a proper and adequate risk transfer mechanism. These are two areas where the market could achieve near 100% penetration before inclusivity makes this possible for commoditised products. The early fault lines may already be visible. We are inclined to believe these are supercial but only to a point. The portfolio is small, the values at risk are manageable and the frequency is low. So what are we seeing? The limits covered, whether under D&O or E&O, are far from adequate. The legal costs by themselves tend to erode these limits. The wordings are getting challenged more often than in any other class of insurance. Several triggers, such as corruption, bribery, employment practices, corporate manslaughter, environment, insider trading and class actions from duciary lapses, have all arrived in India in a short space of time. We are yet to see how disruptive and complex their manifestations may be. The contagion of competitive pricing is beginning to entice these classes to go for a quick market share. No Indian insurers are listed as yet and, despite the announcement of listing regulations, none seem to be in a hurry to do so, until such time as the equity participation of foreign insurers moves up from the existing 26% to 49%. Growing corporate governance demands will also put insurers under the spotlight for relying excessively on investment income rather than underwriting results. There has to be a sense of urgency in realising these are specialist classes that need specialist handling through the entire chain. This is certainly a segment that can be grown. The increasing limits being sought by the Indian corporate world and the growing complexity of local enterprises will be a huge opportunity to develop local talent and capabilities. Likewise, interesting developments on the personal and professional fronts will translate into several new and innovative covers. Insurers and brokers need to invest in people, products and processes to ensure the success of the liability class as its scale and utility grows. While the new laws and environment throw up fresh opportunities, here is a segment not for the faint-hearted or the naive. Praveen Gupta, FCII, Chartered Insurer Managing Director & CEO, Raheja QBE General Insurance Company
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Road ahead
Let us accept that we need to navigate a mineeld. We must also overcome an illusory state of wellbeing thanks to a claim-free situation, which

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