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India

Insurance Barriers in India

CEA Note of 22 December 2005

Today, India is one of the EU insurers’ key partners in Asia. Over the next few years,
these trade relations are expected to experience further substantial growth driven by
the extraordinary dynamism of the Indian economy. With the increase in gross
primary insurance premiums consistently above GDP growth over the past few years,
the Indian insurance industry plays a pivotal role in this dynamic growth. In light of
this, we strongly believe that India could and should further enhance the potential of
the insurance industry.

A. Foreign Investment in the India Insurance Sector

In the short time that foreign investment has been allowed in India’s insurance sector,
over 700,000 new jobs have been created, directly and indirectly. The number of
jobs created is expected to increase to one million by 2006-2007. With most private
insurers on a strong growth path, employment in the insurance sector can be
expected to grow for the foreseeable future. Global insurers have made new
insurance products available to Indian consumers, tailored to their needs, and have
transferred best insurance practice, management skills and product development
know-how to their local partners. In addition, over $2 billion has been invested in
Indian markets, across all asset classes. Insurance companies are among the
largest investors in infrastructure projects, and in debt and equity markets. As a result
of foreign insurers gaining entry to India’s insurance market, Indians from all walks of
life are benefiting, from urban dwellers seeking financial planning assistance to
farmers benefiting from micro insurance.

The CEA are concerned that the benefits to India of foreign investment in insurance
will be restricted unless an increase in the 26% cap on foreign direct investment is
allowed. Our ultimate goal is no restrictions at all on foreign ownership of
establishments in India.
B. Barriers to Insurance in India

However, there remain great opportunities for expansion of insurance in India.

Despite its recent growth, the Indian insurance market lags behind other economies
in the baseline measure of insurance penetration. At only 2.8%, India is well behind
the 13% for the UK, 11% for Japan, 10% for Korea, 9.6% for the US, and even 3.4%
for China. Given the dramatic demographic shifts now taking place in India, it is clear
that the insurance industry will need to play an increasingly important role in the
future. For this to be achieved, further modernisation is required of the regulatory
environment for insurance in India.

The following barriers to EU insurance in India are considered as most

important:

- 26% cap on foreign direct investment in insurance companies

- Set tariffs and conditions which still dominate non-life insurance in India
- Reinsurance monopoly

1. Barriers with regards to the national treatment in insurers in India

• Certain government banks are unwilling to accept insurance covers written by

private insurance companies (i.e Marine)

► Removing this barrier would increase revenues available to private

insurers and widen the choice of available cover

• Foreign reinsurers are not granted right of first refusal privileges while
domestic reinsurers have this right.

► The national reinsurer, General Insurance Corporation, has the right but
not obligation to accept any business that requires reinsurance over and
above 20% mandatory cessions. This unfair advantage has created an
unlevel playing field, and National Re remains effectively a monopoly in
the market.

• Effective prohibition on cessions abroad. Insurance law makes it mandatory to

place the business within India (exhaust local capacity) before reinsurance
can be taken out with foreign reinsurers.

► Greater reinsurance competition would increase pressure on price.

© Comité européen des assurances, 2005 2

2 . Barriers with regard to market access of foreign insurers in India

• Restrictions on foreign equity ownership of insurance and insurance brokerage

companies. Foreign insurers cannot establish unless via a joint venture with
an approved partner with a minimum 74% local shareholding.

► This restriction will hamper the growth prospects of private companies, as

growth requires more capital allocation, which the local partners may be
unable to match. While the intent of the current government to raise the
foreign equity ownership cap to 49% has been made clear, it has yet to
result in action.

• Set tariffs dominate the market resulting in poor development of underwriting

skills and leading to cross-subsidisation.

► 74% of the market GWP is regulated by tariff; the Tariff Advisory

Committee decides on price, terms and conditions. This prevents
insurance companies from offering product or price differentiation.

• Capitalisation requirements in India are at USD 25 million for initial

establishment.

► This may restrict market entry by mono-line insurers. Their entry would
create greater awareness and demand.

• Limitations with respect to payment of claims in foreign currency-exceptions

require approvals from RBI

► A lengthy permission process is required from the central bank. Removal

of this barrier would reduce administrative costs and reduce currency risk.

• Imposition of 20% mandatory cessions across the board for non-life classes to
state reinsurer.

► The National Reinsurer, General Insurance Corporation, benefits from a

share of 20% of every business written by Insurance companies. This
prevents insurance companies from retaining profitable classes of
business on their own books and restricts them from seeking better terms
from foreign reinsurers.

• Insurance companies’ investments are strictly limited. Most funds in insurance

companies are only allowed to be invested in low-return state and central
government bonds.

► This is an impediment for foreign insurers as their profits – and the returns
available to policyholders - may suffer from their inability to invest in a
wider range of investment products.

© Comité européen des assurances, 2005 3

3. Reinsurance monopoly

The state-owned General Insurance Corporation (GIC), with its traditionally close ties
to the primary insurers of the public sector, holds a monopoly, being the only
domestic reinsurer in India. Mandatory cessions to GIC and its right of first refusal
privilege prevent Indian primary insurers from diversifying their risks freely and
flexibly.

On reinsurance, we make the following two observations:

a. India would benefit from a further broad opening of the reinsurance sector to
international reinsurers

Competition is necessary for the insurance industry to serve society most efficiently.
Insurance in India has undergone significant change since the market was opened in
2001. However, there is still room for further liberalisation:

• The insurance industry is integral to development and fosters economic

growth by providing risk management and insurance cover for projects
requiring large amounts of capital. The presence of international reinsurers will
be a vital element by making additional capital available and relieving Indian
insurers of partial or entire risks that are too large for their own capital base.
Furthermore, an international reinsurer can develop innovative products to
cover small and medium-sized risks. This will support local and foreign direct
investment, and encourage the creation of new jobs.

• The reinsurance industry also has an early-warning function by constantly

monitoring the long-term evolution of risks, for example in the field of natural
hazards such as tsunamis or earthquakes. The presence of international
reinsurers will transfer international know-how to the local market and provide
Indian insurers with proven international expertise in assessing complex risks
and handling large, complex claims.

Thus, we believe that the necessary next step of the liberalisation process is to open
up the Indian insurance market not only to private joint venture insurance companies,
as has been done most successfully in the last four years, but also to international
reinsurers. This further broad opening of the reinsurance sector to international
reinsurers can be achieved by the following: a. permitting branch offices of such
reinsurers to be established in India to write Indian reinsurance risks; and b.
permitting such reinsurance risks also to be written freely by foreign reinsurers on a
cross-border basis. These two methods will enable India to have access to the
capital and security provided by the international reinsurance community to cope with
the Indian market's rising liabilities.

b. The “branch office option” could be a solution for some EU companies,

while for others the only option would be the right to provide reinsurance on a
cross border basis.

CEA aims at full liberalisation of the India insurance market.

***

© Comité européen des assurances, 2005 4