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The changing face of life insurance in India

Digital, a small word with just seven characters, is the largest trend of our times and is shaping, disrupting and
transforming many industries. Insurance is no exception. Three key developments are redefining how insurance
business will be done. The advent of tablets, the explosion of smartphones and the rapid reduction in the cost of
computing, coupled with advanced technologies like machine learning, artificial intelligence and bots, is allowing
insurers to completely re-imagine their business models. Combine this with the emergence of the connected
worldthe true Internet of Things (IoT), with a wide variety of devices connected to capture rich realtime data.
Connected cars, humans and even homes is soon going to be the norm. The third development is the ability to
garner and use data. Data is really the new oil. The combination of these three developments enables the delivery
of a world class experience to customers across various digital channels. The business of insurance is being
completely redefined. Insurers no more see themselves as just payers to cover unforeseen events but as partners
to offer support and even prevent such events from occurring. The business of insurance is moving away from
protection to prevention. In the process, many insurers are transitioning from being just insurance product
providers to being providers of an ecosystem of services. Lets do some crystal ball gazing to see what life
insurance has in store for you as a customer. Every customer journey will be completely re-imagined. Take for
example the mundane task of a change of address. Imagine a world where insurers will proactively reach out to
you basis partnerships with telcos (GPS tracking will throw up alerts about potential relocation) to prompt you to
provide the latest information. You will experience a significant enhancement in customer engagement. More
often than not, the underlying trigger for life insurance purchase is a change in life stage e.g. new job, change in
job, promotion, marriage, child birth, etc. Imagine an existing customer is in the hospital and his wife has just
delivered a baby. While his joy knows no bounds, he also feels an additional sense of responsibility towards his
new born and his family. At this point of time, he will get a message from his life insurance company
congratulating him on this event. The message will also explain how buying a child education plan that matures
20 years hence would help them cover their childs college education and that a friend of his recently bought a
similar plan. And this could be availed of at the click of a button, with no additional documentation. Every time
the parent gets a promotion or a pay hike, the life insurer will make a targeted reach out with a customized
message for cover enhancement or top-ups. The possibilities are limitless with the right data capture and use of
analytics and technology. You will see insurers adopting a lot of scenario- or situation-based sales and these
engagement options will be inserted into your regular journeys. Serving retirees is clearly going to be one of the
largest needs for India going forward. According to World Bank data and projections, it is estimated that India will
have over 350 million people over the age of 50 years by 2030. Couple this with the increasing life expectancy for
urban Indians, which has grown substantially over the past few decades and is already more than 70 years for
men and over 73 for women. And that will be even higher for the more aware segment within urban India. This is
just the average. Add to this the results of a research study by a French Asset Management company that
reported India ranked last in their Global Retirement Index (GRI) in 2016 amongst 43 nations in the survey. This all
adds up to create a perfect mix, talk about a market begging for disruption. You are likely to experience a
comprehensive ecosystem of services for the elderly serving a range of needs including experts catering to their
travel requirements, mental health counselors, health care providers, will services, estate planning agents etc. And
all of these offered on a single holistic platform where financial contributions, vested benefits, periodic payouts
are readily accessible. This could be a one-stop shop for all retirement needs readily accessible at the swipe of a
screen. It is clear that the world has moved to a stage where the risk of dying too early (the traditional basis of life
insurance) is far outweighed by the risk of living too long. The question you need to answer is whether you are
well covered to live long!

What Is An Actuary?

An actuary deals with the business of insurance and is responsible for many areas under the broad category of
insurance. The actuary is an individual who will analyze important data such as mortality, sickness, injury and
disability rates and use that information to aid those involved with insurance. An actuary is responsible for
collecting the data to forecast future risks and see how these predictions will affect various aspects of
insurance.General Responsibilities of an ActuaryOne who accepts the role of actuary is responsible for a multitude
of items. They will review statistical information relating to rates dealing with mortality, sickness, accidents,
disability and retirement. They will take the information that they obtain from reviewing statistical data and relay
the information to individuals who need such items to successfully pursue insurance-related interests. The general
role of the actuary is to compile the data which they collect in such a manner that it helps companies deal with
payment and coverage issues.Specific Duties of an ActuaryThere are a variety of specific duties which an actuary
must carry out on a daily basis. The first duty which an actuary must undertake in their job role is to review a
variety of documents. These documents relate to statistical information, insurance plans, annuity plans, pension
plans, contracts and company policies. The overall goal in reviewing these various document is to construct
guidelines for which the companies can follow with their customers and employees.Once the actuary has
reviewed all of the pertinent documents, the individual must then construct concise tables evidencing the results
of the intense document review. The tables will diagram the statistical evidence as well as highlight the
recommended route to pursue with regard to disbursements, premiums and retirement funds.An additional
specific duty of an actuary is to determine company policy and explain such policy and its aspects to those who
will benefit from it. The actuary may also work on the policy so that it adequately works to benefit those affected
by the policy.An actuary may also do consulting work and help various companies with their statistical needs and
company policy construction. One who is an actuary may work for a specific corporation or many different
companies and corporations.Actuaries may also be asked to testify as expert witnesses in various forms of
litigation. Their testimony most often relates to the lifetime earnings an individual would have seen based on a
variety of factors.One who fulfills the role of an actuary may also have to testify before public agencies with
regard to new or revised legislation affecting the companies and corporations which it works for. This frequently
occurs when a new law is about to be passed or the company wishes a particular piece of legislation to become
law.The actuary is also the go to individual for any questions relating to their job responsibilities asked by the
customers of the company. If the questions are best answered by the actuary, then he/she will do so in order to
present straightforward information to the public.An actuary must also develop mathematical ideas and formulas
so that the proper data can be assessed. The actuary must use his/her mathematical abilities to format equations
which will aid in the resolution of an issue.Traits Which All Actuaries Should PossessThere are many beneficial
traits which an actuary should possess. First and foremost, an actuary needs to possess wonderful mathematical
skills. Since they will be dealing a great deal with statistical equations and data, having such mathematical skills
will help them to excel in their job responsibilities.Good analytical skills are another important trait which an
actuary should possess as it will help them in their job role. As they will need to analyze a variety of documents,
having analytical skills which are more than adequate will greatly benefit them in the long run.An actuary is an
individual who should possess good public speaking skills as well. In their daily job duties, not only will they need
to analyze documents and data but they will also have to report such data results to company officials and
members of the public. Therefore, in order to best get their opinions and conclusions across in a straightforward,
easy to understand manner, good public speaking skills should be a prerequisite to taking on the role of
actuary.Creativity is something which actuaries should possess. From time to time, they will need to aid company
officials in the drafting of company policy and make changes to the policy. With a little bit of creativity, an actuary
will be able to take the documentation and put such a spin on it that it is formed into a proper and
valid policy.One who is an actuary should also have wonderful research skills. Since many of the documents that
they need to analyze will not just pop into their laps, it is important that actuaries can do good research and find
out what they need to know with regard to statistics and pertinent documents in an efficient and expedient
manner.An actuary should also have good working computer skills. Since much of their work will involve
computers, it is important that the actuary not only be familiar with computers but know how to maneuver
around with them as well.Comprehension skills are also a necessary component for all actuaries to possess. The
actuary is an individual who in their job role will need to analyze and interpret often-complex documents and
laws as well. If one has excellent comprehension skills they will be able to do their job that much better.

Sample Paper 3 Management:How To Raise Staff Morale

Keeping staff morale up is a frequently overlooked aspect of the business owner or managers role. The mental
well-being and general happiness of your employees are important contributing factors to the general success of
your business; unhappy employees are unlikely to be productive employees, and this will have a knock-on effect
on your firms prospects.
Job satisfaction is at a record low. A recent survey by the Chartered Institute of Personnel and Development
(CIPD) has shown that employee morale is being hit by the twin pressures of cost-saving measures and job
insecurity. As many as a third of those questioned said they would like to move jobs, but are worried that they
would not be able to secure another position.
Unhappy workers are bad for your business. As a business owner you must find ways to raise and maintain staff
morale, in order to ensure a happy and productive workforce.
Communication is keyA key problem in many organisations is the perception of a disconnect between
management and staff lower down the chain. If you are to keep your employees happy, it is vital that you listen to
their concerns and ideas and, where possible, act upon them.
In many cases, simply feeling that they are being listened to will be enough to improve your employees morale.
The ways in which you achieve this will depend on the nature of your organisation; in a small firm with few
employees the answer might be as simple as a regular meeting between you and your staff. If you employ a
larger number, you should ensure that each line manager is personally available to the staff working immediately
below them. You should consider then taking meetings with those managers in order that concerns are passed
on.
A company Intranet can be a great way to keep the lines of communication open and it can be used to
incorporate social aspects of business too. If you cant afford to create an Intranet you could try a social
networking tool such as Yammer.com and encourage employees to take part.
Be flexibleWhile it can often be difficult to arrange employee leave and to work around unexpected sick days, you
should attempt to be as flexible as possible when negotiating with your workforce.
This is particularly true when it comes to parents with young children. All of your employees will have personal
and family concerns that may occasionally take precedence over their work, and you should be prepared to
accede to reasonable requests made for extra time off or flexible working.
It is also important to remember that you have a legal obligation to properly consider flexible working patterns
for most parents with children under the age of 16, or disabled children under the age of 18. Try to take the
initiative and make an offer of these arrangements before being asked by your employee. This will help to put
you on a firm footing when it comes to negotiation.
Benefits and incentivesEmployee benefits are an increasingly important part of a compensation package. As
growth in headline salaries has stalled, many firms are using additional benefits as a way of attracting talent and
maintaining staff morale.
The scale of your benefits package will likely depend on the size of your firm. Do not presume that you have to
operate a company car scheme or build a gym in your offices. Instead, concentrate on personalised incentives
that raise staff morale while encouraging good teamwork. Staff events, paid for by the company, are a great way
of making your employees feel valued and simultaneously helping to forge relationships within your workforce.
Consider things like bowling or a simple meal out as a way of solidifying your team.
Quick, cheap fixesYou need not spend a vast sum of money improving your staff morale. In many cases, quick
fixes for niggling problems will have a far greater impact than occasional grand gestures.
For example, do your employees have access to basic kitchen facilities? Are the staff toilets clean and in good
working order? Are your computer systems running reliably? It is often possible to quickly fix many of the day-to-
day gripes that bother your employees. Listen to what your employees are saying about their workplace and
concentrate on these first.
It is important, though, that you do not become a maintenance worker. Your time is better spent running your
business, not fixing office furniture. As a result you may wish to consider hiring an extra member of staff, even for
just a couple of days a month, to deal with these issues, or to delegate responsibility for staff issues to one of
your existing employees.
The importance of staff morale should not be underestimated. In order to maximise your firms productivity you
must foster job satisfaction among your employees. Consider cost effective ways that you can achieve this in your
firm but beware false economies. Often, refusing to spend money now will result in problems later, either
through an inefficient workforce or high staff turnover.

Provisions for insurance in budget 2017-18

The Union Budget of 2017-18 has made the following provisions for the Insurance Sector:

The Budget has made provisions for paying huge subsidies in the premiums of Pradhan Mantri
Fasal Bima Yojana (PMFBY) and the number of beneficiaries will increase to 50 per cent in the next
two years from the present level of 20 per cent. As part of PMFBY, Rs 9,000 crore (US$ 1.35 billion)
has been allocated for crop insurance in 2017-18.

By providing tax relief to citizens earning up to Rs 5 lakh (US$ 7500), the government will be able
to increase the number of taxpayers. Life insurers will be able to sell them insurance products, to
further reduce their tax burden in future. As many of these people were understating their incomes,
they were not able to get adequate insurance cover. Demand for insurance products may rise as
peoples preference shifts from formal investment products post demonetisation.

The Budget has attempted to hasten the implementation of the Digital India initiative. As people in
rural areas become more tech savvy, they will use digital channels of insurers to buy policies.

2. The Government of India has taken a number of initiatives to

boost the insurance industry. Some of them are as follows:

The Union Cabinet has approved the public listing of five Government-

owned general insurance companies and reducing the Governments

stake to 75 per cent from 100 per cent, which is expected to bring higher

levels of transparency and accountability, and enable the companies to

raise resources from the capital market to meet their fund

requirements.

The Insurance Regulatory and Development Authority of India (IRDAI)

plans to issue redesigned initial public offering (IPO) guidelines for

insurance companies in India, which are to looking to divest equity

through the IPO route.

IRDAI has allowed insurers to invest up to 10 per cent in additional tier 1

(AT1) bonds, which are issued by banks to augment their tier 1 capital, in

order to expand the pool of eligible investors for the banks.

IRDAI has formed two committees to explore and suggest ways to

promote e-commerce in the sector in order to increase insurance

penetration and bring financial inclusion.

IRDAI has formulated a draft regulation, IRDAI (Obligations of Insures to

Rural and Social Sectors) Regulations, 2015, in pursuance of the

amendments brought about under section 32 B of the Insurance Laws

(Amendment) Act, 2015. These regulations impose obligations on

insurers towards providing insurance cover to the rural and economically

weaker sections of the population.

The Government of Assam has launched the Atal-Amrit Abhiyan health

insurance scheme, which would offer comprehensive coverage for six

disease groups to below-poverty line (BPL) and above-poverty line (APL)

families, with annual income below Rs 500,000 (US$ 7,500).

The Uttar Pradesh government has launched a first of its kind banking

and insurance services helpline for farmers where individuals can lodge

their complaints on a toll free number.

The select committee of the Rajya Sabha gave its approval to increase

stake of foreign investors to 49 per cent equity investment in insurance

companies.

Government of India has launched an insurance pool to the tune of Rs

1,500 crore (US$ 220.08 million) which is mandatory under the Civil

Liability for Nuclear Damage Act (CLND) in a bid to offset financial

burden of foreign nuclear suppliers.

Foreign Investment Promotion Board (FIPB) has cleared 15 Foreign

Direct Investment (FDI) proposals including large investments in the

insurance sector by Nippon Life Insurance, AIA International, Sun Life

and Aviva Life leading to a cumulative investment of Rs 7,262 crore (US$

1.09 billion).

IRDAI has given initial approval to open branches in India to Switzerland-

based Swiss Re, French-based Scor SE, and two Germany-based

reinsurers namely, Hannover Re and Munich Re.

3. Road Ahead

Indias insurable population is anticipated to touch 750 million in 2020, with

life expectancy reaching 74 years. Furthermore, life insurance is projected to

comprise 35 per cent of total savings by the end of this decade, as against 26

per cent in 2009-10.

The future looks promising for the life insurance industry with several changes

in regulatory framework which will lead to further change in the way the

industry conducts its business and engages with its customers.

Demographic factors such as growing middle class, young insurable population

and growing awareness of the need for protection and retirement planning will

support the growth of Indian life insurance.

Digitisation of insurance policies: Scope and future

With each passing year, digital is expanding its footprint in every sector within

India and across the globe. Of late, the insurance industry is getting intensely

impacted by the penetration of digital. This began in 2005 when people started

searching for insurance policies online and also did policy comparisons. A

decade after, insurers are selling policies online and that, too, quite

successfully.

The Insurance Regulatory and Development Authority (IRDA), which had

proposed digitisation of insurance policies in 2013, have now made it

mandatory. With this initiative, the insurance industry is now all set to reach a

new milestone.

Objectives behind digitisation

If the compound annual growth rate (CAGR) of 25.36 per cent of the online life
insurance market in India shown in a report is anything to go by, it implies that

digital has become a new market force that is driving the change in

expectations of modern-day consumers. Hence, to avoid the sidelines, insurers

need to evolve and respond to the shift to digital. In the light of this, IRDA is

reshaping the sector and empowering insurance companies to succeed in

future through digitisation.

All of us have seen the positive impact of SEBI's initiative regarding

dematerialisation of shares and mutual funds over the past two decades. It

brought about the ease of stock maintenance to investors who were grappling

with the issue. Therefore, in line with the same initiative, the insurance

regulatory authority IRDA has taken the essential step. Dematerialisation of

policies will be beneficial for all stakeholders, especially for the policyholders,

and this move made by IRDA will bring greater efficiency, minimise costs, and

harmonise and build more transparency in policy maintenance.

What digitisation offers

With digitisation in place, each policyholder will get a policy document known

as the e-insurance policy, which will be the evidence of an insurance contract,

but only in an electronic format. Each customers will have to open an e-

insurance account, which will be a repository holding the electronic version of

his/her life, health and pension policies, and any other policy-related

documents. However, users can also maintain policies in a physical format. In

such cases, the insurer will have to issue a policy in both formats.

On completion of the demat process, it is assumed that the repositories will

help with customer care as opposed to merely storing data, thus performing a

proactive role in addressing customer requests. Besides basic services,

advanced services can also be offered through the repository on a yearly or

per-service basis and these may include generating premium-due calendars,

premium and claims history, service request tracking, facilitating online

premium payment and so on.

Policyholders can also request their insurance companies to convert their

physical documents to e-documents for free. However, to open an e-insurance

account, a user should either get in touch with his/her insurance company or

any other repository from the Central Insurance Repository Ltd (CIRL), NSDL

Database Management Services Ltd (NDML), CAMS Repository Services Ltd,

SHCIL Projects Ltd or KARVY Insurance Repository Ltd.

The most significant benefit of digitising your insurance policy is that in case

you are planning to get another insurance policy, you won't have to show

supporting documents such as KYC. Moreover, all your documents will be safe

and stored in one central data repository.

What does the future hold?

Life insurance policies have the lion's share, followed by vehicle protection,

health and travel. A report from BCG shows that by the year 2020, digital

insurance will grow by 2,000 per cent from its current state, with a total

turnover of Rs 15,000 crore. Furthermore, it is also said that in 2-3 years, 75

per cent of insurance purchase decisions will be powered by digital channels.

This prediction has been proved by a consumer trend analysis conducted by

Google, which showed that since 2008, there has been a growth of 450 per

cent in the number of users searching for life and health insurance policies and

related information online while the cumulative growth witnessed by the

insurance industry is that of 600 per cent over the past five years.

Digitisation is expected to be a long-drawn-out process, which will be rolled

out in phases as per regulatory guidelines, but it will definitely be a uniform

experience for each and every stakeholder.

What is 'Reinsurance?'

Reinsurance, also known as insurance for insurers or stop-loss insurance, is the

practice of insurers transferring portions of risk portfolios to other parties by

some form of agreement to reduce the likelihood of having to pay a large

obligation resulting from an insurance claim. The party that diversifies its

insurance portfolio is known as the ceding party. The party that accepts a

portion of the potential obligation in exchange for a share of the insurance

premium is known as the reinsurer.

BREAKING DOWN 'Reinsurance'

Reinsurance lets insurers cover their risks by recovering some or all of the

amounts they pay to claimants. Reinsurance reduces net liability on individual

risks and catastrophe protection from large or multiple losses. It also provides

ceding companies the capacity for increasing their underwriting capabilities in

terms of the number and size of risks.

Benefits of Reinsurance

By covering the insurer against accumulated individual commitments,

reinsurance gives the insurer more security for its equity and solvency and

more stable results when unusual and major events occur. Insurers may

underwrite policies covering a larger quantity or volume of risks without

excessively raising administrative costs to cover their solvency margins. In

addition, reinsurance makes substantial liquid assets available for insurers in

case of exceptional losses.

1.1. General Insurance Corporation of India

GIC of India (GIC Re) was the sole reinsurance company in the Indian insurance

market with over four decades of experience until the insurance market was
open to foreign reinsurance players by late 2016 including companies

from Germany, Switzerland and France.

GIC Re has its registered office and headquarters in Mumbai.

1.2. Entry of foreign players in Indian Reinsurance business 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). 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, the Insurance Regulatory and Development Authority of India

(IRDAI), in October 2015, released guidelines on the registration and operation

of foreign reinsurers in India - conditions they would have to satisfy to qualify

for certification, followed by a three-stage clearance process they would have

to undergo. IRDAI has since come out with a number of further clarifications

and guidelines.

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 1. 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). In addition, GIC will

have a domestic competitor as well, which has been given clearance - ITI Re,

owned by Sudhir Valia's 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," says Rohan Sachdev, Partner and Leader - Financial Services

Advisory Services, EY.

Challenges and Hurdles

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, five 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 for us will be to
offer the most relevant and innovative solutions for our clients, develop new products and help
them grow their businesses," says Hitesh Kotak, Chief India Representative, Munich Re. 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. "We need to work collectively to enhance underwriting standards, pricing and wording of
policies," says Shankar Garigiparthy, CEO (Designate), Lloyd's India. "We also need to evolve a
transparent dispute resolution mechanism to ensure that the Indian market flourishes in coming
years."

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," says an industry insider, not willing to be
identified. 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," says
Sachdev of EY. "If India is to develop as a reinsurance hub, this needs to be sorted out."

Sizeable Benefits

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. "Reinsurers can look at introducing innovative
products to meet specific needs of specific clients," says G.L.N. Sarma, CEO of Hannover Re's India
branch.

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," says M. Ravichandran, President - Insurance, Tata AIG General
Insurance Company. "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 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," says Ravich-andran of Tata AIG. "Health, agriculture and microinsurance are other areas
which will get a lot of interest from reinsurers." In agriculture, the Pradhan Mantri Fasal Bima Yojna,
announced in January 2016, and intended to extend crop insurance much further than before, is a
major opportunity for the new reinsures. Title insurance, or insurance against any financial loss due
to defects in the title deed to a property (and related issues), is also being considered by IRDAI. "As
the regulator allows introduction of new products like title insurance, new areas of growth for the
reinsurers will open up," says Sachdev of EY.

Potential Pitfalls

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," says Kotak of Munich Re. "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," says Garigiparthy of Lloyd's. He also warns
against the proliferation of brokers. "It is common practice in India for multiple brokers to seek
reinsurance quotes on the same risk," he adds. "We would encourage brokers to collaborate and
agree upon a framework as to who is the 'broker of record' relating to a particular placement, in line
with international best practices."

At the same time, Indian branches should be allowed sufficient autonomy if the parent company
tries to remote control Indian operations, it will lose the benefit of the access to local data and
expertise. "It is imperative that reinsurers provide the right blend of their technical pricing
knowledge, international experience and local knowhow of the risks," says Kotak of Munich Re. "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. "It is essential to carry out full due diligence before applying for a licence," says Garigi-
parthy. "But once a reinsurance company has entered the market, it is extremely important for it to
remain committed for the long term."

What is Capital?

Capital has various definitions ranging from financial capital to human capital.
 In the broadest broadest sense, capital capital is a factor of production production, used to
produce produce goods or services, that is itself not significantly consumed in the production
process.

In financial sense, capital may be interpreted as the equity on the company In financial sense,
capital may be interpreted as the equity on the company s balance sheet.

Types of Capital

Accounting Capital

The amount of shareholders funds on the balance sheet.

It is calculated in accordance with the Accounting Standards International or

Local. For example, IFRS published by IASB

Economic Capital

Economic Capital is often based on a true market valuation of the companys

assets and liabilities, which is a complex task for an insurance company.

It may exclude intangible assets such as future profits or goodwill.

Regulatory Capital [Solvency Capital]

Regulatory Capital is the minimum amount of capital that insurer need to hold to be able to write
new business or run-off existing one.

It may be calculated using a simple formula or a more complicated risk-based approach (UK & EU)

Why we need capital?

Unexpected Events

Other Reasons

Portfolio Monitoring

Financing new lines of business

Expansion of existing lines

Merger & Acquisitions Merger & Acquisitions

Working Capital

To demonstrate financial strength to rating agencies, policyholders, etc.

5. De-tariffing in India

5.1. What are Tariff Rates and Detariffing

Tariff is a schedule of premium rates and policy terms and conditions applicable to risks in a class
of business. A Tariff rate in the Indian context is the minimum rates to be charged for a tariff cover
with a prescribed wording; a reduced rate charged amounts to a breach of tariff provision.
Detariffing means that the pricing of insurance policies are left to the individual insurance
companies concerned, to decide and offer, based on their analysis and perception of risk.

5.2. ABSTRACT

Tariff Advisory Committee was controlling the Tariff structure in Insurance sector. But with the
opening up of this sector for private players in 1999 the whole scenario changed. To make this
sector truly competitive general insurance sector was detariffed from April 1, 2007. The Rs. 348
billion Indian general insurance industry went through a challenging period during 2007-10that
was marked by de-tariffing of the Fire, Motor and Engineering lines of insurance, besides a
slowdown in economic growth. The result was a compounded annual growth rate (CAGR) of 11.5%
during this period, as against 16.8% during 2004-07. To attain scale and size, few players
aggressively targeted the profitable lines of Fire, Engineering and Motor Own Damage in the de-
tariffed scenario, which led to steep price discounts that ignored rate adequacy and risk-based
pricing to a large extent. As a result, while premium growth remained muted, risk coverage
increased and this led to a rise in claims for both public and private sector entities. This paper
discuss in detail the impact of detariffing on General Insurance Sector.

5.7. Recommendations

Though Indian insurance professionals are highly rated for their knowledge of insurance theory,
the applications of such knowledge to meet the market realities is found to be inadequate. The
tariff rating structures that dominated the market for over five decades made them neglect the
finer nuances of risk management, accident prevention and risk mitigation. They need to relearn
their risk management lessons and build rating models based on quality and extent of risk
exposures. Insurers need to focus from merely selling insurance products to selling services to
differentiate themselves. Claim settlement services, the core issue for insurers should be
outsourced for the purpose of processing and not decision making. New innovations have to be
brought in. Claims issues impinging on liability have to be determined fast. An insurer would need
to know whether the product purchased is reliable or effective. Mass customization of the
products is the best way to sell in rural market. Insurers must be the voice for their customers in
matters such as service tax imposition, making it more expensive to sell insurance to the needy.
The regulator must have an agenda of its own for the development of the market with full
cooperation of the insurers. Customer Segmentation must be created and strengthened by
deliberate efforts. Price reductions are offered by insurers voluntarily as they could not
differentiate themselves on products or services. Hence differentiating is the most important
lesson to learn. The General Insurance Council of all non- life insurers set up under the Insurance
Act 1938 with specific objectives to pursue must get serious about their responsibility. The market
reforms needed must be initiated by the council rather than leaving it entirely to IRDA.

DEFINITION of 'Detariffing'

The act of removing the pricing regulations of an industry, set forth by tariffs created by a
regulatory body. Detariffing allows an industry to price its goods or services at market value, as
regulation is discontinued to promote market equilibrium.

BREAKING DOWN 'Detariffing'

When an industry is tariffed, goods and services have fixated prices. Companies must file forms
with a regulatory body, such as the Federal Communications Commission, stating its rates, terms
and other conditions associated with its products and services, all of which must conform to
standards set forth by the regulator. Detariffing removes the obligation to file these forms, and
allows companies to choose what to charge for their goods.

Tariff - Rates defined by Tariff Advisory Committee (TAC) and rates tables are released and each
company has to follow the rates. So the rates are fixed.

Non - Tariff - Rates of the Products not defined by Tariff Advisory Committee (TAC) and each
company can fix their own rate.

De-Tariff - Above Tariff restriction has been removed by IRDA All general insurance products got
Detariffed from 1st Jan 2007, but only Motor got De-Tariff from 1st of July 2007.

1.1. IMPACT OF DETARIFFING OF INSURANCE SECTOR

Tariff Advisory Committee was controlling the Tariff structure in Insurance sector. But with the
opening up of this sector for private players in 1999 the whole scenario changed. To make this
sector truly competitive general insurance sector was detariffed from April 1, 2007. The Rs. 348
billion Indian general insurance industry went through a challenging period during 2007-10

that was marked by de-tariffing of the Fire, Motor and Engineering lines of insurance, besides a
slowdown in economic growth. The result was a compounded annual growth rate (CAGR) of 11.5%
during this period, as against 16.8% during 2004-07. To attain scale and size, few players
aggressively targeted the profitable lines of Fire, Engineering and Motor Own Damage in the de-
tariffed scenario, which led to steep price discounts that ignored rate adequacy and risk-based
pricing to a large extent. As a result, while premium growth remained muted, risk coverage
increased and this led to a rise in claims for both public and private sector entities.

INTRODUCTION

Global integration of financial markets resulted from deregulating measures,technological

information explosion and financial innovations. Liberalisation and Globalisation have allowed the
entry of foreign players in the Insurance sector. With the entry of private and foreign players in
the Insurance business, people have got a lot of options to choose from. India's economic
development made it a most lucrative Insurance market in the world. Before the year 1999, there
was monopoly state run LIC transacting life business and the General Insurance Corporation of
India with its four Subsidiaries transacting the rest. The general insurance business in the country
was nationalized on January 1, 1973 by the merger and grouping of more than 107 non-life firms
into four public sector companies. The IRDA (Insurance Regulatory and Development Authority of
India) Act, 1999, paved the way for the entry of private players into the insurance market, till then
the preserve of the public sector. There are now 30 insurance companies in the market, of which
14 are in the general insurance business. Till 2007 Pricing of General Insurance Sector was within
the control of Tariff Advisory Committee. Internal Tariffs were introduced to protect the
consumers interests. But this system left very little scope for competition among Insurance
players. Thus Tariff Advisory Committee which controlled rates, terms, conditions and regulations
applicable to fire, engineering, motor, workmen's compensation and other classes of business
currently under tariffs have been withdrawn effective from January 1, 2007. However, the rates of
premium applicable to Motor Third Party insurance business have been set out by IRDA.

The Detariffed Regime in India

The tariff rating structure applicable for the pricing of fire, engineering and motor insurance covers
of the non- life sector has been freed from January, 1, 2007, with one provision that the rates for
the statutory third party insurance covers would be prescribed by the IRDA. The motor third party
insurance forms about 12% of the total market premium of Rs. 25,000 cr. in 2006 07. Used to
tariff rate regime that has been in operation for over five decades, the insurers, with the new
freedom given to them to price risks according to their risk perceptions have been provided a huge
opportunity to widen their customer base by selling covers without any statutory price
restrictions.

Competition with other in the insurance game is now on two aspects of customer received
parameters: premium rates when insurance is bought and claims servicing, when claims do arise.
Why there was no need for Detariffing:

Tariff regime controlled rates in the portfolio of fire (20%), motor (42%) and engineering (8%) of
the insurance Market of about 25,000 cr in 2006-07. While the tariff rates in fire and engineering
were comparatively higher than what the market forced would have kicked in, had these been left
to them, the motor third party (TP) tariff rates, consulting about 12% of the market, were grossly
inadequate, make up insurers incur over all mounting operating losses.

While the combined loss ratios (Claim cost plus expenses on earned premiums as a percentage) in
fire and engineering are about 75% and 80% respectively, the motor portfolio, including Motor TP,
has a combined loss ratios of nearly 130% i.e. for every Rs. 1000 cr. Earned premium in motor
portfolio, the insurers make a loss of Rs. 300 cr. Since the motor portfolio forms about 42% of the
total market, the incurred losses at existing tariff rates produced operating losses of about Rs.
3000 cr. From the motor segment. The operating profits derived from the fire and engineering
portfolios was too inadequate to cover the huge losses in the motor segment.

Detariffing occurred in three phases

Phase I: One of the significant milestones has been the withdrawal of premium pricing restrictions
initiated from Jan 1, 2007

Phase II: From Jan 1, 2007 Jan 1, 2009, insurers were permitted to structure the premium rates,
but were not allowed to vary the coverage, terms, conditions, policy wordings etc. This period
allowed to migrate towards risk based pricing

Phase III: From Jan 1, 2009 the IRDA allowed the insurers to file variation in deductibles, coverage
amounts, etc. This phase has allowed flexibility in terms of breadth of coverage

Advantages of Detariffing

1. Insurers as a group have been unfair to all the customers due to the high uneconomic cost at
which they conduct their business. More than 40% of the premium goes towards maintaining the
huge infrastructure of insurers establishments and their business procuration with detariffing in
order to keep their prices competitive, they have to reduce these expenses.

2. The lack of concern towards customers to reduce insurers costs has prevented retail and rural
sectors business from growing. The cultivation of new markets is uneconomic at current insurers
costs and hence given up as useless, without making any attempt. With detariffing these sectors
are expected to grow.

3. It is highly unlikely that courts would interface in the pricing mechanism of a totally detariffed
regime, so long as the changes are not related to raising the minimum statutory tariff rates.
Secondly when the entire tariff regime is abolished. Leaving the market forces to work on their
own, courts would have little or no reason to intervene, as there are no statutory issues involved
for them to adjudicate. Rates could go downward or upward depending on the individual track
record of the insured and his individual track record of the insured and his individual risk
exposure.

4. By continuing to encourage high risk customers to enjoy artificially lower rates at the expense of
low risk customer, who are compelled to pay higher premiums, in the same class of risk band,
insurers have allowed such discriminatory practices to continue and flourish. These tariff rates
were only the minimum rates to be charged, and insurers had a legal right to raise rates for high
risk carriers. With detariffing such unfair practices are expected to be stopped.

5. Insurers have till now played their roles only as distributors of insurance products and not as
under writers. That function was assigned in favour of the TAC. As long as insurers do not take
pricing mechanism as their basic responsibility, they can never bring in economic efficiency to
their operations or financial stability to their organizations.

6. Insurance industry would charge rates based on their risk perceptions, and at a level that
encourages a customer to involve himself in loss mitigation efforts to keep the price charged as
low as possible.

7. Elimination of cross subsidization, leading to independent pricing for each class/line of

business.
8. It would encourage policy holders to invest in claims controlling and loss minimization
initiatives/activities.

9. A higher premium rates would create incentives for the high risk vehicle owners to make
measures and invest in loss mitigation measures that they need to implement. Inadequate rates
actually lead to risk less driving and irresponsible defence of TP claims. There is no pressure on the
insured for safer driving leading to lesser number of road accidents to TP.

Threats with Detariffing

(1) In view of the IRDAs restrictions against alteration of terms and conditions of the existing tariff
policies, the broker community who are up in arms- mounting criticism on the regulatormight
cause embarrassment in securing and retaining the business of the all important corporate clients,
particularly in respect of profitable portfolios like Fire and Engineering.

(2) The tricky exercise of preparation of internals tariffs by the respective insurers and
acquainting their marketing and underwriting personnel with the new rates and also updating
their computer database, etc., are likely to upset their day to day work schedules and priorities
and impact their overall performance in the initial stages.

(3) The momentum of double digit growth consistently achieved by the non- life insurers in the
last five years might be forced to go in slow gears, arising out of intense accelerated competition
that is likely to set in, due to possible slashing of premium rates by the insurers, which is most
likely, out of their curiosity to retain their market share.

(4) The ensuring aggressive rate wars, among the players, would possibly lead to unhealthy
competition at the marketplace, which would indirectly threaten to reduce the solvency margins
of some of the insurers, particularly the private companies. The regulator, who cannot afford this
to happen under any circumstances, might be forced to come out with more stringent measures
against the defaulters and such eventualities would indirectly influence the operating results of
free market regime in non-life sector, in the crucial initial phase of the experiment.

(5) The revised guide lines of IRDA on file and use of the insurance products, issued in the
context of scheduled detariffing of tariff rates, might inflict new challenges on the players in
ensuring timely compliance of the set norms and in maintaining the marketing schedules of the
new look products, before the competitors could make it to the market place.

(6) As the premiums in Fire, Engineering and other property insurances is forecast to drop by at
least 40%, arising out of dispensation of tariff controlled prices, the international rating is likely to
come under pressure and the leading global reinsurers, who are comfortable with the present
controlled price structure of tariff advisory committee, may be compelled to review their existing
treaty insurance arrangements with our country. As acceptance of all major risks by the non life
insurers in India is directly linked with the global reinsurance market, the detariffing is sure to
pose few indirect problems and therefore it has already triggered some serious thinking on the
part of a section of the private insurers, in this regard.

(7) Meanwhile, the common man and the average consumer of insurance products, who is
supposed to be the biggest beneficiary out of free market regime, is least delighted about the
proposed changes pricing methodology. He is only apprehensive of some possible disturbed state
of climate at the marketplace, where the competing sellers of insurance are sure to confuse the
potential buyers to the maximum. The general perception is that it hardly matters to an average
consumer, in our country, whether it is tariff controlled pricing or free market pricing, so far he is
ensured of easy availability of simple and need based compressive products at the lowest price
which he can easily afford to pay and hassle free settlement of his claims, if any, as expeditiously
as possible. This paper now discusses the impact of free pricing on different segments that
followed administrated pricing in the erstwhile tariff.

IMPACT ON FIRE AND ENGINEERING PORTFOLIO

Fire and Engineering portfolios have remained most chased profitable segments for insurance
providers. Profit margin on these segments would now be put to severe strain due to competitive
pressures. At present fire portfolio is the second largest segment having 18.4% of market share of
the non-life business. In FY 2005-06 premium for this segment was Rs 3751 Crore.

Engineering segment in India is having 4.2% of total general insurance premium. In FY 2005-06
engineering premium collected by Indian insurers was Rs. 856 crore. These portfolios have
developed in India to a large extent as a lender driven market. Banks and Financial Institutions
have been the major drivers of wealth creation and insurance as a necessary collateral has grown
alongside. In competitive scenario such banks, which have already taken the new role of corporate
agents, will have better negotiating power to gain major reduction in pricing for proper insurance.
Tariff free regime is expected to open up new opportunities and it will also present new
challenges to insurers. Small and marginal customers desiring property coverage will get nominal
benefits as insurers will offer them rule-based underwriting products depending upon their
internal guide tariffs on class-based pricing. These rates are expected to be 20% lower than the
former tariff rates. Those who are watchful will also be able to negotiate further discounts in
shape of claim-experience and discretion discount that is now available with the underwriters as
per the policy of their company. In retail, the targeted segments will be charged lesser than non-
targeted segments. The individual rated products will, however find many chasers and clients
seeking cover for these products will be able to find attractive price tags for coverage of their risks.
In long term deregulation is beneficial but in short term it may cause price wars and turmoil.
Gainers, in free pricing regime, would be large corporate who have volume and the clout to secure
heavy reduction in rates. They are capable of negotiating substantial price reduction in fire and
engineering segment. There is a threat that reinsurers will also be forced to support such price
wars. Initially companies would see higher loss ratios and proper reserving would be required to
maintain the solvency. Should companies resort to under cutting premium to uneconomic levels
they would be brought back by the losses they may face? Though the regulator has conveyed that
premiums will not be allowed to drop below 20% beyond the current levels on renewals but the
initial reports, after the demise of tariff, suggests that premium for all categories have dropped
much beyond 20% deviation permitted by the IRDA in fire segment. With relaxed claim experience
discount FEA discount and discretionary discount fire product is available upto 35-40% cheaper
than one- time tariff rates. Engineering portfolio is also facing rigid competition but the segment
has initially maintained the fall in rates within the expected margin.
Market based pricing has its own tricks that largely depends on systematic database and actuarial
calculations based on pure risk formulae. Absence of statistical data would compel insurers to
price risks on assumption either with conservative element built into it or they will be forced to
follow the rates of any of its forceful competitor. Presence of brokers will put more pressures on
underwriters. Competition is still young in India, just seven years old, and market needs the
protection from regulator in initial days. Regulator is expected to chip in the role that a guard
plays in protection of young plant till it attains maturity. There are comfortable margins in
erstwhile tariff rates. These margins were used to cross subsidise the other segments like motor,
health and marine. Pricing of fire and engineering segment will surely go down but providers
should watch the trend and should not indulge in the price wars. They should ensure that their
database is properly aligned with key rating factors. A risk should be judged on its own merits and
detariffing will force insurers to scale up their risk assessment capability and give the underwriting
function its due importance in insurance process. Competitive dynamics will force to eliminate
cross subsidisation provided to other segments but ability to respond suitably to the dynamics of
the market will depend on scientific rating, adoption of better risk management practices leading
to independent pricing for fire and engineering lines based on pure risk plus loading for
procurement cost, expenses and margins permitted by the marketing force. It should be
remembered that India is a tropical country. Floods and cyclones are quite natural here. It is also a
seismically active zone hence prone to natural disasters. Anything below the pure rates just to
beat or meet the competition may turn disastrous.

In short run the competitive forces may force the insurance providers of property line to operate
on cash-flow basis. Except in Japan most of developed countries follow cash flow underwriting
resulting in underwriting losses and survival on investment income. This, however cannot be the
part of business strategy in long run.

IMPACT ON MOTOR PORTFOLIO

Motor insurance has retained its position as largest and fastest growing portfolio having 42.6% of
general insurance premium. In FY 2005-06 the premium collected by motor insurance providers in
India was Rs. 8685 Crore. The above figures clearly depicts that this segment has not attracted the
private players. It appears to be the simplest to underwriters but the experience of Indian market
during the last 2 decades has been anything but satisfactory. The problem of industry is unlimited
T.P. liability and the trend of court awards that is making motor insurance as a whole unviable.
Entire

industry is losing heavily on auto insurance especially in commercial vehicle segment. The revenue
bleeding is so severe in this segment that it forced private players to remain away from it and
even the public sector companies started cautious underwriting for truckers and old commercial
vehicles. It is pertinent to note here that third party risk coverage is mandatory in our

country and non-availability of cover was going to multiply the problems to all concerned. There
was a fear that once the market is thrown open for free pricing of this sector the insurers will gang
up to fix very high tariffs. These problems posed major challenge before the Regulator and after a
thoughtful process regulator addressed this problem with an incredible solution by
creating common pool. With new rules of underwriting the T.P. premium the outlook of insurers
has suddenly changed in the very first week of the opening of the market and the OD segment has
also been left free for its independent rating based on underwriting experience of the insurers.

For motor third party risks IRDA has now set up a Third Party Pool where all T.P. liabilities will be
underwritten and claims will also met out of the same pool. All the insurers will continue to
underwrite motor T.P. premium and process the claims as before but all this will be in account of
the pool. T.P. cover to all vehicles is to be granted as per the IRDA approved rates for the

pool business and all insurers registered to carry on general insurance business or general re-
insurance business have to collectively participate in a pooling arrangement to share in all motor
third party insurance business underwritten by any of the general insurers in the country. The
pooling of business among all insurers will be achieved through a multi-lateral reinsurance
arrangement between the underwriting insurer and all the other registered insurers carrying

general insurance business and general insurance reinsurers. The participationof GIC in the pooled
business will be 20% of motor business that is ceded to it by all insurers as statutory reinsurance
cession under section 101 A of Insurance Act. The remaining business after such cession to GIC will
be shared among all registered general insurers writing motor insurance business in proportion to
gross direct general insurance premium in all class of general insurance underwritten by them in
that financial year. Defining these rules regulator has estimably left no scope for refusal or
temptation to charge higher premium for third party segment. There will be no agency
commission or brokerage payable in respect of this segment. The real icing is the fact that
underwriting insurer will now get reinsurance commission of 10% on premium ceded by it to all
other insurers and reinsurers. These directions under Section 34 of Insurance Act for Motor Third
Party insurance have well taken care of several complaints regarding the non-availability of T.P.
insurance especially for commercial vehicles. This was in public interest and Regulator has ensured
that all insurers who were expressing difficulty in underwriting unless they were permitted to
charge the rates they consider appropriate have suddenly found it an attractive portfolio to chase
now. Regulator has reasonably hiked the erstwhile tariff rates by 33 to 34% for private cars (for
cars more than 1500 cc the hike is of 257%) and for other class of vehicles by 122 to 150%. To rate
vehicles for own-damage section, the insurers are now free to charge differential rates. The O.D.
segment is a profitable segment on current rates and insures have opted to reduce the OD rates
by 20% in private car and two- wheeler segment. Commercial vehicles are also enjoying 10 to 15%
discount in

OD section in normal case and in case of fleet owners, automobile manufacturers & dealers,
financers handling large volumes further discounts to an attractive extent are available from all
insurers. Old vehicles are subject to loading charged by few insurers. Insurers have not attempted
to made much changes in the rating factors at present but in near future RFRS (risk factor rating
system) like profile of driver, occupation, use of vehicle, incidence of theft, repair costs will
contribute a lot in deciding the price of insurance. People who clock fewer Kms on their
dashboards will be able to wrangle more discounts. Sloppy & slack driving will become expensive.
Existing IDV based pricing will soon be outdated and it will be replaced with statistically based
pricing. The insurance premium may soon play a major role in deciding which vehicle one should
buy.
Maruti Udhyog Limited, the largest car buyer, which holds 54% of market

share, could be the first to come up with a strategy to gain lower rates by

reducing cost of its spare parts. It already had a series of meetings with PSUs and private insurers
to understand the rating factors for judging motor insurance premium. It is learnt that MUL is
working with one of the public sector company for procuring a software solution from a UK based
Software Company to generate a database on motor insurance claims. Automobile Industry, so far
has been selling its products on the basis of celebrity endorsements, alleged ratings by media
without independent third party verifications, self-promoted claims related to safety features. It
has got away with it because Indian market is relatively uninformed one. Insurance sector has also
practiced universal rates in erstwhile tariff system. Practice in western parts of the globe is
different where differential rating is charged to different models and substantial reduction in rates
is offered only for vehicles equipped with safety features like driver and passenger side air bags,
side impact airbags, automatic seat belts, ABS brakes, fraction control and fog lamps. IRDA is
planning to set up a rating agency to evaluate safety features of cars with the objective of helping
general insurers to determine differential pricing while insuring different models. This facility will
be established in Tamil Nadu, which has offered to give 50-acre land for this purpose.

IMPACT ON OTHER SEGMENTS

Non-Tariff products will also take the heat and impact of free pricing in

property segment. Insurers today are free to trade these non-tariff portfolios

on self-developed product features to differentiate it with other products in market at their own
rates. The major impact of free pricing will be seen in the Marine and Health sector, which at
present are cross-subsidised by former tariff covers. Health insurance has its strong presence in
the non-life market with 11% of market share. Marine portfolio has a market share of 6.3% of
total general insurance premium.

Insurance providers, till today, were offering the marine cover at throwaway prices while
negotiating the fire and engineering covers. Health covers were also made available to the
corporate clients at very attractive terms on very low rates. Now when the market forces will take
away the cross-subsidy facility insurers will be forced to re-look at these rates, which are expected
to move north the moment pressure of squeezed margins is felt in property portfolio.

Rationalisation of rates in these sectors will be directly proportional to the sensitive exposure of
these risks on their pure risk experience. Insurers should also gross up the designated pure risk
rates for these lines to cover their administration and procurement expenses and expected profit
margins according to their best underwriting judgement.

Insurers are free to have their own product features and pricing in health segment. Innovation is
the buzzword for the long run sustainability. Industry understands the utility of the product
differentiation when there exist many players in the market. So new variety of products and
services is the need of industry. Competition has already given medical insurance concept a whole
new dimension by including pre and post hospitalisation reimbursement coverage for pre-existing
illness, tie ups with hospitals and TPAs for dispensing the policy. Today there are wider covers and
standalone specific covers covering the major surgeries available in health segment. It is important
to understand the fine print.

Workmen Compensation Insurance has also been set free from the ambit of tariff. The public
sector companies wrote Rs 294.11 crore premium in this sector in FY 2005-06 and New India,
alone, booked Rs 201.22 crore premium. This sector will not face the blaze of the competition, as
it is specialised cover with not so many chasers in the market. Premium for Shopkeepers and
Householders policy and other package covers like Office Umbrella, Kissan package etc will also
see reduced rates as most of them includes erstwhile tariff rates for fire and engineering sections
built in their packages.

Private Players Increase their Market Share Post Detariffing The four public sector insurance
companies, which enjoyed collective monopoly and tended to focus their effort on maintaining a
strong status and market position prior to de-regulation, had lost significant market share up to
2007. Post-detariffing of Fire, engineering and Motor OD portfolio in 2007, the public sector
companies lost further market share although the pace slowed down, and now they appear to be
consolidating their market positions at the current levels. Their loss of market share is attributable
to several factors, including lack of efficiencies and IT support systems, flight of talent, long
winding processes and weak underwriting practices, all of which came into greater prominence
once the private sector players were allowed to enter the General Insurance sector. However,
most of the public sector players have tightened their systems and processes and improved their
claims management since then. Among the private sector players, the individual market shares

have also undergone change. Players like ICICI Lombard have seen their market share reduce while
they focused on improving their efficiency and profitability. ICICI Lombard however remains the
largest player in the industry, although its market share has shrunk from 12.5% in FY2007 to 9.5%
in FY2010. On the other hand, HDFC ERGO General Insurance Company, which saw its earlier
international partner CHUBB exit and then ERGO team up with it in 2009, has found its market
share rising to 2.7% in 2010 from less than 1% earlier. As for Reliance General, it raised its market
share to 6.9% during FY2008, capitalising on the de- tariffing opportunity and expanding its
distribution channel. Subsequently however, its market share has been on the decline, and fell to
5.7% in FY2010 and further to 3.9% in H1 2010-11. With underwriting losses mounting and capital
requirements on the rise (because of network expansion and to maintain solvency), the company
has been focusing more on profitable growth rather than increase in market share. The newer
entrants are also seen as aggressive on pricing in order to garner more business and sometimes
resort to large price discounts, only to eventually incur higher underwriting losses. With the
General Insurance sector poised for healthy growth over the next few years, more players
including monolith players are expected to enter the fray in the near future. The last few years
have seen the emergence of specialised health insurers such as Star Health and Allied insurance,
Apollo DKV and Max Bupa. Further, new players such as HDFC ERGO and SBI General Insurance
Company, which are supported by banks (HDFC Bank and State Bank of India, respectively), would
be in a relatively better position to compete in the market as compared with other players owing
to cross- selling opportunities available to them. Overall, the public sector players are expected to
maintain their dominant position over the medium term, even as the private sector makes further
inroads into the industry on the strength of flexibility in operations, superior claims servicing,
aggressive marketing, and cost competitiveness.
Conclusion

In the near term, the soft pricing regime prevailing post detariffing is expected to stabilize at
current levels posing challenges to domestic general insurance industry with regards to strain on
underwriting profitability before eventually moving to risk based pricing. Pricing sufficiency in
several business lines is expected to remain under stress because of competition for market share
and the entry of new players. The smaller private players in particular are likely to feel more
acutely the need to scale up and thereby achieve long-term sustainability. But this, in turn, could
also lead to higher competitive pressures in the industry. Over the long term, the pursuit of
profitable growth and maintaining sound underwriting profitability by various players will ease
out pricing pressure. With the general insurance sector poised for significant growth, more
players, including monolith players, are expected to enter the fray in the near future. Already,
companies specialising in health insurance, such as Star Health & Allied Insurance, Apollo DKV and
Max Bupa, have come up during the last two years. Further, among the new players, those
promoted by banks would have an advantage over the others, given the strong cross-selling
opportunity available to the bank- promoted entities. Among product lines, Motor and Health,
benefiting from a favourable economic climate and demographics, are expected to be the main
drivers of future growth. While new lines of business, such as micro insurance, targeting the rural
market could emerge as a potential opportunity, having a cost-effective distribution network
would hold the key here. The currently prevailing free pricing regime in the Indian general
insurance industry provides the backdrop for risk based pricing to emerge over the longer term.
Gradually, the industry players are expected to focus more on franchise building (via improved
client servicing), cost competitiveness, and product differentiation, which in turn is likely to help
them better face increased competition if and when the industry is opened up further to foreign
direct investment. The near-term challenges notwithstanding, the long-term outlook for the
domestic general insurance industry is supported by several factors, including the currently low
levels of insurance penetration and the countrys long- term economic growth potential.

Observations

The private sector players gained a market share of nearly 40% in a span of less than six years
and proved that in a tariff rate regime, it was easier to compete with the public players. The
market changed its appearance from 2007.

Once the tariff rates were freed, the fire premium dropped from Rs. 4200 cr in 2006-07 to Rs.
3400 cr in 2008-09 due to rate compe4tition, though the value of risk exposure accepted grew. The
manner of risk evaluation and pricing was more arbitrary and was almost wholly subjective based
on the risk appetite of the insurers for cash flow.

The motor premium grew by Rs 3100 cr between 2004-05 and 2006-07 in a two year span. In the
next two years the motor premium despite the huge increases permitted in motor TP Premiums
from 2007 grew by only Rs. 2600 cr.

The motor OD detariffed in 2007, which had grown by Rs. 2400 cr in the earlier two year span,
grew by only RS. 600 cr in the next two year span after detariffing.
 The motor TP premium, which had grown by only Rs. 600 cr in the earlier two year span, grew by
about Rs. 3000 cr in the next two year span due to IRDA raising them by a steep margin.

Private players have incurred losses before taxes for the first time despite a massive increase in
their earned premiums.

The freedom given to price products has been used to raise loss ratios as well as expense ratio.
With investments incomes down in 2008-09 due to global financial meltdown, the overall
performance looks weak.

Insurers have made little effort to control the rising operating losses as they have continued to
adopt the policy of cash flow underwriting as in the past. The accountability thrust on the
insurers has been poorly discharged and there is no certainty if the market has seen the worst yet.
With past high growth rates, Insurers have made massive investments in staff; which is adding to
incurred costs without adding to premium volumes.

FSLRC

8.1. Formation of the Commission

The Finance Minister in his Budget speech of 2011-2012 announced the formation of FSLRC to
rewrite and harmonise financial sector legislations, rules and regulations. The resolution notifying
the FSLRC was issued by the government in March 2011.

Chaired by Justice BN Srikrishna, the Commission has a diverse mix of expert members drawn
from the fields of finance, economics, public administration, law, etc.

8.2. Purpose of formation

FSLRC was formed as most legal and institutional structures of the financial sector in India had
been created over a century. Many financial sector laws date back several decades, when the
financial landscape was very different from that seen today. There are over 61 Acts and multiple
rules and regulations that govern the financial sector. For example, the SEBI (Securities and
Exchange Board of India) Act does not give the regulator powers to arrest anyone but tasks it with
penalising all market related crimes stiffly. The Reserve Bank of India (RBI) Act and the Insurance
Act are of 1934 and 1938 period, respectively. The Commission was formed to review and recast
these old laws in tune with the modern requirements of the financial sector. FSLRC plans to
eliminate 25 of the current 61 laws that currently govern the financial sector and amend many
others.

8.3. FSLRC moots single regulator

The FSLRC submitted its report in March 2013. It came up with its recommendation spread over
two volumes and 439 pages. The Commission has proposed an Indian Financial Code Bill 2013 to
create a Unified Financial Authority (UFA) and bring about reforms in financial sector regulations.
The panel suggested that SEBI, IRDA, PFRDA (Pension Fund Regulatory and Development
Authority) and the Forward Markets Commission (FMC) be merged under one regulatorUFA.

However, RBI (Reserve Bank of India) will continue to be the banking regulator. The new UFA
would subsume watchdogs for insurance, capital markets, pension and commodities while letting
the RBI continue its supervisory role over the banking industry.

8.4. Consumer protection

According to FSLRC, all financial laws and regulators are intended to protect the interest of
consumers. Hence, a dedicated forum for relief to consumers and detailed provisions for
protection of unwary customers against mis-selling and defrauding by smaller print etc. has been
recommended. The FSLRC report proposes certain basic rights for all financial consumers. For lay
investors, the report proposes additional set of protections. The Commission has recommended
some amendments to existing laws and new legislations. These changes will have to be carefully
brought about accordingly. Some basic protections consumers would expect include that financial
service providers must act with due diligence. It is essential to protect investors Against unfair
contract terms, unjust conduct and protection of personal information. The FSLRC report also
recommends fair disclosure and redressal of investor complaints by financial service providers.

8.5. Financial Regulatory Architecture Act

The proposed regulatory structure will be governed by the Financial Regulatory Architecture Act
that will ensure a uniform legal process for the financial regulators. The finance ministry will unify
the regulatory structure before tweaking the legislative structure. It may take two years for the
report to be implemented in a phased manner.

8.6. Judicial review

The panel has recommended judicial review of regulations. The report has suggested a sunset
clause of 10 years. In other words, the laws would be reviewed every 10 years. The committee
also recommended giving required attention to debt management and setting up a financial
redressal agency and a financial stability and development council.

8.7. The Draft Indian Financial Code

The draft Code is a non-sectoral, principles-based law bringing together laws governing different
sectors of the financial system. It addresses nine components, which the FSLRC believes any
financial legal framework should address:

Consumer protection: Regulators should ensure that financial firms are doing enough for
consumer protection. The draft Code establishes certain basic rights for all financial consumers
and creates a single unified Financial Redressal Agency (FRA) to serve any aggrieved consumer
across sectors. In addition, the FSLRC considers competition an important aspect of consumer
protection and envisages a detailed mechanism for cooperation between regulators and the
Competition Commission. Micro-prudential regulation: Regulators should monitor and reduce
the failure probability of a financial firm. The draft Code specifies five powers for micro-prudential
regulation: regulation of entry, regulation of risk-taking, regulation of loss absorption, regulation
of governance and management, and monitoring/supervision.

Resolution: In cases of financial failure, firms should be swiftly and sufficiently wound up with
the interests of small customers. A unified resolution corporation, dealing with various financial
firms, should be created to intervene when a firm is close to failure. The resolution corporation
would charge a fee to all firms based on the probability of failure.

Capital controls: While the FSLRC does not hold a view on the sequencing and timing of capital
account liberalisation, any capital controls should be implemented on sound footing with regards
to public administration and law. The FSLRC sees the Ministry of Finance creating the rules for
inbound capital flows and the RBI creating the regulations for outbound capital flows. All capital
controls would be implemented by the RBI. Systemic risk: Regulators should undertake
interventions to reduce the systemic risk for the entire financial system. The FSLRC envisages
establishing the Financial Stability and Development Council (FSDC) as a statutory agency taking a
leadership role in minimizing systemic risk.

Development and redistribution: Developing market infrastructure and process would be the
responsibility of the regulator while redistribution policies would be under the purview of the
Ministry of Finance. Monetary policy: The law should establish accountability mechanisms for
monetary policy. The Ministry of Finance would define a quantitative target that can be monitored
while the RBI will be empowered with various tools to pursue this target. An executive Monetary
Policy Committee (MPC) would be established to decide on how to exercise the RBIs powers.

Public debt management: The draft Code establishes a specialised framework for public debt
management with a strategy for long run low-cost financing. The FSLRC proposes a single agency
to manage government debt. Contracts, trading and market abuse: The draft Code establishes
the legal foundations for contracts, property and security markets.

6. Motor business and Indian experience

6.1. Introduction

Motor Insurance is the branch of insurance that most directly affects the general public. With over
55 million vehicles on Indian roads and a legal requirement for insurance for every vehicle on
road, it is easy to mark why this portfolio plays such a major role in insurance services. Though it
appears to be simplest of all insurances yet it is experiencing most difficult time in India. The
performance of Indian market in motor-portfolio during the last decade has been anything but
satisfactory. It generates huge amounts of premium income but it also produces frequent losses
that have now reached new dimensions. It is least attractive market for the new players. Public-
sector companies have experienced continuous trend of payouts and cost far exceeding the
collected premium. Negative in AUTO Insurance ABSTRACT results of this segment are fuelled by
increased severity of claims, brutal competition, regulation, increased frequency of law suits, high
jury awards, inflation, increase in auto thefts and improper fraud management that all are
contributing substantially to make the bottom lines red for insurers.
6.2. Motor business in India

Auto insurers are basking in a false sense of security, seemingly oblivious to the impending decline
in market size and the threat of new entrants. The sector is ripe for disruption: the value of
insurers proprietary data and traditional expertise is diminishing, and other players are emerging
with the data, analytics, and customer access needed to attack the value chain. In light of the
combined threat of these dynamics, incremental change is not an option. Insurers must adapt.

The Boston Consulting Group and Morgan Stanley Research conducted 45 interviews with senior
executives of insurers, OEMs, and technology providers around the world. In addition, we
surveyed drivers and auto insurance customers in 11 countries. Finally, we modeled the impact of
technology change and shared vehicles on the industry from 2015 through 2040. Although specific
dynamics will vary by market, our research yielded several

key conclusions:

Shrinking Mature Markets. The auto insurance market could decline to 40% to 50% of its current
size by 2030, and even to 20% to 30% by 2040 in certain mature markets.

An Even Greater Reduction in Personal Lines. We expect the proportion of personal lines to
commercial lines to shift from about 80:20 in 2015 to 50:50 by 2030 and 30:70 by 2040. In mature
markets, this means a 65% reduction of the personal auto insurance market by 2030.

Rise of Non-traditional Players. The incumbent motor insurance model is likely to be heavily
disrupted by new players with access to proprietary driver data, superior analytics capabilities,
and direct customer access. For instance, shared-mobility players not only will own the data but
are likely to perform their own analytics, leaving insurers struggling for insight into the growing
commercial-line market. Furthermore, we see a credible threat that tech giants, OEMs, and, to a
lesser extent, telcos could corner a significant (and profitable) share of the remaining personal-line
market. Our consumer survey supports this potential outcome, showing that nearly 50% of todays
young driver population is prepared to purchase motor insurance from non-traditional players.

Higher Growth in Emerging Markets. Insurance premiums in emerging markets will keep
growing, predominantly driven by increasing vehicle volumes and miles driven. China, which today
represents approximately 13% of the global motor market, will capture some 20% of it by
2025.Insurers must respond quickly to defend their turf against these combined threats. We
recommend a fundamental rethinking of all aspects of the operating modelincluding product
and business mix, underwriting capabilities, distribution channels, cost structure, and acquisition
strategy. Broadly, we see three nonexclusive strategic plays:

Digital Playleveraging technology throughout the value chain to exchange

data and engage with consumers, optimize the cost of risk, and achieve

superior cost efficiency

Partnership Playturning to strategic partners (most likely, OEMs, new

mobility players, telematics manufacturers, and telcos) to secure access to

24

data and customers or to complement coverage-related services, so as to keep

increasing revenue within the motor insurance value chain and defend against

potential disruptors

Adjacency Playexpanding into mobility-related adjacencies (possibly

including car safety features, car repairs, services related to roadside

assistance, new mobility solutions, and products covering new risks such as

cyber) in order to increase consumer engagement, collect more data, replace

lost revenue, and fuel future growth The relevant strategic choices and timing

of execution will depend on each insurers size and business mix. For example,

multinational insurers are in a better position to form partnerships with

disruptors such as OEMs and tech giants. Insurers with a younger, more urban

customer base should consider diversifying even more rapidly. There is no

standardized approach, and the path to the future state is unlikely to be linear.

6.3. The changing face of motor insurance in India

When Uber tested driverless cars in Pittsburgh in August 2016, it was a

technological marvel that both enthralled people and caused concern at the

same time. Insurers are already planning ahead for the implications of this

development on the insurance business. In addition, the impact of anti-

collision technology powered by the Internet of things (IoT) has got insurers

concerned. The core of the motor insurance business, which is accident risk, isclearly at risk. Motor
Insurance 2.0, a joint report by The Boston Consulting Group and Morgan Stanley, written in 2016,
predicts that by 2040, motor insurance could decline by as much as 80% in mature markets. Luckily
for Indian motor insurers, the prospect of driverless cars is some time away and market growth is
also not a concern. Yet, technology advancements,the increasingly connected world and the
ability to collect and process data is transforming the Indian motor insurance industry. Customer
experience is about to improve drastically across sales, service, renewals and claims along with
increased breadth of products.

Insurers will target customers like you, the car owner, right at the beginning of your car purchase
journey. New car insurance is already integrated with a new car purchase and is included in the
on road price.

You notice the premium but hardly pay attention to the insurer or the product features. In the
future, however, motor insurance will be a key talking point when the car salesperson is making
her pitch. She will explain how the insurance price is optimized based on the safety features on
board the car and how the car electronics interface with the automatic claim notification process
in case of an accident.

She will also demonstrate how the insurance app can be conveniently accessed through the cars
infotainment system. The insurance app will be activated along with the vehicle delivery. Hows
that for a simple and convenient onboarding journey?

Once onboarded, insurers will closely engage with customers to ensure safe driving and to prevent
future accidents. Fewer accidents mean a win-win for you, the car owner, as well as the insurers,
who look to achieve lower claims, which account for 70-80% of the premium. The insurance app
powered by telematics sensors and GPS tracking will give you tips on safe driving based on your
driving patterns. You will indeed pay more if you drive rashly. Such technological sophistication
will also allow insurers to offer bite-sized pay-as- you-drive (PAYD) products or products that
cover only specific geographies/drivers/timings with an attractive price.

Innovation will also make renewals more convenient. As the renewal date nears, your digital
personal assistant will prompt you and offer you help in narrowing down the options on the basis
of your profile. Instead of answering untimely calls from call centres or dealers, you will be able to
enter into chat sessions with chatbots of insurers or web aggregators at your convenience.

You will be able to get quotes on the basis of a picture of the number plate or registration card
that you will send during the chat. Digital lockers will save you the hassle of finding the old policy
and other details such as car engine number, making the renewal process seamless. Much like
how the process of registration for marathons has evolved. I am sure the active runners among
you remember the days one had to find a picture, an identity proof and a previous timing
certificate, all within a certain size. Now you just register onceand all the information is on the
cloud (equivalent of digital lockers). God forbid, if you meet with an accident or a breakdown,
your insurer will be your friend/partner in need. The electronics in your car will communicate
directly with your insurer, remote monitoring will inform the insurer about the extent of damage,
and whether the car is drivable or not. Drones will be on site within minutes to capture digital
evidence of the accident and estimate the damage. Without you having to ask for it, the tow truck
and replacement car will be sent proactively. You will not need to wait for the surveyor as your
claims will be authorized based on the uploaded pictures of the damages. All this will happen
within minutes, and not weeks or even days. Sounds like science fiction, right? But this will be a
reality in the near future. The confluence of technology advancements, big data and IoT is set to
transform motor insurance for customers as well as for insurers. The customer experience of
tomorrow will entail personalized offers, instantaneous paperless transactions, an intuitive digital
experience, natural language interaction, and above all, peace of mind.

In summary, customers can expect faster, better, cheaper (for better risk) and more convenient
motor insurance. Yet, none of this should concern you if you are intending to give up car
ownership and lead an Uber/Ola life.

7. Changing Insurance Regulations/Laws

Insurers have been grappling with a host of regulatory changes the last couple of years. Heres a
look at what lies ahead.

7.1. Life Insurance

Regulatory changes, volatile capital markets and decline in financial savings have impacted the
performance of private life insurers in the last five years. In 2010, the focus of the insurers was on
first year premium growth and market share gains. However, post the regulatory changes in
product structures, particularly ULIPs, companies have been focussing on cost rationalisation.
Theoperating expenses as a percentage of total premium have been trending Lower in the last
four years. Looking ahead, increase in financial savings and low insurance penetration vis- -vis
other countries should drive growth. Coming out of the regulatory overhang, players are looking
at a more balanced product portfolio. Life insurance policies are broadly categorised into
traditional and ULIPs. Within traditional policies, life insurers sell participating (bonuses declared
at the discretion of the insurer) and non-participating policies (bonuses clearly defined; pegged to
an index). Non-par products, though a smaller portion of traditional polices, typically provide
higher margins. Due to regulatory changes in 2013-14, many life insurers, had to withdraw non-par
policies and shifted the product mix towards par policies. Players are now rebalancing their
portfolios, with focus

on higher margin non-par policies and ULIPs. This should aid margin improvement. ICICI Pru and
HDFC Life have a higher proportion of ULIPs, while Reliance, Max Life and Bajaj Allianz have a
traditional (policies) heavy portfolio. Max Life has a sharp focus on participating policies, while SBI
has a balanced mix between participating policies and ULIPs. However, diversification will be
important as dependency on a single product ULIPs in 2010 and NAV guaranteed products in
2013 can be risky. Also, distribution mix will be critical. Over the last four years, bancassurance
has come into focus as agency distribution became less cost efficient. Insurance players will
continue to improve the productivity of agency channel and build a diversified distribution
channel. Besides, given that the top seven players account for over 70 per cent of the private
insurers markets, there could be consolidation of the small players who are yet to achieve scale.

7.2. General Insurance

The Indian non-life insurance sector, which was opened to the private sector in 2001, has also
gone through various regulatory changes. The sectors performance can be tracked in two phases
2001 to 2007 before de-tariffing, and post de-tariffing in 2007. Pre-2007, premium rates of
policies were fixed by the regulator except for marine and health. The private insurers had an
excellent run between 2001-02 and 2006-07 their gross premiums growing at more than 70 per
cent annually during this period. In 2007, the Insurance Regulatory and Development Authority of
India (IRDAI) decided to de-tariff most of the policies except for motor third party pool. This
triggered a price war amongst players. Between 2007-08 and 2014-15, gross premium for private
insurers grew 17.8 per cent annually. Growth has been healthy, thanks to the strong prospects in
the health and motor insurance space. However, the main overhang for this sector has been the
losses on account of the motor third party pool. In 2007, while IRDA deregulated the premium for
all other general insurance products, it continued to fix the tariff for third party motor insurance.
The third party pool was created to make available ThirdParty Insurance to all commercial vehicle
owners at reasonable rates. Hence, players did not have the leeway to price in the higher risk but
the claims were unlimited. This led to huge losses for insurers on account of this portfolio.

In 2011, the IRDAI dismantled this pool and set up a declined risk pool. Insurers are given a
minimum quota of standalone third-party policies that they have to underwrite in their books. If
the quota is not met, then the shortfall has to be met from the declined pool (policies rejected by
individual insurers). However, the losses in the motor segment continue to persist because the
pricing is still regulated. In the long run, however, implementation of the RoadTransport and
Safety Bill of 2014 which, among other things, proposes stiff penalties and streamlines the process
for dealing with accidents, may help to bring down the frequency and severity of accidents. This,
in turn, should help reduce claims cost.

Insurance companies have been generating losses in recent years, mainly due to the third party
motor pool. But there are some signs of improvement in profitability of players. Besides, insurers
have been delivering healthy growth in premiums driven by retail products, such as health and
motor insurance. Importantly, prices have dropped substantially since 2007, post de-tariffing.
However, insurers believe that given the experience of players in the last couple of years, there is
likely to be more sanity in pricing of products and premium rates are likely to recover from here.
This should bring more value and margins to the business.

7.3. Insurance Laws (Amendment) Bill, 2015

The Insurance Laws (Amendment) Bill, 2015 was passed by the Lok Sabha on 4th March, 2015 and
by the Rajya Sabha on 12th March, 2015.The passage of the Bill thus paved the way for major
reform related amendments in the Insurance Act, 1938, the General Insurance Business
(Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act,
1999. The Insurance Laws (Amendment) Act 2015 to be so enacted, will seamlessly replace the
Insurance Laws (Amendment) Ordinance, 2014, which came into force on 26th December 2014.
The amendment Act will remove archaic and redundant provisions in the legislations and
incorporates certain provisions to provide Insurance Regulatory and Development Authority of
India (IRDAI) with the flexibility to discharge its functions more effectively and efficiently. It also
provides for enhancement of the foreign investment cap in an Indian Insurance Company from
26% to an explicitly composite limit of 49% with the safeguard of Indian ownership and control.

Provides for Enhancement of the Foreign Investment Cap in an Indian Insurance Company from
26% to an Explicitly Composite Limit of 49% with the Safeguard of Indian Ownership and Control;
 Provides Insurance Regulatory and Development Authority of India(IRDAI) with Flexibility to
Discharge its Functions More Effectively and Efficiently Among Others

Major Highlights of the Insurance Laws (Amendment) Bill, 2015 Passed by Parliament;

Capital Availability: In addition to the provisions for enhanced foreign equity, the amended law
will enable capital raising through new and innovative instruments under the regulatory
supervision of IRDAI. Greater availability of capital for the capital intensive insurance sector would
lead to greater distribution reach to under / un-served areas, more innovative product
formulations to meet diverse insurance needs of citizens, efficient service delivery through
improved distribution technology and enhanced customer service standards. The Rules to
operationalize the new provisions in the Law related to foreign equity investors have already been
notified on 19th Feb 2015 under powers accorded by the ordinance. The four public sector general
insurance companies, presently required as per the General Insurance Business (Nationalisation)
Act, 1972 (GIBNA, 1972) to be 100% government owned, are now allowed to raise capital, keeping
in view the need for expansion of the business in the rural and social sectors, meeting the solvency
margin for this purpose and achieving enhanced competitiveness subject to the Government
equity not being less than 51% at any point of time.

Consumer Welfare: Further, the amendments to the laws will enable the interests of consumers
to be better served through provisions like those enabling penalties on intermediaries / insurance
companies for misconduct and disallowing multilevel marketing of insurance products in order to
curtail the practice of mis-selling. The amended Law has several provisions for levying higher
penalties ranging from up to Rs.1 Crore to Rs. 25 Crore for various violations including mis-selling
and misrepresentation by agents / insurance companies. With a view to serve the interest of the
policy holders better, the period during which a policy can be repudiated on any ground, including
mis- statement of facts etc., will be confined to three years from the commencement of the policy
and no policy would be called in question on any ground after three years. The amendments
provide for an easier process for payment to the nominee of the policy holder, as the insurer
would be discharged of its legal liabilities once the payment is made to the nominee. It is now
obligatory in the law for insurance companies to underwrite third party motor vehicle insurance as
per IRDAI regulations. Rural and Social sector obligations for insurers are retained in the amended
laws.

Empowerment of IRDAI: The Act will entrust responsibility of appointing insurance agents to
insurers and provides for IRDAI to regulate their eligibility, qualifications and other aspects. It
enables agents to work more broadly across companies in various business categories; with the
safeguard that conflict of interest would not be allowed by IRDAI through suitable regulations.

IRDAI is empowered to regulate key aspects of Insurance Company operations in areas like
solvency, investments, expenses and commissions and to formulate regulations for payment of
commission and control of management expenses.It empowers the Authority to regulate the
functions, code of conduct, etc., of surveyors and loss assessors. It also expands the scope of
insurance intermediaries to include insurance brokers, re- insurance brokers, insurance
consultants, corporate agents, third party administrators, surveyors and loss assessors and such
other entities, as may be notified by the Authority from time to time.
Further, properties in India can now be insured with a foreign insurer with prior permission of
IRDAI; which was earlier to be done with the approval of the Central Government.

Health Insurance: The amendment Act defines 'health insurance business' inclusive of travel and
personal accident cover and discourages non-serious players by retaining capital requirements for
health insurers at the level of Rs.100 Crore, thereby paving the way for promotion of health
insurance as a separate vertical.

Promoting Reinsurance Business in India: The amended law enables foreign reinsurers to set up
branches in India and defines re-insurance to mean the insurance of part of one insurers risk by
another insurer who accepts the risk for a mutually acceptable premium, and thereby excludes
the possibility of 100% ceding of risk to a re-insurer, which could lead to companies acting as front
companies for other insurers. Further, it enables Lloyds and its members to operate in India
through setting up of branches for the purpose of reinsurance business or as investors in an Indian
Insurance Company within the 49% cap.

Strengthening of Industry Councils: The Life Insurance Council and General Insurance Council
have now been made self-regulating bodies by empowering them to frame bye-laws for elections,
meetings and levy and collect fees etc. from its members. Inclusion of representatives of self-help
groups and insurance cooperative societies in insurance councils has also been enabled to broad
base the representation on these Councils.

Robust Appellate Process: Appeals against the orders of IRDAI are to be preferred to SAT as the
amended Law provides for any insurer or insurance intermediary aggrieved by any order made by
IRDAI to prefer an appeal to the Securities Appellate Tribunal (SAT). Thus, the amendments
incorporate enhancements in the Insurance Laws in keeping with the evolving insurance sector
scenario and regulatory practices across the globe. The amendments will enable the Regulator to
create an operational framework for greater innovation, competition and transparency, to meet
the insurance needs of citizens in a more complete and subscriber friendly manner. The
amendments are expected to enable the sector to achieve its full growth potential and contribute
towards the overall growth of the economy and job creation.

Role of an Actuary

4.1. What is an actuary?

Actuary means a person skilled in determining the present effects of future contingent events or
in finance modelling and risk analysis in different areas of insurance, or calculating the value of life
interests and insurance risks, or designing and pricing of policies, working out the benefits
recommending rates relating to insurance business, annuities, insurance and pension rates on
thebasis of empirically based tables and includes a statistician engaged in such Technology,
taxation, employees benefits and such other risk management and investments and who is a
fellow member of the Institute. Traditional responsibilities of Actuaries in life and general
insurance business include designing and pricing of policies, monitoring the adequacy of the funds
to provide the promised benefits, recommending fair rate of bonus where
applicable, valuation of the insurance business, ensuring solvency margin and other insurance
risks like legal liability, loss of profit, etc. They also define the risk factors, advise on the premium
to be charged and re-insurance to be purchased, calculate reserve for outstanding claims and carry
out financial modelling. An Actuary works as consultant either individually or in partnership with
other Actuaries in multi-disciplines life insurance, information technology, taxation, employees
benefit, risk management, investment, etc. Evidently, the scope of the functions and duties of an
Actuary has increased considerably under the changed conditions.

4.2. What does Actuaries do?

a) Actuaries Make Financial Sense of the Future

Actuaries are experts in assessing the financial impact of tomorrows uncertain events. They
enable financial decisions to be made with more confidence by:

Analysing the past

Modelling the future

Assessing the risks involved, and

Communicating what the results mean in financial terms.

b) Actuaries Enable More Informed Decisions:

Actuaries add value by enabling businesses and individuals to make better-informed decisions,
with a clearer view of the likely range of financial outcomes from different future events. The
actuaries skills in analysis and modelling of problems in finance, risk management and product
design are used extensively in the areas of insurance, pensions, investment and more recently in
wider fields such as project management, banking and health care. Within these industries,
actuaries perform a wide variety of roles such as design and pricing of product, financial
management and corporate planning. Actuaries are invariably involved in the overall management
of insurance companies and pension, gratuity and other employee benefit funds schemes; they
have statutory roles in insurance and employee benefit valuations to some extent in social
insurance schemes sponsored by government.

Actuarial skills are valuable for any business managing long-term financial projects both in the
public and private sectors. Actuaries apply professional rigor combined with a commercial
approach to the decision -making process.

c) Actuaries Balance the Interests of All

Actuaries balance their role in business management with responsibility for safeguarding the
financial interests of the public. The duty of Actuaries to consider the public interest is illustrated
by their legal responsibility for protecting the benefits promised by insurance companies and
pension schemes. The professions code of conduct demands the highest standards of personal
integrity from its members.

What is 'Reinsurance?'
Reinsurance, also known as insurance for insurers or stop-loss insurance, is the practice of insurers
transferring portions of risk portfolios to other parties by some form of agreement to reduce the
likelihood of having to pay a large obligation resulting from an insurance claim. The party that
diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of
the potential obligation in exchange for a share of the insurance premium is known as the
reinsurer.

BREAKING DOWN 'Reinsurance'

Reinsurance lets insurers cover their risks by recovering some or all of the amounts they pay to
claimants. Reinsurance reduces net liability on individual risks and catastrophe protection from
large or multiple losses. It also provides ceding companies the capacity for increasing their
underwriting capabilities in terms of the number and size of risks.

Benefits of Reinsurance

By covering the insurer against accumulated individual commitments, reinsurance gives the
insurer more security for its equity and solvency and more stable results when unusual and major
events occur. Insurers may underwrite policies covering a larger quantity or volume of risks
without excessively raising administrative costs to cover their solvency margins. In addition,
reinsurance makes substantial liquid assets available for insurers in case of exceptional losses.

Reinsurance and its importance Fundamentals of Reinsurance

The transfer of risk from one insurance company to another is called reinsurance. Catastrophic
events such as earthquakes or oil tankers spilling oil into the sea can generate claims that could
place a considerable financial burden on the insurer. To ensure that they can fulfil their promise to
pay claims, insurers transfer a part of their risk to another insurer. Should one of the above events
happen, the primary insurer would pay a part of the claim and the reinsurer would pay the rest. In
India, all the insurers are to compulsorily cede 10% of their premium to the national reinsurer that
is the

General Insurance Corporation (Reinsurance) Insurers retain risk up to a certain limit (retention
limit) and transfer the rest to the reinsurer. There are insurance companies that deal exclusively
in reinsurance although reinsurance can be done with any insurer. Reinsurance is not a simple
business; it is complex and can be arranged in numerous ways. Some of which are:

Reinsurance brokers act as intermediaries and find a reinsurer willing to accept the risk.

Treaties between the insurance company and the reinsurer specify retention limits for various
risks and agree to reinsure any amount above the retention limit on terms specified in the treaty.

Treaties may specify that reinsurance would be a certain proportion of the risk underwritten by
the insurance company.

The reinsurer may or may not have the option to refuse particular risks.

In some treaties, when the loss exceeds a certain limit the reinsurer gets involved.
General Insurance Corporation of India

GIC of India (GIC Re) was the sole reinsurance company in the Indian insurance market with over
four decades of experience until the insurance market was open to foreign reinsurance players by
late 2016 including companies from Germany, Switzerland and France. GIC Re has its registered
office and headquarters in Mumbai.

1.2. Entry of foreign players in Indian Reinsurance business

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).

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, the Insurance Regulatory and Development Authority of India (IRDAI),
in October 2015, released guidelines on the registration and operation of foreign reinsurers in
India - conditions they would have to satisfy to qualifyfor certification, followed by a three-stage
clearance process they would have to undergo. IRDAI has since come out with a number of further
clarifications and guidelines.

So far, Swiss Re (Switzerland), Munich Re and Hann- over Re (Germany), ScorSe (France) and
Reinsurance Group of America (RGA) Life Re have passed all the three stages and set up their
branches from February 1. 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 areinsurance
company but an insurance and reinsurance market, is also set to enter (IRDAI has issued separate
guidelines for Lloyd's). In addition, GIC will have a domestic competitor as well, which has been
given clearance - ITI Re, owned by Sudhir Valia's 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," says Rohan Sachdev, Partner and
Leader - Financial Services Advisory Services, EY.

Challenges and Hurdles

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, five 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 for us will be to offer the most relevant and innovative solutions for our clients,
develop new products and help them grow their businesses," says Hitesh Kotak, Chief India
Representative, Munich Re.

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. "We need towork
collectively to enhance underwriting standards, pricing and wording of policies," says Shankar
Garigiparthy, CEO (Designate), Lloyd's India. "We also need to evolve a transparent dispute
resolution mechanism to ensure that the Indian market flourishes in coming years."
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," says an industry insider, not willing to be identified. 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," says
Sachdev of EY. "If India is to develop as a reinsurance hub, this needs to be sorted out."

Sizeable Benefits

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. "Reinsurers can look at introducing
innovative products to meet specific needs of specific clients," says G.L.N. Sarma, CEO of Hannover
Re's India branch.

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," says M. Ravichandran,

President - Insurance, Tata AIG General Insurance Company. "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 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," says Ravich-andran of Tata AIG. "Health, agriculture and microinsurance are other areas
which will get a lot of interest from reinsurers." In agriculture, the Pradhan Mantri Fasal Bima
Yojna, announced in January 2016, and intended to extend crop insurance much further than
before, is a major opportunity for the new reinsures. Title insurance, or insurance against any
financial loss due to defects in the title deed to a property (and related issues), is also being
considered by IRDAI. "As the regulator allows introduction of new products like title insurance,
new areas of growth for the reinsurers will open up," says Sachdev of EY.

Potential Pitfalls

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," says Kotak of Munich Re. "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," says
Garigiparthy of Lloyd's. He also warns against the proliferation of brokers. "It is common practice
in India for multiple brokers to seek reinsurance quotes on the same risk," he adds. "We would
encourage brokers to collaborate and agree upon a framework as to who is the 'broker of record'
relating to a particular placement, in line with international best practices."

At the same time, Indian branches should be allowed sufficient autonomy if the parent
company tries to remote control Indian operations, it will lose the benefit of the access to local
data and expertise. "It is imperative that reinsurers provide the right blend of their technical
pricing knowledge, international experience and local knowhow of the risks," says Kotak of
Munich Re. "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. "It is essential to carry out full due diligence before applying for a
licence," says Garigi-parthy. "But once a reinsurance company has entered the market, it is
extremely important for it to remain committed for the long.
Microinsurance: A critical need for the poor in India

Microinsurance, by definition, is the protection of low-income people against specific perils in

exchange for regular premium payments proportionate to the likelihood and cost of the risk

involved. It has ultra-low premiums and low coverage. Designed to

protect the poor against specific losses, it leverages economies of

scale (large volumes of small policies). Because of its affordability,

more people can get policies. And more policies mean greater

business for the company and viable coverage for clients.

Finance is the glue that holds all the pieces of our life together. It enables

money to be in the right place at the right time for the right situation. To

borrow and save is to move money from the future to the present or from the

present to the future. To insure is to move money from a good situation to a

bad one. Ideal financial societies are those which provide safe and

convenient ways of managing these simple monetary affairs.

This year marks the 25th anniversary of the declaration by the United Nations

of October 17 as the International Day for the Eradication of Poverty. We have

still a long way to go for making this world poverty free. One of the key

strategies for eliminating poverty is equipping poor with the right financial

tools. Access to the right financial tools at critical moments can determine

whether a poor household is able to capture an opportunity to move out of

poverty or absorb a shock without being pushed deeper into debt.

Low-income persons live on the edge, in constant fear of a catastrophe or

tragedy. They live in risky environments, vulnerable to numerous risks and

economic shocks such as a loss of a job, loss of property due to theft or fire,

crop failure, the death of a breadwinner, and disasters of both natural and

manmade varieties. Although poor households often have informal means to

manage risks, these coping strategies generally provide inadequate protection.

One way for them to protect themselves is through insurance. The poor need
insurance more than wealthier people because they are more vulnerable to

many of these risks than the rest of the population, and they are the least able

to cope when a crisis does occur.

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Studies on the impact of microinsurance cheap insurance policies aimed at

the poor have shown they can improve healthcare outcomes, smooth

income shocks in vulnerable households and raise school attendance rates.

In the developed world, insurance is an everyday part of life. However,

insurance coverage is much patchier in the developing world. More than 80

per cent of Indias poor are not covered in any way. However, what was a

once-unthinkable luxury that allows the poor to secure their gains and plan for

the future with confidence is now becoming a reality on account of several

innovative models developed by institutions. The entire micro-insurance

segment is growing and is now worth about 15 per cent of the worldwide

insurance industry. India is now a major site of a rapidly growing

microinsurance revolution. Micro-insurance is most prevalent in India and the

Philippines, which have proper policies and regulations in place. India

accounted for 65 per cent of Asias micro-insurance market, according to the

Munich Re and GIZ report, with some 37 million poor families signed up to

Rashtriya Swasthya Bima Yojana (RSBY) or national health insurance

programme, the flagship programme of the government for health insurance.

Enrolment in RSBY costs just `30 rupees per family and coverage includes an

annual benefit cap of `30,000 for a family of five. Members use a biometric
smart card to minimise fraud. The government is working with private insurers

to roll out health insurance plans across different states.

Poverty and vulnerability reinforce each other in an escalating downward

spiral. Often, the trigger for poverty is illness. Illnesses are a severe risk and can

shave off most of the hard-earned savings. They are the number one route to

bankruptcy. The Indian ministry of health found that a quarter of all people

hospitalised were pushed into poverty by their hospital costs not including

the cost of missed work. In these and other emergencies microinsurance can

help families avoid desperate measures such as incurring debts or selling assets

or abandoning children or taking them out of school.

Insurance can provide low income communities with a greater degree of

protection against health, property, disability and death risk, because the risk

of these events occurring is pooled over a large number of people, at a much

lower cost or premium per person. The cost of insuring against an uncertain

event is considerably lower than self-insuring through savings, and is small

relative to a household budget. Governments, donors, development agencies

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and others engaged in combating poverty need to have insurance as one of the

weapons in their arsenal.

The key challenge for microinsurance is the high costs of administering it. Most

poor live off the banking grid. Families are scattered across the countryside,

making physical access difficult and the transaction costs of issuing millions of

small policies through service agents are too high. The global revolution in
mobile communications, along with rapid advances in digital payment systems,

is creating opportunities to connect poor households to affordable and reliable

financial tools through mobile phones, and other digital interfaces.

Microinsurance can piggyback on the exploding reach of cellphone banking

and the infrastructure created by microcredit institutions. They both reach the

poor and reduce the cost of servicing remote clients.

For the poor to reap the real benefits of microinsurance, companies need to

practice responsible insurance. On account of lack of proper awareness and

failure of institutions to properly guide them, people buy insurance policies

without proper planning and give up mid-way because they dont have money

to pay the premium. Aggressive selling prevents the agents from properly

assessing the consistency in income streams of buyers for servicing their

policies. The customers end up losing heavily as penalties are very harsh. The

greatest challenge for microinsurance schemes is finding the right balance

between adequate protection and affordability to deliver real value to the

insured.

Microinsurance is certainly a way to end the cycle of poverty to provide the

safety net that families need. But it is more than that. If the poor know they

are covered, theyre more likely to invest in expanding businesses, diversifying

their crops, or sending their children to school, without fear of losing their little

and only savings if something were to happen. The whole capacity to take risks

changes. Thus from just being a safety net, microinsurance provides something

that earlier generations could never imagine: hope in the future.

Micro Insurance

The micro-insurance portfolio has made steady progress. More life insurers

have commenced their micro-insurance operations and many new products

are being introduced every year. The distribution infrastructure has also been

considerably strengthened and the new business has shown a decent growth,

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though the volumes are still small. Micro-insurance business was procured

largely under the group portfolio. Life Insurance Corporation of India (LIC)

contributed the most both in terms of policies sold and number of micro-

insurance agents.

With the notification of the IRDA (Micro-insurance) Regulations 2005, by the

Authority, there has been a steady growth in the design of products catering

to the needs of the poor.

The flexibilities provided in the Regulations allow the insurers to offer

composite covers or package products. Insurance companies are now offering

already approved general insurance products as micro-insurance products with

the approval of the Authority, if the sum assured for the product is within the

range prescribed for micro-insurance.

Products Available In the Market and Their Features

Category of Products: Endowment/ Savings/ Pension

Features:

Under this category, there is life protection, both on survival and death.

Pension can also be built into the product. Some Insurers offer accident benefit
and permanent disability benefit during the premium paying term only, or for

the full term. The sum is capped between Rs 30,000 and Rs 50,000. A majority

of the insurers offer policies under the non-medical scheme and automatic

acceptance if size of the group is more than 200 members.

It is possible to offer an automatic cover facility after two years of premium

payment. A policy bond is given and administration is done through a micro-

insurance agent.

Exclusions:

Some Insurers may exclude the risk coverage for the first 45 days. Suicide

during the first year is covered to protect the third party interest/ refund of

premiums, excepting in the case of some insurers.

Prospects:

While it is popularly sold as an individual policy, Group Endowment is currently

being issued by some Insurers for economically weaker sections.

Capping:

Insurers are allowing a maturity age of up to 60 years, capping premium

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payment up to 45/ 50/ 55 years under different modes of premium payment,

including monthly payment with the maximum term being 10/ 15 years.

Freelook Cancellation:

Insurers are offering a free look cancellation during the 30/ 15 days period,
after receiving the policy bond. Most of them are giving a 30 day grace period.

All are giving liberal surrender values after 1/ 2/ 3 years.

Category of Products: Protection (Term insurance)

Benefits:

Life risk with accident benefit, is generally being offered under term products.

A majority offer accident benefit and some offer permanent disability benefit

too under term products.

Capping:

No one is paying any Bonus in addition to the sum assured. The sum assured is

capped between Rs 5,000 and Rs 50,000 or is defined as 100 times the annual

premium. Some are giving refund or more than 110% of premium at maturity

under term products. Others are not giving any maturity value. Majority are

offering under non-medical scheme. Automatic acceptance if size of the group

is more than 200 members.

Refund of Premium:

Most insurers are giving a refund of premium in case of suicide during the first

year. Some entertain a refund for Single premium cases only.

Terms of Product:

While majority offer one year term, some are offering 5/ 10 year terms under

Group product.

Term of Policy:

Insurers offering Individual Term are offering 3/5/10/15 (premium paying term

restricted to 10 years) year policies. Majority are allowing different modes of

premium payment, including Monthly and Yearly premium.

Freelook Cancellation:

Insurers are offering a Free look cancellation during the 30/15 days period

after receiving the policy bond. Majority are giving a 30 day Grace period.
Revival eligibility varies between 6 months to 2 years.

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Category of Products: Health

Benefits:

Disability, hospitalisation, loss, etc Popular format of Health insurance cover is

a fixed sum in case of the hospitalisation (Pre, during and Post). Generally,

benefits are 150 Rs/day hospitalisation expenses, consultant fee up to Rs

4500/hospitalisation, diagnostic expenses up to Rs 4500/hospitalisation,

transportation expenses Rs 350 per hospitalisation. One overall limit for

hospitalisation may be defined as Rs 15,000 and overall sum Insured for one

year defined as Rs 30,000. Group products with discounts offered to the

members/clients of MFIs and NGOs and to specific sections of the population

(such as all the BPL families in a state).

Condition:

Entire family needs to be covered under one Sum Assured, any number of

times.

Category of Products: Property

Coverages:

Mainly for Rural and Urban poor. Making good damage cover/loss/ input costs/ recurring costs
due to natural causes/theft/accidents/burglaries/cover against diminished agricultural input/loss
due to electrical/mechanical break down.

Key Risks:

Key risks faced by low-income households like package cover and crop insurance product. Loss to
livestock due to death, disease and accident dwellings Fire policy for dwellings and contents
Breakdown of agricultural implements cover for poppy/crops against inadequate/variation in
fall/variations in different weather parameters. Limit based risk cover or on case by case basis.

Actual loss/market value whichever is less is reimbursed in case of Live Stock all indigenous, cross
bread animal/birds defined Submersible/non-submersible Pump set up to 25/30 HP defined
Building (Structure) / contents (belongings)/both defined.

Exclusion: Loss of life due to accident/diseases even in case of epidemics.

Category of Products: Personal Accident

Target Prospects:

Low income groups/Kissan Credit card holders/girl child parents/married ladies.

Coverages:

Death/Permanent Total Disablement/Total and irrecoverable loss of limb/eye sight Medical

expenses during/pre/post hospitalisation Percentage of Sum Assured on case by case basis entire
family is covered under one Sum Assured any number of times All fees for
surgeons/anaesthetists/consultants/associated expenses of hospitalisation under one Sum
insured Parent of girl child /women covered with beneficiary as the girl child/insured women for
death/PTD/ Total and irrecoverable loss for a limit.