Reinsurance in India: all that glitters is not gold

A number of foreign reinsurers have recently received approval to open a branch in India. The list includes Swiss Re, Munich Re, Lloyd’s, Hannover Re and XL Catlin. Indian reinsurance business could previously be written from abroad. However, India’s regulator has now introduced regulations placing branches of foreign reinsurers at the top of a preference order setting out how Indian insurers are to cede business.

On top of the preference list are Indian reinsurers that have a minimum credit rating from any of the internationally renowned credit rating agencies for the previous three years, which only applies to state-owned GIC Re, and thereafter, the branch office of a foreign reinsurer which shall maintain a minimum retention of 50 percent of the Indian reinsurance business.

“We are truly excited by what is happening in India and it would be remiss if we were not part of that narrative,” says Brendan Plessis, head of emerging markets of XL Catlin.

Reinsurers are excited about India because of the insurance growth potential they see for the country. Drivers for growth are the bright economic outlook on the one side and a low insurance penetration on the other.

The Indian economy is set to grow at 7.4 percent in 2017 and 7.6 percent in 2018, according to a February Consensus Forecast report by FOCUSECONOMICS, a data provider.

India is predicted to become the world’s third largest economy in terms of GDP (gross domestic product) by 2020, according to Munich Re. Two-thirds of the country’s population are below 35 years of age, the GDP is services-dominated (56 percent), and the political environment is stable, the reinsurer noted in a written statement.

“You’ve got economic reforms, you’ve got infrastructure improvements and great consumer spending,” Plessis says. “This is actually benefitting the local economy and raising living standards,” he adds.

Insurance penetration is expected to rise on the back of increasing living standards and income levels. Munich Re expects that property/casualty (P&C) insurance in India will register annual average real premium growth of 9.2 percent.

The growth potential is also driven by the fact that India’s insurance market is perceived as underpenetrated. Life insurance penetration is at 2.7 percent of GDP and at 0.73 percent for non-life insurance, as of 2015, which suggests large potential, according to Swiss Re.

“Crop insurance and health insurance will be the major drivers for the industry growth in India this year,” says Kalpana Sampat, the new CEO of Swiss Re’s India branch. “Less than 40 percent of farmers are covered under various agro insurance schemes. The government is very supportive of agricultural insurance as evidenced by the crop insurance scheme launched in India last year,” she notes.”

The Indian government introduced a crop insurance scheme in 2016 — an attempt by Prime Minister Narendra Modi to reduce risks for farmers. It allows for a lower farmer’s contribution towards premium, making it possible to include the small and medium farmers to sign up for crop insurance. The scheme has no cap for the premium rate and farmers receive claims against the full sum insured. As a result, many drought-hit states have significantly increased fund allocation, benefitting reinsurers operating in India.

The government’s budget for 2017/2018 includes further funds allocation to rural India and infrastructure, which is likely to spur the Indian insurance sector.

“The demographic profile, infrastructure investment, the ‘Make in India’ campaign, or the PM’s agricultural insurance program are some of the catalysts which will drive the Indian market forward,” says Hitesh Kotak, the new CEO of Munich Re’s branch in India.

Munich Re expects reinsurance opportunities to be driven by growth in the construction, energy, liability and agriculture segments and also from new risks and trends like cyber, autonomous cars, wellness or smart cities.

Hannover Re plans to focus on agriculture and health insurance in India. But the German reinsurer also expects the need for reinsurance to grow as “demand for catastrophe insurance is set to increase drastically over the coming years, driven by rising threat from cyclones and floods,” says Michael Marx, managing director Asia Pacific at Hannover Re.

Severe flooding in southern India at 2015-end, referred to as the Chennai floods, has reminded the country of how vulnerable it is to weather catastrophes like rains, droughts and cyclonic storms. Torrential rains had caused several hundred deaths; the deluge destroyed crucial road and rail links, shut down the airport, snapped power and telecom lines.

The Indian economy suffered a $3 billion loss from the persistent floods amid low insurance penetration, according to an Aon “Global Catastrophe Recap report”. India's General Insurance Corporation had reported insurance claims of around $300 million.

“India is vulnerable to a number of natural catastrophe risks including flooding, earthquakes, storms, droughts and landslides,” Swiss Re’s Sampat says. “A number of metropolitan and megacities in India are in disaster-prone areas. Port cities like Mumbai, Cochin, Kolkata and Surat are hugely exposed and vulnerable to climate extremes.

However, due to low insurance penetration, the insured losses remain low and there is a large protection gap in India.”

The influx of foreign reinsurers together with additional government efforts might help reduce this protection gap.

“We are working with primary insurers on entering the digital space, establishing new distribution channels and utilising these new channels to create growth and reducing the insurance gap,” says Munich Re’s Kotak.

But besides reducing the protection gap, Indian regulators have more ambitious plans. Decision makers are hoping that India may become a reinsurance hub for the region. But it might be a long way to go.

“To develop India into a regional reinsurance hub will require the implementation of incentives,” Hannover Re’s Marx says. “The regulator and government of Singapore have, for example, rolled out several initiatives to attract reinsurance business. In order to compete with other locations, India needs to put in place a very competitive reinsurance environment; cost and tax ratios need to be adapted in order to attract business.”

After latest regulation prioritized foreign reinsurers with branches in India, the country’s market is likely to become more competitive, driven by a flurry of global players setting up domestic offices.

“As more reinsurers set up branches, competition in India will grow,” Marx says. “In addition, the so-called cross-border reinsurers, which are not locally registered, will be able to write business in the same way as they did in the past.

“It’s just a matter of time until the right of first refusal will be weakened or scrapped [...] competition will become similarly intense as in other Asian markets.”

Up to now, state-owned GIC Re was the only local reinsurer in India, holding more than 50 percent of reinsurance out of India. But its role in the Indian market is unlikely to change much. “I expect them to remain a very important player in the business which international markets are hesitant to write and they will continue to be the reinsurer of last resort,” says Marx.

But in addition to foreign reinsurers opening branches in India, there are new local ones being founded such as ITI Re, which has received final clearance from local insurance regulator IRDAI. It claims to be the first private sector reinsurance company in India and it is aiming to service the direct insurance markets in India as well as overseas territories.

Higher competition comes as India, similarly to other parts of the world, is experiencing a period of low rates.

XL Catlin’s Plessis believes that the soft market is the main challenge for reinsurers to grow in India. But there may be more.

One potential issue is that the primary insurance market is currently operating in a challenging underwriting environment.

“Right now the domestic insurance results are not that great, registering combined ratios in excess of 100 percent,” Marx says. “This creates a challenge for reinsurance in India.”

In addition, Marx believes that capital requirements for insurers in India are likely to rise, further constraining primary insurers’ ability to grow the business. Also, finding the right staff in India to grow the reinsurance business is unlikely to be easy, especially as more players enter the market, he notes.

Despite the short-term challenges, the reinsurance industry is convinced that the potential of the market is real.

“We certainly see India as one of the high primary growth markets with future growth potential across all segments of insurance,” says Munich Re’s Kotak. “The growing Indian market is an important pillar in our strategy.”