Reinsurers plunge into India seeking growth

As India opens its market to international reinsurers, major foreign players are applying for licences to take advantage of the country’s strong growth potential. But they will encounter a fairly soft market with prices likely to depreciate further due to the additional inflow of capacity, and a paramount state-run competitor, experts believe.

India’s regulator amended the Insurance Act 1938 in 2015, allowing foreign reinsurers to open branch offices in the country.

Reinsurers hoping to receive a licence to operate in India from 2017 include Munich Re, Swiss Re, SCOR Re, Hannover Re, RGA (Reinsurance Group of America) and Berkshire Hathaway’s reinsurance unit Gen Re, according to news reports.

As India’s reinsurance market offers tremendous growth potential and regulation favours local companies, interest for setting up such operations will continue, according to an AM Best Global Reinsurance Segment Report released in September.

In order to prevent capital outflow, regulators prefer reinsurers to retain premiums inside the country. This structure benefits reinsurers with a domestic entity, according to the ratings agency.

Lloyd’s of London is among the suitors for a domestic licence. The Indian parliament has approved Lloyd’s and the market to operate onshore in India for reinsurance; Lloyd’s plans to open a hub in the country in 2017.

An onshore branch will provide Indian reinsurance brokers with local access to Lloyd’s underwriting expertise and innovative reinsurance solutions for complex and specialist risks, including agriculture, infrastructure and disaster management, according to a statement.

Foreign reinsurers are attracted by India’s comparatively low insurance penetration and growth potential, which is likely to also benefit the reinsurance sector.

Another driver is India’s expected strong economic expansion. According to the World Bank, India’s gross domestic product will expand 7.6 percent in 2016 and 7.7 percent in 2017.

Reinsurers may face growth opportunities particularly in property/casualty as the segment is set to grow at low double-digits in the medium term. In addition, the influx of foreign reinsurers is set to develop underwriting expertise.

So far, GIC Re is the sole reinsurer in the domestic Indian reinsurance market and receives statutory cession of 5 percent on every policy, subject to certain limits of direct general insurance companies, according to its website. GIC Re leads many of domestic companies’ treaty programmes and facultative placements.

State-owned GIC Re reported a year-on-year gross premium growth rate of 21.4 percent in its 2015/16 financial year to $2.8 billion. The premium split between domestic and the overseas business over the period was 55 percent and 45 percent respectively. GIC Re’s profit after tax during the year 2015/16 was $429 million.

Despite significant growth, market conditions for reinsurance are difficult in India—GIC Re reported a combined ratio of 107.4 percent for the 2015/16 financial year.

In order to prepare for the challenges ahead, India’s domestic reinsurers will need to adapt their business models to the changing needs of India’s primary insurers: “A challenge for local reinsurers will be to stay relevant in their core markets,” said Moungmo Lee, managing director, analytics, Asia-Pacific at AM Best.

“Their major cedants have grown quickly and are able to retain more risk. Reinsurers need to keep pace with this shift to be able to provide the necessary capacity,” he explained.
Alternative revenue sources may include life reinsurance, agricultural and cooperative business.

What should help India’s reinsurers is their focus on proportional business with variable commission in their portfolios, according to AM Best. While the loss ratio at GIC Re may appear high, relative to the large primary companies in the market, this ratio compares favourably.

Furthermore, investment yield in India is at a high single-digit level at around 7 to 8 percent, Lee said. GIC Re reported investment income of $639 million for the 2015/16 financial year.