India looks to accelerate insurance boom

With a thriving economy, low penetration levels and very high exposure to natural catastrophe risks, India has been one of the fastest-growing insurance markets in the world and new rules should create opportunities for international insurers to benefit from this trend.

In the past 18 months the Insurance Regulatory and Development Authority of India (IRDAI) has implemented several pieces of regulation that apply to the primary, reinsurance and broking markets in both the retail and corporate areas, with the goal of boosting innovation and expanding the use of insurance in the country.

As a result, new players are applying to get into the Indian market and foreign groups are able to take higher stakes in the country’s local insurance companies.

In November last year, the IRDAI granted an insurance licence to Kshema, an agricultural insurance start-up, the first new company to enter the market since 2017. A new licence is expected at any moment. At least 18 other applications have been filed by underwriters and are in the regulator’s pipeline, according to media reports.

The new arrivals are attracted by the potential of a market that still has considerable scope to develop, as insurance penetration barely reached 1% in non-life segments and 3.2% in life insurance at the end of 2021, according to Swiss Re. But the situation is bound to change for several reasons, including a forceful effort by the IRDAI to make it easier for insurers to sell insurance and a pledge by the government to make sure all Indians have access to insurance by 2047.

“We expect continued growth across the spectrum of insurance lines, buoyed by the economic outlook for India, which continues to outperform other major economies, as well as a renewed focus from the IRDAI on seeking to address India’s low insurance penetration rate,” Jonathan Pipe, chief executive of Aon Commercial Risk Solutions in India, says.

Economic outlook

The robustness of the Indian economy is the main reason to be optimistic about the future of India’s insurance market. Swiss Re expects India’s GDP to grow 6.7% a year over the next decade, easily the fastest rate among the G20 group of economies. The country’s insurance market should benefit from that growth to the tune of a 14% increase of premiums every year in nominal local currency terms. If that transpires, by 2032 India should become the world’s sixth-largest insurance market, up from 10th in 2021, overtaking Italy, South Korea, Canada and Germany.

“Across commercial lines, there is no area we do not have optimism for growth. India is buoyed to be a key beneficiary of countries adopting a ‘China plus one’ approach,” Pipe says. “For India to achieve its goal of being a $5trn economy by 2025, significant investment will be required and insurance will have a key and growing role to play.”

The Indian government is making a strong push for investments in areas like infrastructure development, renewable energies and semiconductor production, while posting healthy volumes of foreign direct investment and merger and acquisition (M&A) activity, Pipe says. On the retail side, demand for life, motor and health insurance should also remain solid for years to come. All of that should boost premium growth in the country, not the least because the economy is heavily exposed to natural catastrophe risks, including earthquakes, tropical cyclones, floods and droughts.

“We expect continued growth across the spectrum of insurance lines, buoyed by the economic outlook for India, which continues to outperform other major economies, as well as a renewed focus from the IRDAI on seeking to address India’s low insurance penetration rate”
_{Jonathan Pipe
Aon Commercial Risk Solutions}

But India’s insurance regulators seem to have acknowledged economic growth alone will not be enough to unleash the potential of the country’s insurance market. Other measures will have to be adopted to add a shot of innovation and flexibility to insurers’ operations and bring new sources of capacity into the market, as a lack of capital is thought to have hampered the development of the industry in the past.

Some measures stand out in this regard. On the one hand, in 2021 the government decided foreign groups would be able to own up to 74% of the capital of Indian insurers, up from 49%. The increase to some extent addresses the concerns of global players operating in the country that their Indian partners do not have the capacity – or desire – to make higher capital allocations to develop new business lines. Some experts even believe the limit on foreign ownership could be scrapped in the future.

“The increase allows foreign insurers to further strengthen their foothold in one of the world’s fastest-growing insurance markets, with controlling stakes,” Hadi Riachi, chief executive of Swiss Re’s India branch, says. “The move should facilitate insurers’ access to capital, underwriting knowhow and product innovation.”

Reinsurance liberalisation

In a similar vein, the IRDAI plans to increase the ratio of a single risk that can be ceded to reinsurers located outside the country. Now a local insurer can place up to 30% of all its cessions to a single cross-border reinsurer, provided it has a rating of at least A+. Lower-rated cross-border reinsurers can individually take up to 20% or 10% of the risks placed by a single cedant.

The IRDAI has plans to equate Lloyd’s India and other foreign reinsurance operations to GIC, the state-owned reinsurer, when it comes to minimum placements that must be initially offered to a local reinsurer, which stands at 4% at present.

Both changes have been welcomed by trade federation Insurance Europe, although the body argues broader freedom to place risks with the global reinsurance market would be more supportive to the sector’s growth.

It is believed the regulators are pushing to scrap minimum mandatory placements altogether and the IRDAI has proposed a new definition of captive insurance for the Indian market, among other plans to unshackle reinsurance placements.

According to Pipe, global re­insurers have started to delegate greater under­writing authority to their Indian operations. Swiss Re highlights in a recent report regulators aim to turn India into a reinsurance hub.

Furthermore, the IRDAI will allow private equity funds to invest directly in insurers, with a stake of up to 25% earning them the status of “investors”, while investments that are higher than that will turn them into “promoters”.

With a growing number of initial public offerings and M&A deals involving insurance companies, more private investors could become interested in this sector in the future. International insurance brokers have already started the process, with the majority taking 100% ownership of Indian operations, Pipe points out.

Innovation

The regulator has also shown an eagerness to encourage new, innovative companies into the market. It is reportedly in negotiations with the government to reduce the capital requirements for new entrants to make it easier for start-ups to offer innovative products. A regulatory sandbox initiative is under way and is going through adjustments that should be more beneficial to insurtech start-ups, according to Swiss Re. It is estimated there are 110 insurtech firms today in India.

“India has a great potential for insurtechs and other innovative companies, as there is strong support for technology by the regulator as well as the government of India,” Riachi says. “India has one of the highest levels of smartphone and internet penetration in the world. This, combined with data-driven risk assessment capabilities, can help to increase insurance penetration.”

Innovation would be particularly welcome on the retail side. “The insurance industry needs to collaborate to simplify insurance and then raise awareness of its role,” Piper says. “At the same time, the industry needs to recognise consumers are used to hyper-personalisation and they seek flexibility of choice and customisation for them as an individual.”

Product flexibility has also been targeted by the IRDAI, which last year granted more freedom to general and health insurers to develop new products by adopting a “use and file” regulation that enables companies to launch products without waiting for approval by the regulators. The IRDAI said the measure is aimed at promoting “creative innovation and ease of doing business” in the Indian market.

“India has great potential for insurtechs and other innovative companies. India has one of the highest levels of smartphone and internet penetration in the world. This, combined with data-driven risk assessment capabilities, can help to increase insurance penetration”
_{Hadi Riachi
Swiss Re}

The hope is innovative products become a more common feature of the market. Something in that sense may already been happening. In December, Bajaj Allianz, which is co-owned by Germany’s Allianz group, launched the first ever surety bond product in the country. It was followed in March by a surety product from state-owned New India Assurance, India’s largest general insurer.

With the Indian government planning to invest up to $1.4trn over five years to fund infrastructure projects, many of which should be granted to new contractors that may struggle to secure bank guarantees, the companies expect plenty of demand for the new product in years to come.

In declarations to the Indian media, the IRDAI’s president, Debasish Panda, said the Indian market will need investments of up to Rupee500bn ($6bn) a year to meet insurance penetration goals. In March, it sent the Ministry of Finance a draft of a new regulatory framework containing many of the measures under discussion alongside a new risk-based supervision regime. The global insurance market will be following closely the next developments.