Emerging Markets (Part 3): Hunting for Insurance Gold in India
By Jared Shelly
Welcome to a business environment where foreign insurance companies are only permitted to own about one-quarter of any insurance deal. Welcome to an environment where insurance brokers are seen as competitors for insurance companies and customers simply don't know what brokers do. Welcome to a place where huge swaths of the populace are among the poorest in the world and the threat of terrorism and violence -- and the huge property/casualty losses that follow -- loom large.
Welcome to India, a land with a curious attitude toward insurance -- but with 1.22 billion people and a fast-growing economy, its potential for large, growing profits has the industry's full attention.
Insurance penetration in India in 2010 was a paltry 0.71 percent for nonlife, according to Marsh, and the general insurance sector in India is showing robust growth of about 22 percent year-over-year. Such potential for premium revenue could ignite an insurance gold rush.
Plus, the Indian market seems ready for insurance.
Indian consumers have "strong needs for insurance and financial planning, fueled by worry about medical expenses," according to the "Survey of Risk Appetite and Insurance: Asia-Pacific 2011" by Swiss Re. The survey also found that Indian consumers were more likely to take risks than consumers in China, Malaysia, Vietnam and Indonesia.
Indeed, foreign insurers and brokers are excited about the possibilities in India, but any company hoping to crack the market had better not be in it for quick profits. Experts agree: Access in India will be a long haul.
The story of foreign insurance offerings in India began in 1999, with the passage of the Foreign Exchange Management Act, which allowed foreign insurers and brokers to enter the market as long as they teamed up with a domestic partner.
Large players such as Marsh, Aon and Allianz were among the first foreign companies to enter the market, followed more recently by Liberty Mutual and Prudential, experts said. Some companies, such as Chubb, Zurich and New York Life, have recently stopped offering insurance in India, while others seem to be waiting before testing the waters.
Indian law states that a foreign company can own just 26 percent of an insurance deal, with the remaining 74 percent held by a domestic partner. While foreign insurers are surely happy to be permitted to do business in India, the heavy-handed split is a serious point of contention. Experts believe it's even led some brokers and carriers to stay away from the market altogether.
"The 26 percent restriction needs to be amended by Parliament. We keep expecting it to be amended," said Sanjay Kedia, Marsh's country managing director for India, based in Mumbai. "It always looks like it will get amended [but never does]. There has been intense debate."
The split reduces the willingness of companies to invest in the country andlimits the technical know-how and product expertise that could flow in to the country with the entrance of more players, said Kieran Angelini-Hurll, regional director of the Indian Subcontinent, Middle East, North Africa and Turkey operations for Willis Re.
"Even though the multinational joint venture partner might have the management control ? in actuality it can become difficult for the foreign partner to enforce decisions and policies," he said.
That business culture, combined with an increasingly competitive market, doesn't leave much room for profits in the near-term.
"India is a growth market, there's no debate about it ... but it's growth without margins," said Kedia, noting that group health and commercial car insurance have been particularly challenging.
For group health, inflation has taken its toll, with increases of 10 percent to 15 percent, well above the country's overall inflation of 7 percent to 11 percent, said Kedia.
On the upside, individual car insurance, construction insurance and individual health insurance have been profitable, he said.
a challenge for brokers
Another challenge -- especially to brokers -- is the history of direct broking relationships in India, meaning that customers went directly to their insurance companies to handle premium collection and claims settlements.
Because of that, said Susan C. Bauman, managing director at Aon, customers "don't recognize the value [of brokers], aren't very trusting and are very suspicious of what the brokers bring to the table."
Angelini-Hurll said brokersare seen as competitors to insurance companies and risk managers, and that there is a low awareness of insurance -- even among the middle class.
"Sentiment will inevitably change as the market develops," he said, "butit will take time -- as long as it takes for brokers to be able to prove they can contribute to the growth and developmentof the insurance market and that the elements they contribute benefit both insurers and clients."
Another hurdle is dealing with government regulations. Take commercial motor insurance, for example. For years, motor insurance premiums had been pooled together, with all claims paid from that pool and losses shared among insurers, said Santosh Balan, head of corporate communications at Bajaj Allianz -- the Indian arm of Allianz.
Between 2007 and 2012, the pool collected
Rs. 187 billion ($3.29 billion), but claims were
Rs. 330 billion ($5.81 billion) -- meaning insurance companies had to pay for that difference whether their individual customers suffered significant losses or not.
"To put it in perspective, this loss has effectively wiped out the entire capital deployed by all the general insurance companies in India," said Balan.
Much to the delight of insurance companies, the pool was dismantled in April 2012, he said, noting that it is perhaps a sign that the business environment in India is realizing its insurance missteps and is taking strides to correct them.
The risk of terrorism and other violence is also an issue foreign companies need to consider.
For four days in late November of 2008, terrorists executed a coordinated bombing on a hotel, hospital and other buildings in Mumbai, leaving 164 dead and wounding 308. The now iconic image of the burning Taj Mahal Palace & Tower in Mumbai gave the violence a grim face and it led to losses of
Rs. 5 billion ($88 million), according to the Insurance Regulatory and Development Authority. The threat of such violent and expensive actions has certainly gotten the attention of foreign insurers thinking of entering the market.
THE START OF A GOLD RUSH
Despite the challenges inherent to the country, plenty of employers, insurers and brokers are not only willing to deal with India's rules and culture -- they're excited about it.
Marsh, for example, was one of the first foreign brokerages to do business in India and now boasts eight offices, 250 employees and 1,700 corporate clients. Marsh India has grown by an average of 30 percent year-over-year in the last three years, with group health insurance its fastest growing sector, said Kedia.
It partners with Rampart Group, which, by law, owns 74 percent of all deals, even though the operation is managed primarily by Marsh and has the Marsh brand, he said. Rampart does have some governance oversight on the board, he added.
Any insurance company thinking of entering the market in India should ask themselves if they are prepared to meet the challenges with patience.
"India is a market for the long run," said Kedia. "It takes time to become profitable."
Balan, of Bajaj Allianz, agreed that profitability for foreign companies is hardly a guarantee, but noted that Bajaj Allianz General Insurance (its nonlife insurance company) has been profitable every year since it started offering coverage in 2002. The company grew by 15 percent in fiscal year 2011-2012.
Lois H. Fuchs knows first-hand about the challenges and benefits of entering the Indian market. As vice president of risk management for Honeywell, Fuchs has seen the growing pains of the Indian business market, as the multinational technology manufacturer built up a portfolio of 60 offices and 12,000 employees in the country during the past four years.
"I wanted to be able to show our employees that risk management provides a service. That took a while," she said.
The staff was originally skeptical, especially after Fuchs instituted some serious changes; namely new insurance coverages and a different risk level. For example, Indian managers at Honeywell didn't purchase property liability coverage -- something Fuchs thought was essential.
One way Fuchs was able to show employees the value of risk management was when the company suffered water damage, but thought it was uninsured. Fuchs, realizing it was actually an insured matter, stepped in to work with the insurance company to make sure a claim was paid. Although it was less than a $50,000 claim, it sent a message that effective risk management can bring some real benefits.
"Every time I went over there, they just thought I was going to go back home and forget about them," said Fuchs. After three trips to India, they finally got the message.
But perhaps no change was as drastic to the Indian employees as the move from a state-owned insurance company to Bajaj Allianz,which partnered with Honeywell's global carrier Ace.
"When [the Indian insurer] brought us to their offices, they said that the status quo [of having a policy that was not integrated with its global coverage] should be fine. I didn't want India to be handled differently," she said, noting that Honeywell wanted its India business on the same global program as the rest of the company -- which the Indian insurance company couldn't provide.
Honeywell also changed brokers during its time in India, starting with Marsh then moving to Aon.
"The gentleman assigned to us at Marsh decided to leave the brokerage, so we hired him," said Fuchs, noting that the former Marsh broker is now a trusted risk manager for Honeywell in India. With knowledge of the business in India, and after some training in the United States and Europe, he's been quite an asset, she said.
"It keeps reinforcing to our businesses that we're trying to provide the same professional risk management services in India that we do in the United States, or in Italy or in France," said Fuchs.
Aon's Bauman, who is Honeywell's broker, said the company is expanding its operation the right way: "It takes time, it's not just one visit and things change. It takes longer to get them out of their set box.
"The same is true in China and Japan," said Bauman. "If you're trying to fill a hole, you're not going to do it. You've got to build a relationship."
JARED SHELLY is senior editor/Web editor of Risk & Insurance®. He can be reached at firstname.lastname@example.org.
July 24, 2012
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