India market report: Liberalisation but tough stance on compliance

The Indian insurance market has undergone a number of changes in the past few years, not least the raising of the foreign direct investment limit in the insurance sector from 26% to 49%, which has seen a number of global insurers raise the stakes in their Indian joint ventures. There has also been a tougher stance taken by the regulatory and tax authorities on compliance when it comes to insurance.

Parul Kashyap, counsel and head of business development, Clasis Law, an Indian law firm with offices in Mumbai, New Delhi and London, and associated with Clyde & Co, explains: “The insurance industry is extremely capital intensive and the Indian insurance market craved this increase in the foreign direct investment limit for so long. This will help insurers in funding their expansion plans, which would ultimately increase insurance penetration in India. The foreign direct investment limit in insurance sector was increased in the Amendment Act and, in the past two years, most of the foreign insurers have either increased their stake to 49% or decided to increase in near future.”

She explains that some of the major foreign insurers that have raised their stakes to 49% in their Indian joint ventures include Fairfax Financial, Tokio Marine, Mitsui Sumitomo, ERGO, Generali, AXA, QBE, IAG, HDI-Gerling, Liberty Mutual, Sun Life, Standard Life, Munich Health and BUPA.

Sameer Rinwa, director, global risk practices, JLT Independent Insurance Brokers, says that the impact will be different from one company to another. “Although the Indian joint venture partner still remains the majority stake holder, the increase in the stake by the foreign joint venture partner exhibits their commitment to the venture. It also helps in bringing the Indian insurance industry closer to the rest of the world,” he says.

He adds that in the broking space, only JLT has increased its stake to 49% (in JLT Independent Insurance Broker), and no other multinational broker has increased their stake in their respective organisations. As to whether there is likely to be any further liberalisation of the Indian insurance market, he says that according to market information from various sources, the insurance regulator is contemplating increasing the foreign direct investment limit to 100%.

Ms Kashyap says the government is considering allowing 100% foreign direct investment in insurance broking, with a view to giving a boost to the sector and attracting more funds. She explains that representations have been made to the government that insurance brokers should be treated on par with other financial services intermediaries, where 100% foreign direct investment is permitted, as insurance broking is like any other financial or commodity broking services.

India has also seen legislation that has enabled foreign reinsurers and Lloyd’s to set up branch offices in India. The law also clearly defined reinsurance as “the insurance of part of one insurer’s risk by another insurer, who accepts the risk for a mutually acceptable premium”. This clearly excludes the possibility of 100% ceding of risk to a reinsurer (fronting). “This will definitely force the companies to alter their global insurance programme, and now most of the insurance policies need to be placed with Indian insurers up to the limit and coverage available in the Indian insurance market,” adds Ms Kashyap.

There have been other changes in the Indian market. Previously, a person resident in India could only purchase insurance cover from a non-admitted insurer subject to a ‘no objection’ certificate from the central government. But now, Ms Kashyap points out, there are a few exceptions where risk can be covered with non-admitted insurers without prior approval from the central government.

Foreign exchange regulations issued by the Reserve Bank of India (RBI) on 1 January 2016 list the exceptions where risk can be covered by a non-admitted insurer without central government approval:
– Health insurance – a person resident in India may take or continue to hold a health insurance policy issued by an insurer outside India, provided aggregate remittance including amount of premium does not exceed the limits prescribed by RBI for the remittance of funds outside India.
– Units located in special economic zones may take or continue to hold general/health insurance policies from a non-admitted insurer, provided the premium is paid by the units out of their foreign exchange balances.
– A person resident in India may continue to hold any life insurance policy issued by a non-admitted insurer when such person was resident outside India. However, if the premium due on a life insurance policy has been paid by making remittance from India, the policyholder shall repatriate to India through normal banking channels, the maturity proceeds or amount of any claim due on the policy, within a period of seven days from the receipt thereof.
– A person resident in India can take out or renew any insurance policy in respect of any property in India or any ship or other vessel or aircraft registered in India with a non-admitted insurer, with the specific permission of the Insurance Regulatory and Development Authority of India (IRDAI).

Ms Kashyap says that while the Indian insurance market has always been highly regulated, the IRDAI has now become stricter in terms of compliance. Penalties for non-compliance as set out in the Insurance Act 1938 have been significantly enhanced under the Insurance Laws (Amendment) Act 2015, and new penalties have been introduced.

Mr Rinwa agrees, saying that the Indian insurance regulator is stringent about matters related to compliance and it continues to get stricter by the day. “Every insurer and insurance broker is subject to statutory audit annually. We have seen various instances of pecuniary penalties being levied on insurance companies and brokers. A few of the brokers have also lost their licence for not being compliant,” he points out.

Mr Rinwa notes that the Indian government has decided to implement a good and sales tax (GST) with effect from 1 July 2017. GST is a comprehensive value added tax on supply of goods and services. He explains that it is a consumption based tax, which is a departure from the former regime of origin-based taxation. Previously, 15% tax was applicable on insurance, whereas now 18% GST will be charged.

The insurance market
At the end of March 2016, there were 54 insurers operating in India, of which 24 are life insurers, 24 are general insurers and five are health insurers exclusively doing health insurance business, plus national reinsurer GIC. The leading public sector insurers are National, New India, Oriental and United. There are 46 insurers in the private sector, comprising 23 life insurers, 18 general insurers and five standalone health insurers.

ICICI Lombard continued to be the largest private sector non-life insurance company, with market share of 8.39%, followed by Bajaj Allianz with a market share of 6.05%. The Indian non-life insurance sector saw growth of 8.1% (inflation adjusted) during 2015, according to the latest annual report from the IRDAI. The non-life insurance industry underwrote total direct premium of Rs96379 crore in India for the year 2015-16, a growth of 13.8% from Rs84686 crore in 2014-15.

Motor business continued to be the largest non-life insurance segment, with a share of 43.89% in 2015-16, and a growth rate of 13.17%. Health reported a share of 21.30% in 2015-16, with a growth rate of 28.49%. Fire business grew by 8.35%, while marine business fell by 1.19% in 2015-16.

According to a report by Axco Insurance Services: “Changes in listing regulations and local reinsurance market regulations are all indicative of the current government’s determination to change the historic operational status quo in the Indian insurance market in favour of more up-to-date conditions, many of which have been favoured by some other markets in Asia for a number of years.”

Axco adds: “Although the regulator appears to remain intent on retaining very tight and detailed routine market control on all aspects of insurance company operation, the revised product filing guidelines for non-life insurance products represent a further indication that the authorities are beginning to become more prepared than was the case previously, to allow some limited self-regulation by insurers in the interests of efficiency.”

Looking specifically at global insurance programmes, is it getting easier to incorporate Indian risks into a global insurance programme? JLT Independent’s Mr Rinwa says: “I would say there is no change in the complexity as it was earlier, as deductibles in India continue to be at a very low levels. Insurance managers in India still feel that they can place their policies in India at a much lower rate as compared to their global programmes.”

According to Clasis Law’s Ms Kashyap, while there is no problem in incorporating Indian risks into a global insurance programme, it is the operational difficulties that create issues for the entities, such as:
– Both outward and inward remittance of foreign exchange is subject to RBI regulations, and the IRDAI would always be within its legal rights to investigate any insurance claim or premium remittance, unless such covers or limits are not available in India.
– A policy document issued by a non-admitted insurer cannot be admitted as evidence in India.
– Non-admitted insurers, therefore, cannot step in to defend on behalf of their clients.
– Where premiums are paid by the overseas parent on behalf of the Indian subsidiary, the expense may not be recharged to that Indian entity. Consequently, the parent company may not get income tax relief on that premium expense in its own jurisdiction. If the premium is recharged, the subsidiary may not get tax relief on that expense.