Growth of Indian 

Insurance 
Industry and
Industry and 
Determinants of 
Solvency 

2nd OECD-
OECD-Asia
A i Regional
R i Seminar
lS i on IInsurance St
Statistics:
ti ti
Enhancing Transparency and Monitoring of Insurance Markets
26-27 January, 2012
Bangkok, Thailand

Subir Sen, PhD

subir.sen@teri.res.in
TERI University, India

Outline of Presentation

• The Indian insurance industry

• Understanding solvency
• Methodology and Data Issues
• Key Findings
• Conclusions and Policy Implications

1
 The Indian Insurance Industry‐
The Indian Insurance Industry‐ 1999
1994
Path to Liberalisation  1990
1972
1956 IRDA
Indian Mercantile Malhotra
Insurance Co. Ltd Committee
Report
Oriental Life
1938
Insurance Co. Banking Sector Reforms
1871 1907 General Insurance
Insurance Act Corporation of India (GIC)
& 4 subsidiaries
1818

Liberalisattion
Life Insurance
Bombay Mutual Life Corporation of India (LIC)
Assurance Society

Post
British Raj Nationalisation
Independence

State of Insurance Industry 
em ium per-capita in USD)

10 0.80%
on (Prem ium as % GD P)
• IRDA (1999) leading the industry 9 0.70%
8
• GDP growth (annual %) around 8.56% 7
0.60%

0.50%
during 2005-2010 and Gross Savings to 6
5 0.40%
GDP ratio around 33.6%
4 0.30%
Penetratio

• Fastest growing middle class

D ensity (Pre

3
0.20%
2
• Urban development rate of around 54% 1 0.10%

and improvements in life expectancy 0 0.00%

80

96
98
82
84
86
88
90
92
94

00
02
04
06
08
10

• In 2010, premium growth slowed to 4.2% &

19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20

General Insurance Density General Insurance Penetration

premium share compared to global
standards very low 60 5.00%
Density (Prem ium per--capita in USD)

Penetration (Prem ium as % of GDP)

4.50%
• Operational issues of importance for 50
4.00%
insurers: 40
3.50%
3 00%
3.00%
– Controlling expenses, Improvements 30 2.50%
in investment yields, claim settlement 2.00%
20
1.50%
process, capital requirement, etc.
1.00%
10
0.50%
0 0.00%
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20

Data from World Bank, World Development Indicators

and Swiss Re, Sigma Life Insurance Density Life Insurance Penetration

2
 State of Insurance Industry 
• As on March 2011, 24 general insurers General Insurance -Gross Premiums and Pvt Mkt
were operational 500
Share 60
55
– 4 public sector insurers 450

Sharre (in percentage)

oss Premiums (in
400 50
– 2 specialised insurers 350

billion INR)
38 39 39 40
– 3 stand alone health insurers 300
33
250 30
– 1 private insurer fully owned by Indian 200 25
business house 150 19 20
14
– 14 private
i t sector t i
insurers, JV with
ith

Gro
100 10
9
foreign insurer 50 4
0 0
2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010-
• 24 life insurers were operational 02 03 04 05 06 07 08 09 10 11

– 1 public sector insurer Public Sector Private Sector Private Mkt Share
– 2 private insurers fully owned by Indian
business house
– 21 private sector insurers, JV with Life Insurance - 1st Yr Premium and Pvt Mkt Share
foreign insurer 1400
45

Gross Premiums ((in billion

39 40

entage)
1200 36 35 35
• 1 Reinsurer – General Insurance 1000 31 30
C
Corporation
ti off India
I di (GIC)

Share (in perce

26 26 25

INR)
800
21 20
600
15
• Oligopolistic Competition in the 400 12
10
insurance market and strong growth 200 6 5
between 2001-02 to 2010-11 0 1 0
2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010-
02 03 04 05 06 07 08 09 10 11

Public Sector Private Sector Private Mkt Share

Data from IRDA

Product Mix 
Product Mix ––General Insurers 
2009-
2009 -10
• Retail segment fuelling growth,
Personal All Others,
personal lines are increasing
p g with Accident,
Accident 7.37%
Liability, 2.63% Marine ,
growing income levels and 2.40% 5.97%
Aviation, Fire,
lifestyle changes 1.08% 10.91%

• Motor Insurance continues to

dominate Health,
22.58% Engineerin
g, 4
• Changing mix following
“detariffication”
• Medicliam policies and role of
Motor OD,
Third Party Agencies Motor TP, 27.63%
14.94%

Data from IRDA

3
 Product Mix 
Product Mix ––Life Insurers 
2009-
2009 -10
• ULIPs sale dominating even after
Linked
Sept 2010 regulations Riders,
Life
0.01%
G
Group,
• Traditional life insurance sales 13.54%
improving
Non Non
• Emphasis on riders Linked Linked
Life Gen
• Group General Annuity dominates Linked Individual, Annuity
over individual general annuity Insurance 21.70% Group,
s, 55.01% 4.33%
• Slow pensions sales Non
Linked
• Life insurers allowed to sale life plus Gen
health combi insurances Non Non Annuity
Non Linked Linked Individual,
• Microinsurance products and Linked Pension Pension 0.85%
Health, Individual, Group,
composite package of standard 0.09% 0.25% 4.22%
insurance for rural and social sector

Data from IRDA

Financial Trends, Problems and Prospects
100% 0.25
Herfindahl-Hirschman Index (HHI)

100% 1.00
90% 0.90 90%
80% 0.80 80% 0.20
hare (in %)

70% 0.70 70%

60% 0.60 60% 0.15
50% 0.50 50%
Market Sh

40% 0.40 40% 0.10

30% 0.30 30%
20% 0.20 20% 0.05
10% 0.10 10%
0% 0.00 0% 0.00
D 6

F e 07
Ja 3
Au 4

Ja 0
Au 1 1
Ju 2

O 5

Ju 6

Se 8
N 2*

Ap 8

Ju 9
O 4

O 5

O 6

O 7

O 8
O *

M 05
Ap 3

Ap 4

Ap 5

Ap 6

Ap 7

Ap 08

Ap 9

Ap 0

M 4

11
09
O 9

O 0

11
3

-0
-0

-0

-0

-0
l -0

l -0

l -0

l -0

l -0

1
-0

-0

-0

-0

-0

-0

-1

0
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l -0
l -0

p-
l-
n-

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n-

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b-
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-
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r-

r-

r-

r-
ov

ec

ov
ay
ar

ct
ct

ct

ct

ct

ct

ct

ct

ct

Ap
Ap

LIC Market Share HHI for Life Insurance Market Public Insurer Market Share HHI for General Insurance Market

Data from IRDA, IRDA Journal (monthly)

• Domination of LIC in life segment. It has lowest paid-up capital, largest

number of policies in force, huge network of offices and distributional
channel. LIC (amendment) Bill, 2009 pending due to legislative delays.

• General insurance segment is more competitive – combined ratio, retention

ratio, etc.

4
 Trends, Problems and Prospects
• Focus on actuarial pricing 2001‐02 2010‐11
Life General Life General
• Investment norms
Annual Growth 
• Claim Settlement Rate 43.00% 13.60% 4.20% 8.10%
Geographical 
Geographical None
• Issues related to distribution Restriction
channel especially Equity Restrictions Foreign promoter can hold upto 26 % of the 
equity
bancassurance Registration  Composite registration not available
Restrictions
• Regulatory confusion: IRDA vs
Paid‐up Capital
SEBI; IRDA vs PFRDA or IRDA
Private Total 16.64 7.27 236.57 39.56
vs RBI Industry Total 16.69 11.27 236.63 67. 06

• Solvency Regulation and p g p

Operating Expenses
Private Sector 4.19 0.42 159.62 39.32
Issues before implementation
Industry Total 46.80 79.31 329.42 106.20
of Solvency II
Claims/ Benefits Paid
• Data transparency – promotion Private Sector 0.03 1.27 312.51 99.37

of efficient market functioning Industry Total 174.84 27.19 1425.24 295.36

Figures in billions INR

Data from IRDA

Solvency Margin (SM) and the Available Solvency Margin

(ASM)
A ss ets not to
Questions be used

• Is it possible to identify factors explainingGood SM

the financial strength of ASM
an insurers?
As se ts
• Can we use available data to calculate solvency ratio pre-
pre-2005
2005--06
06?
?
L A
LIAB IL IT Y
• What are the limitations of available data?

• Solvency Requirement under Section 64V of the Insurance Act 1938

• Guidelines for maintenance of a ‘statutory’ solvency reserve as per IRDA
(Assets, Liabilities, and Solvency Margin of Insurers) Regulations, 2000
• Audited financial statements and of financial performance analysis as per
IRDA (Actuarial Report and Abstract) Regulations, 2000
• Solvency Ratios made public from FY 2005-06 onwards

5
 Solvency Trends –
Solvency Trends  – General Insurers
14
12

Solvency Ratio
10
8
6
4
2
0

Ch CI L KIO

an ard
O dia

ya ed al

al
u dia

IF Re IG

IC -T ce

m
N ta l

Sh po
Fu FC m

ive G o

So li

I G BE
ja ram

he XA

en l
TA z

T e ra
al ra
Un ture Er g
TA lian

er
Ro n i ion

la

Bh rira
O n
A
n

m
am b
l S In
In

rs en

Ra r ti A

S B ja Q
O

HD da
FC lia
rie

L& en
ol om
Ba nda
U at

l
w

jA

G
Ne

a
t

I
March 2006 March 2011

• Ratio of Solvency ratio is set at 1.5 for all insurers

• In 2005-06, National Insurance, ICICI Lombard and Bajaj Allianz fell short of solvency and capital
infusion was advised to first two and a deadline was set for the third for correction.
• Except one private general insurer in 2008-09, all general insurers satisfied norms for years 2006-
07 and 2007-08
• 2009-10, 3 general insurers failed to comply and IRDA penalised the defaulting insurers

Data for Non Life Insurers ‐ 2009‐10
Solvency Ratio Net Premiums Mkt Share Size Premium Growth
RAHEJA QBE 3.79 ‐282 0.00 2.32
NEW INDIA 3.55 600263 19.82 2.30 9.97
UNITED 3.41 419016 14.63 2.18 22.47
UNIV SOMPO 3.15 14817 0.53 2.18 528.00
BHARTI AXA 2.38 18669 0.87 2.30 990.60
ICICI LOM 2.07 231409 9.20 2.61 ‐3.14
TATA AIG 1.88 58000 2.38 2.48 3.63
IFFCO TOK 1.76 99083 4.07 2.39 6.10
CHOLA 1.76 51463 2.19 2.43 14.50
SHRIRAM 1.75 22420 1.16 2.02 266.50
RELIANCE 1.70 142872 5.53 2.06 3.38
NATIONAL 1.60 397765 12.97 2.00 8.15
ORIENTAL 1.56 396253 13.55 2.00 19.05
BAJAJ ALL 1.54 197167 6.93 2.04 ‐5.23
FUTURE GEN 1.54 24647 1.05 2.45 101.95
HDFC ERGO 1.49 58868 2.56 2.62 169.86
ROYAL SUN 1.39 75460 2.55 2.32 13.66

6
 Solvency Trends –
Solvency Trends  – Life Insurers
8
7

vency Ratio
6
5
4
3
Solv

2
1
0
D w tial

U am C
ar Re ral

D ca
Vy d

aF i
a
R LIC

TA ra
M I Pr u n

t
Sh ia

Ae I F rali
et A IG

D SB C re
jA e

In -Ich
Fu a r m
M Life
S nz
a

h a iv a

irs
G A
St rk

di

a r Pr OB
sy

j a nc
N en

d
IN nda

TA ind

on eri
X
Bh ri ra

e
H li ga
IC a S

ll ia
FC Yo

In

In

ID ene

C g o ed
Sa Av

tu ti A
Ba el ia

ai
ax ud

t a BI
ah

e
a

ra

di
IC Birl

lif
G
e

B
re

an n
k

ni
St LF
a
Ko
H

March 2006 March 2011

• 2005 06 LIC had the lowest solvency of 1

2005-06, 1.3
3
• All life insurers complied with solvency requirement in 2006-07, 2007-08 and 2008-09 with
majority showing marginal improvement.
• 2009-10, LIC has lowest solvency ratio with solvency falling for all life insurers but all insurers
complied.

Data for Life Insurers - 2009-10

Solvency Ratio Net Premiums Market Share Size Premium Growth
SUDI 7.46 53009 0.473 4.398 935.80
IndiaFirst 5.27 20160 0.183 4.301
Aviva 5.12 236150 0.726 5.276 10.19
Sahara 4.50 25052 0.114 4.365 ‐6.85
IDBI Fed 4.05 56902 0.364 4.652 26.45
Max NY 3.22 480086 1.683 5.265 0.33
ICICI Pru 2.90 1647896 5.764 5.155 ‐7.01
OM Kotak 2.79 284985 1.214 4.708 ‐0.67
Shriram 2.69 61060 0.382 4.097 33.40
All Bajaj 2.68 1139118 4.050 4.178 ‐0.90
AEGON 2.66 16479 0.137 4.756 381.80
Canara 2.58 83991 0.567 4.699 110.05
Future Gen 2.34 53484 0.442 4.846 224.12
SBI Life 2.17 1008048 6.407 5.000 30.71
BirlaSun 2 11
2.11 542537 2 694
2.694 5 294
5.294 4 93
4.93
Tata AIG 2.11 348156 1.203 5.283 15.69
Reliance 1.86 658834 3.568 5.066 11.58
HDFC Std 1.80 695563 2.964 5.294 22.87
ING Vysa 1.79 163856 0.585 5.008 ‐6.75
Bharti AXA 1.68 66744 0.398 5.054 49.33
DLF P 1.67 3840 0.034 4.345 1009.20
MetLife 1.65 250621 0.966 5.249 ‐7.24
LIC 1.54 18598239 65.083 2.699 34.49

7
Determinants of Solvency
FACTORS
Studies in this area byVariable Dambolena and Khoury, Observations 1980; Staking and
Babbel,
FIRM Size 1991; Ambrose andofCaroll,
Smaller the size the firm,1994;
more BarNiv
Directly andandpositively
Hersbarger,
affecting 1990;
insurer
vulnerable it is to insolvency insolvency
Browne and Hoyt, 1995; Kim et al., 1995; Cummins et. al., 1995; Grace et
INVESTMENT Important for financial solidity of an Positive correlation expected but insurers are
, 1998;; Kramer,
al.,
Performance
, 1996;
insurer and ;discloses
; Chenefficiency
and Woong, g,to2004;
in found ; etc.relationship
have negative identified few
for both life
factors investment decisions and non-life Insurers

UNDER-WRITING 2 key components: investment income Few studies shows a positive correlation but
Results and underwriting income. Expected to some failed to empirically prove the same
have a negative correlation

OPERATING More revenues desirable and existence The studies have concluded in line with
Margin of positive relationship expected positive relationship

PREMIUM Growth Rate of market penetration, higher Positively related with insolvency determinant
growth prospect affect “risk
risk selection
selection”

MARKET/ No. of insurers to assess competition, Studies have supported expected relationship
ECONOMIC positive relation between underwriting
cycle and inflation and interest rate
Factors
having negative relationship.
LIQUIDITY Ratio Ability to pay liabilities inclusive of Studies show a positive relationship
operative expenses and payment for
losses and benefits

Methodology
DATA:
– Major Sources:
• IRDA and RBI
– Important Disclosures - Company Level:
• Revenue A/C Statement Policyholders’ A/C
Since 2005-06
• P/L A/C Statement Shareholders’ A/C
• Balance Sheet
• Underwriting Experience for non-life insurers
• Investment Details
• Grievances, Quarter Public Disclosure, etc.
• 2007-08 state level business figures
– Two periods: 2001-02 to 2005-06 and 2005-06 to
2009-10
– Dependent variables: ASM to MSM and Solvency
Ratio for two periods respectively

8
Calculation of ASM to MSM:
• IRDA guidelines
– “Required solvency margin” A non-life insurer’s RSM can be based on either
net premiums (RSM-NP) or on net incurred claims (RSM-IC) and the RSM
will be the higher of the amounts of RSM-NP and RSM-IC. Data not shared.
– “Available solvency margin” (ASM) is the figure which reflects the actual
reserves or assets pertaining to various policies in force.
force
– Minimum solvency margin of Rs. 50 crore used as a benchmark.

Comparing ASM/MSM with Reported Solvency Ratio for 2005-06:

Life Insurers Non Life Insurers

9
9
8
8
7
7
6 6
Ratios

Ratios
5 5
4 4
3 3
2 2
1 1
0 0

om
IC k

bb
l

G
a u

Ba n

FC L A
ll
d

IF nce
al

na
G td

To
M IG
Ta otak
R LIC
FC Y

SB jaj

jA
Al c e

fe
sa
IC un

am
M fe

Sh ra

u
M Pr

Sa va

te
di

AI

hu
nt
IN S

IL
H xN

S
Li

io

O
O I Li
a

ha
A
Vy

ni
n
aS

In

O
ja
i

ri e

ia
I

rir
lB

Av

C
ta

H
et
ia

at

al
IC

U
ta

FC
el
ew

C
rl

Ta
O
el

oy
N

IC
D

R
Bi

D
H
IRDA Author's Calculation IRDA Author's Calculation

Independent Variable - Selected Determinants

– Financial ratios calculated based on Gart et al. (1994), NAIC guidelines
and IRDA
– Inflation and interest rate from RBI

Independent Variable Description

SIZE Total Assets to earned Premiums Life / Non-Life Insurers
INVPER Investment Income to Earned Premiums Life / Non-Life Insurers
IY Investment Income to Total Investment For Non-Life Insurers
Investment Income to Total Investible Assets For Life Insurers
LR Total Investment to Total Reserves Life / Non-Life Insurers
FDI Log of equity share capital Life / Non-Life Insurers
OPM Total Income to Total Outgo Life / Non-Life Insurers
UNR Combined ratio using financial basis Non-Life Insurers
PGR Year on year change in premium Life / Non-Life Insurers
NUMBER Total number of insurers Life / Non-Life Insurers
INFLATION Log difference of CPI Life / Non-Life Insurers
INTEREST RATE Average of deposit interest rates Life / Non-Life Insurers

9
Observations
2001‐02 ‐ 2005‐06 2005‐06 ‐ 2009‐10#
Insolvency  Expected 
Predictors Life / General Relationship Life Non‐Life Life Non‐Life
Dependent variable ‐> ASM to MSM Solvency Ratio
Firm Size Life / Non‐Life + + +* + +
Investment Life / Non‐Life + +* +* +* +*
Performance
Operating Margin Life / Non‐Life + ‐ ‐ +* +
Premium Growth Life / Non‐Life ‐ ‐ ‐ ‐ ‐
Liquidity Ratio Life / Non‐Life + ‐ + ‐ +
Underwriting Non‐Life ‐ +* +*
Results
Number of Insurers Life / Non‐Life ‐ ‐ +* ‐ +*
Interest Rate Life / Non‐Life ‐ +* ‐* +* ‐*
Changes
Absolute level of Life / Non‐Life + ‐ +
interest rate
Inflation rate Life / Non‐Life ‐ +* + ‐ +
FDI Life/ Non‐Life ? +* +*
* Indicates that the effect/relationships are significant. # Initial Estimates

Conclusion and Policy Implications

• Solvency of a life insurer is heavily dependent on the
returns received from total investible funds and the
interest rate
• The
Th need d for
f efficient
ffi i t investment
i t t decision
d i i and d strictness
ti t
from the part of the regulator with the insurers’
investment guidelines
• The non-life insurers’ solvency is affected by the interest
rate ... Are they more into short term investments?
• One of the investment performance predictor, investment
yield have the expected sign and strongly suggests that
returns available from total investments or investment
decisions contributes to overall non-life insurer solvency
status

10
Conclusion and Policy Implications contd. …

• Size of firms is significant and it contributes to higher income and

hence contribute towards solvency for non-life insurers
• Increase in the number of nonnon-life
life insurers may help spreading of
risks.
• Combined ratio were significant but have unexpected relationship
may be due to the fact that most of the insurers are spending (or
investing) more compared to additions to total assets, generating
less income and underwriting profits
• FDI increase may strengthen solvency. Increase in FDI from
proposed
p p 26 p
percent to 49 p
percent will strengthen
g insurers
• More data, especially as per product line, required before solvency II
can be implemented

Th
Thank
k you …
Suggestions and Comments are Welcome

11