India Market General Insurance Update

India Market General Insurance Update India Issue 27 June 2014 Introduction We are pleased to circulate our latest quarterly newsletter on some of the key developments in the general (i.e. non-life and health) insurance industry in India during the period January to March 2014. During this period, the industry has recorded a growth of 7% over the previous fiscal, which saw the private sector players increase their market share in terms of premium volume at the cost of the Public Sector general insurers (PSUs). Each of the PSUs lost market share ranging from 0.17% to 1.03%. Bajaj Allianz General Insurance increased its market share by about 0.13% whilst some others gained marginally. Reliance General Insurance and Royal Sundaram Alliance General Insurance lost some ground. According to a recent study, the domestic general insurance industry is expected to grow at a lower rate of 15 percent in FY14 on the back of continued economic slowdown. The downturn in the automobile sector has slowed down growth of motor business. Likewise, fall in industrial activities and investment in new projects has considerably slowed down the Commercial Lines, where pressures continue, led by Fire and Engineering lines of business. Premium reduction of up to 20% is reported to have been offered to large corporate accounts renewing their annual policies in January. To add to this, premium for traditionally unprofitable group health covers are not expected to see any correction. In this issue Industry statistics January 2014 March 2014 Market update Insurers Mergers & Acquisitions Other market developments Appointments Awards Regulatory update Government update Distribution Products Contact details PSUs continue to attract a large corporate business that is usually found to be unprofitable. On the other hand, the private sector insurers have invested in building their retail business that is largely profitable. The Insurance Development & Regulatory Authority of India (IRDA) has indicated that motor third party premium will be deregulated. Meanwhile, it has announced increase in motor third premium rates that many insurers consider to be inadequate. The Finance Ministry s advice to Indian banks on changing their current corporate agency model to the broker model continues to be met with some reservation. In other developments, reports suggest that by 2020 online life insurance sales are expected to grow 3-5% of the individual annualised new business premium and non-life insurance sales are expected to grow faster at 15-20% of the retail business. As always, we hope that you find the newsletter informative and look forward to your feedback. Towers Watson Risk Consulting, India Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 1

Private 2.19% PSU (2.19%) Baj-Allianz 0.13% RSA (0.32%) Reliance (0.05%) United India (0.76%) Oriental (1.03%) New India (0.22%) National (0.17%) Industry statistics January 2014 - March 2014 GWP (business figures) As per data released by IRDA, the Gross Written Premium (GWP) for the period January to March 2014 for India s General Insurance industry (i.e. non-life and health) is INR 21,352 Crores (USD 3562 million). The last fiscal s (FY2012-13) corresponding figure was INR 19,135 Crores (USD 3192 Million). The public sector general insurers (PSUs), including Agriculture Insurance Company (AIC) and Export Credit & Guarantee Corp. (ECGC) continue to dominate the market at 57% and the rest is divided between private players. Pie A, shows the split of the four PSUs, AIC, ECGC and all private sector general insurers as a block at 43%. Pie B shows the respective market shares of various private players, notable among which are ICICI Lombard, Bajaj Allianz, HDFC Ergo and Iffco Tokio with market shares of 9%, 6%, 4% and 4% respectively. Others in the chart include SBI General, Star Health, Universal Sompo, Apollo Munich, L&T General, Magma HDI, Religare Health, Max Bupa Health, Liberty Videocon and Raheja QBE. Source: IRDA Market shares: how major companies fared As a block, the four PSUs lost market share and the private insurers gained correspondingly. Growth rates The GWP growth rate for general insurers is shown in the following graph. During the period January 2014 to March 2014, the non-life industry registered a growth of 7%, an increase compared to 13% in FY2012-13 for the same period. Major private insurers change in market share ICICI Lombardunchanged Marginal gains by HDFC Ergo Tata AIG IFFCO TOKIO Chola MS Bharti Axa Loss of Market Share by PSUs Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 2

Industry In order to compete and grow their business, general insurers have started offering up to 40 per cent discounts in insurance premium rates for the fire and engineering segment. This segment largely covers manufacturing plants and large-scale industrial projects from fire and other risks associated with construction and maintenance. With the manufacturing industry and infrastructure in general bogged down, new business has taken a hit. According to a senior executive in HDFC Ergo General Insurance, The non-life insurance sector growth is moderating due to the base effect and a slowdown in the economic growth. Industry players expect the situation to continue until after the new government announces policy changes to attract new investments. While the four public sector non-life insurance companies (PSUs) are aggressively trying to increase their revenues by picking large corporate accounts, their private sector counterparts are focusing on growing their business in profitable retail lines. As a result, private non-life insurers have grown profitable businesses such as retail health insurance, personal accident, home and SME insurance. A senior executive of HDFC Ergo said: Post detariffing in 2007, the large private non-life insurers started focusing on profitable lines of business especially individual health, personal accident, home and liability insurance. In order to increase the topline, the public-sector insurers have been aggressive in group health and large corporate accounts for property insurance. Motor insurance remains the largest business segment with a share of around 46 per cent in the gross premium. Next is health insurance that has a share of around 26 per cent in the gross premium. However, growth of motor business has been adversely impacted by weakening of demand for automobiles, with eight of the country s leading vehicle makers together registering a decline in sales compared to the year-ago period. Earthquakes, rather than cyclones, floods or tsunamis, are the biggest natural catastrophe threats to India, according to the vice chairman of the National Disaster Management Authority (NDMA). If there is an earthquake of 8 or above on the Richter scale anywhere in the Himalayan belt, one million deaths can take place. For tackling cyclones, floods and tsunamis, we have put in place state-of-the-art early warning systems. Evacuations can be done to minimise human casualties during such disasters," he said. Studies indicate that enough strains have accumulated to generate magnitude 8 or larger earthquakes in the Himalayan region. At a time when insurance companies are losing money in providing health cover, Star Health Insurance has reported profits not just from investments, but also from the core business of underwriting too. Claims ratio has been in the range of 63-65 per cent, while the industry average has been in the range of 70-80 per cent. Market update Insurers Bharti Axa General Insurance will start to gradually reduce its dependence on motor insurance segment and will focus on commercial and health insurance lines to derisk its growth prospects, a top company official said. Its motor insurance contributed around 73 percent of the overall business. Apollo Munich Health Insurance is looking at 25 per cent growth in premium collection in FY 2014-15 with key focus on retail segment. Future Generali India General Insurance expects to close FY 2013-14 with a Gross Written Premium of nearly Rs 1,300 Crores (USD 217 Million ). Reliance Capital has decided to hold back its plans to offload a stake in its general insurance business. With the general insurance unit likely to record profits in all the quarters in FY 2013-14, Reliance Capital can expect improved valuations for this business when the stake sale happens next fiscal, according to its top management. Despite rising competition in the weather and crop insurance space, Agriculture Insurance Company (AIC) promoted by General Insurance Corporation (GIC Re), Nabard and the four PSUs is hopeful of retaining its leadership position in the agriculture insurance segment and aims to reach a premium target of over Rs 4,000 (USD 667 Million) Crores in FY 2014-15. While there are seven players in the agri-insurance space as of now, it is reported that three more are likely to join from next fiscal taking the number to 10. General insurers may face claims ranging up to INR1 billion (US$16.4 million) arising from massive crop damage, following hailstorms in the western state of Maharashtra in the recent past. As per our initial estimates, claims may be to the tune of INR850-1,000 million (USD 14-16.6 Million) from this event," a senior executive of Agriculture Insurance Company of India (AIC). Cholamandalam MS General Insurance Company is eyeing gross written premium of Rs 1,900 Crores (USD 317 Million) for FY 2013-14 with a focus on retail health and motor insurance, a top official said. The company is a joint venture between Rs 225 billion (USD 3754 Million) Murugappa Group and Japan-based Mitsui Sumitomo Group. Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 3

Bajaj Allianz General hopes to close FY 2013-14 with around Rs 600 Crores (USD 100 Million) profit and a premium income of over Rs 4,700 Crores (USD 784 Million). The Pune-headquartered company expects to grow above the industry average by around 4 per cent in 2014. The insurer is also likely to come up with 10-15 new products in the current year. General Insurance Corporation (GIC Re), India's sole reinsurance company, expects INR750-million (US$12.3 million) claim from Malaysian Airlines (MAS) for the Boeing 777 which disappeared between Malaysia and some time back. It hopes to clock double-digit growth in FY 2013-14 despite an economic slowdown. GIC Re s management expects it to be around 14-16 percent and investment income to be better in FY 2013-14. It is of the view that being a part of Lloyd s would supplement their vision of becoming a global reinsurer. GIC is studying the market, meeting players and engaging in understanding the dynamics and identifying the way forward. They believe three years is a good time for achieving this objective. New India Assurance will expand into new overseas markets, such as Canada, Qatar and Myanmar, in the next few months. The company, which has a presence in 22 countries, has approached the IRDA for clearance to enter the new markets. In India, it will add 700 micro branches in rural areas this year to take the total number of branches to 2,000. The common Third Party Administrator (TPA) formed by PSUs companies will start operations by the end of 2014. Mr P K. Bhagat has been appointed as its first managing director and chief executive officer. The TPA will be initially used for captive purposes. Mergers & Acquisitions Shriram General Insurance has become the first private insurer to make a foreign acquisition with the purchase of a large chunk of share in Philippine non-life company Monarch Insurance. This is the first overseas insurance transaction after the insurance regulator allowed domestic companies to do business in other countries. They are looking at more acquisition opportunities in Asia. SGI, along with its South African partner Sanlam, is eyeing deals in the range of $50-75 million. There has been a buzz in insurance circles over Star Health and Allied Insurance becoming a takeover target for some time. The original investors, which included NRIs and investors from the Gulf, have diluted their holding with the entry of investors such as ICICI Ventures and Sequoia Capital. The latest speculation is that Canada s Fairfax group, led by Indian-origin billionaire Prem Watsa, is interested in the company. Watsa, incidentally, is also a copromoter of ICICI Lombard as it is the Fairfax Group, which owns Lombard Insurance. The AV Birla group has hired consultants to find a partner to foray into the country's fast-growing health insurance sector. The Indian conglomerate is expected to hold 74 percent stake in the proposed venture, persons familiar with the matter said. The group is in talks with a South African health insurance company, they added. Mumbaiheadquartered AV Birla group is already present in the life insurance segment through a joint venture with Canada's Sun Life. Some large global health insurers like South Africa's Discovery and US-based Aetna have been scouting for a local partner to enter India's health insurance market, which is estimated to grow 25 percent in the next five years. The Rs 12,606-Crores (USD 2103 Million) domestic health insurance business accounts for about a quarter of the total non-life insurance business in the country. The latest entrant into this segment is Cigna TTK, a joint venture between US-based Cigna and India's TTK Group. The other players are Apollo Munich, Max Bupa, Star Health & Allied Insurance and Religare are the other standalone health insurance companies focusing mainly on the urban market, which is seeing a growth in hospitals, clinics and doctors. Other market developments Recently, credit rating agency ICRA said general insurers might need around Rs 17,500 Crores (USD 2920 Million) in fresh capital over the next five years with the requirement for private sector at around Rs 8,000 Crores (USD 1335 Million). The recent high profile sexual harassment scandals involving Tarun Tejpal and Phaneesh Murthy have put more pressure on India Inc. Leading companies are rushing to take insurance cover that would cover the legal expenses of sexual harassment and other employeerelated suits. The push for taking increased cover is coming mainly from independent directors on the boards of companies as more employees are coming forward to sue their employers and directors over matters ranging from sexual harassment to wrongful discrimination. With fewer airlines acquiring new aircrafts, flat growth in general aviation and softening of reinsurance rates in the international market, the aviation insurance business of non-life insurance companies has been hit badly. Only Indigo and Air India have robust acquisition plans. Other airlines are not acquiring new aircraft. Also, there is no growth in the general aviation sector that includes helicopters, corporate business jets, private aircraft, charters, sports flying, air-taxis, leisure-flying and medical evacuation referred to as medevac. The decline in aviation insurance premium is also due to the grounding of Kingfisher Airlines which had around 60-70 planes. Insurance premiums payable by Indian airline companies may rise following the US Federal Aviation Administration's (FAA) downgrading of India's aviation safety rating to Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 4

Category 2 under the FAA's. In its most recent assessment that led to downgrading, it remained principally concerned with the lack of full-time, qualified flight inspectors to conduct airline inspections, especially in light of the aviation sector s rapid growth in India. The insurance fund for domestic refineries importing crude oil from Iran is likely to be delayed due to lack of consensus over the release of INR 500 crore (USD 83 millions) that the Oil Industry Development Board has to pay to the Finance Ministry. The ongoing diplomatic efforts to normalise the frozen ties between the US and Iran are being watched keenly by the state-run general insurers, who are currently wary of providing cover to companies dealing with Iranian oil imports. Any kind of positive outcome will be favourable for the industry, a top official of New India Assurance said. A soft insurance and reinsurance market would help companies see their insurance cost fall by 10-15 percent on an average when they renew their insurance policies for FY 2014-15. Top officials of non-life insurance companies said that competition among insurers would help companies get discounts on their premiums. Insurance cover against terror attacks is set to get cheaper from 1 April, following a decline in the number of terrorismrelated incidents in India. Rates are likely to fall by 15-20 percent, according to industry executives. The experience of the Indian terrorism risk insurance pool has been good, with no major claim after the 2008 attack, so we are bringing down the rates," said the top official of GIC Re. With medical inflation continuing to rise unabated (20 percent), India's insured population is on the lookout for add-on covers to make for the rising hospitalization expenses. Research carried out shows India's healthcare expenditure stood at 3 lakh Crores (USD 50 billion) (or 4 percent of GDP) during 2012-13, of which out-of-pocket spends contributed to a high 61 percent of the total healthcare expenditure. The preferred provider organisation (PPO) a type of health insurance arrangement that allows plan participants relative freedom to choose the doctors and hospitals they want to visit is expected to gain prominence in 2014, with more hospitals entering this sphere. With IRDA and Insurance Information Bureau having unique identity numbers of hospitals, insurers feel the process of tying up with hospitals would be speeded up. According to experts, mounting losses in health insurance due to increased claims outgo is a matter of concern. To address this, public general insurers had begun a mechanism to rationalise health costs through PPO. A policy holder can get cashless treatment at those hospitals which have agreed to a preferential pricing, resulting in lower claims. In emergency cases, this facility is available even at hospitals which are not part of PPO. The customer is free to choose a hospital of choice which could be outside the PPO. Here, the health policy provides for reimbursement of these costs. The General Insurance Council, representing the interests of 25 non-life insurance companies, has strongly pitched for a regulator to oversee the healthcare industry and prescribe norms for standardisation and inspection of services across hospitals. Recently, the insurance regulator started a pilot initiative by publishing a list with a unique identity code for 30,000 hospitals, to help streamline and identify the charges for different treatments. Concerned over the excess incentives insurers are paying motor dealers leading to expensive motor policies insurance regulator IRDA has asked general insurers to bring down such incentives and instead pass on the benefits to customers in the form of low premium on policies. Insurers pay large incentives to these dealers to push sales of motor insurance policies, making policies in the 'own damage segment' expensive, which is deterring customers from buying motor policies. The regulator recently convened a meeting of CEOs of general insurance companies to discuss this issue. The IRDA move has come at a time when the general insurance segment is still finding it tough to manage their operations in view of the losses in the third party liability. Insurance companies are considering increasing the premium charged on luxury cars because claims from this segment have outpaced the auto industry average and costs to repair these high-end vehicles is steep. According to insurance industry executives, the increasing number of claims has made the business of insuring luxury cars a loss-making one for them. Next year, high-end cars will drive growth in the motor insurance segment, ICICI Lombard General Insurance has said in its outlook for the health and motor insurance segments for 2014. The company said that the motor insurance space had seen a 12 per cent increase in liability premium and nominal growth in the two-wheeler segment. It added that the launch of new add-ons had contributed to the overall increase in own-damage premium. One of the senior executive said that more risk-based pricing would be introduced in the motor segment factors such as where the vehicle was being driven, and whether it was chauffeurdriven or not would be considered. On new motor products ICICI Lombard said that they see demand for covers such as engine-protect and voluntary deductible. Engine protect covers consequential losses such as damage to engines arising due to insufficient lubricants, water lock, etc. while voluntary deductible provides discounts on premium for a higher deductible chosen by the customer. To address the problem of a large number of vehicles running without cover, the General Insurance Council is planning to make motor third party insurance policies valid for three to five years, from the existing one-year term. The council said the step is to ensure that there is continuity of insurance cover and all vehicles plying on the roads are Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 5

covered, especially two-wheelers, a segment which has seen a big drop in renewals. Rising cases of motor thefts by organized gangs as well as small-time criminals is not only proving a headache to car owners but insurance companies as well. As per industry estimates, the frequency of motor thefts in north India is three times more compared to the rest of the country. According to insurers, Delhi tops (with 70% of the stolen cases being reported from the region) the motor theft list. The most prominent car targets are entry-level models and low-end SUVs as such vehicles can be easily remodelled. It is believed that about 60 percent of car insurers in India are not meeting their stand-alone third-party (TP) insurance obligations for commercial vehicles for the financial year ended 31 March 2013, in violation of a regulation laid down by the IRDA. In December 2011, IRDA had prescribed the minimum cover to be underwritten in respect of stand-alone commercial vehicle motor TP insurance by non-life insurers based on their market share. Furthermore, the extent of the shortfall is more than 25 percent of the quota. The tendency to seek admission in bigger hospitals for even minor ailments makes health insurers bleed, suggests a new survey on health insurance. It also showed India's health transition - from a hub for infectious diseases to noninfectious diseases - is reflected in its insurance patterns. For example, health insurance expenditure for one of the most worrisome non-communicable diseases - cancer - has steadily grown in five years, shows data released by a private health insurer. Cancer care now accounts for 11% of insurance claims in 2013-14, up from 8% in 2009-10. But the survey for the first time shows how the preference for tertiary care hospitals is pushing up health insurance costs. Data released by ICICI Lombard General Insurance of its health insurance portfolio shows cases referred to tertiarycare or super-specialty hospitals are on the rise. Policy holders are opting for new procedures that are less painful and ensure faster recovery but cost substantially more, resulting in higher health insurance claims. The dilemma for insurers is whether to accept claims involving new medical procedures and push up the cost of health insurance for all, or to ask claimants to meet part of the cost. It was felt that the pattern of diseases was shifting towards non-communicable ones. Neoplasms (such as cancer) stood at 11 per cent in 2013-14, compared to eight per cent in 2009-10. The costs of robotic surgery on average are 25-35 percent higher than conventional surgery. An executive of a public sector insurance company says that one criterion applied in settling claims is how the charges measure against industry averages. "If the average industry claim for an ailment is INR 50,000 and the claimant has opted for a procedure which costs INR 80,000, we will not pay." Several insurance companies in India are seeing a rapid rise in claims with diabetes forming part of the diagnosis. Also, the average age of those diagnosed with diabetes in the country has fallen to 30 from 40 years. Insurers are reporting higher claims for dengue than earlier with the surge in claims substantially and mostly from urban areas. Standalone health insurers have turned cool towards group cover, as they anticipate a decline in this insurance segment this year because of increased competition from general insurance companies. Our main focus is on the retail segment, and we are slowing down on group insurance as it is not profitable, said the top official of Apollo Munich Health Insurance. Star Health and Allied Insurance also paints a pessimistic picture: This year, several general insurance companies have become aggressive in the segment. Many are underwriting with losses, just to increase their toplines. Being standalone health insurers, we cannot cross-subsidise as they do. According to media reports, domestic banks lost INR172.84 billion (USD 2884 Million) due to of fraud in FY 2012-13. During the year, 62 banks reported a total of 26,598 cases related to online fraud. Data from insurance companies show that large banks are opting for policies worth INR5 billion (US$81 million) to shield against fraud, including online crime, while mid-sized banks are going for cover in the range of INR2.5-3 billion (USD 41.7-50 Million). Regulatory update IRDA has initiated a study regarding the subsidisation of premium for group insurance policies. The insurance watchdog said a number of complaints have been received by it on the unfair discounts given to group policies, and it wants insurance companies to do away with this practice. General insurers are in a fix as the Insurance Regulatory and Development Authority has moderated the premium hike for third party motor insurance cover. While the regulator had initially proposed to hike premium rates for private cars and two-wheelers by 26 to 137 per cent in its draft circular, the regulator finally lowered the proposed increase to 9 to 20 per cent in its final circular. The regulator also raised rates for commercial vehicles such as goods-carriers, the most vocal and organised segment, by 10 to 13 per cent, which insurers feel is inadequate. The IRDA, while raising third-party motor insurance, said insurers must be mindful of the concerns expressed by vehicle owners about the rates and availability of insurance since motor TP is a mandatory cover. Further, the regulator warned of serious action if any company tries to deny or delay the cover for those seeking it. As per media reports, IRDA plans to take the first step in two or three months to abolish the administrative pricing mechanism (APM) for third-party vehicle premiums and make pricing market-driven. The premium for motor thirdparty insurance is controlled by IRDA. "We will come out Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 6

with the road map for de-tariffing the third party premium in two or three months' time. The Declined Risks Pool will be two years old by that time. We will be able to study the loss trends and the kind of vehicles that come into to the pool," Mr. M Ramaprasad, IRDA member (Non-Life), told the Indo-Asian News Service. Commercial vehicles that have been denied compulsory third party insurance cover by general insurers for varying reasons are provided cover under the Declined Risk Pool. "De-tariffing the third party premium is necessary so that good customers get the benefits of lower premiums. The current tariff regime is cross-subsidizing the bad customers with uniform pricing for both good and bad customers," said Mr. Amaranth Ananthanarayanan, managing director and chief executive officer, Bharti Axa General Insurance. The marginal increase in motor third party premium rates by IRDA would not help curtail the losses for general insurance companies. According to insurers, the industry would have an estimated third party loss of Rs 8,000 Crores for 2014-15. From April 1, IRDA has increased the motor third party premium rates by 9-20 percent against its draft proposal of a hike of up to 137 percent in motor third party premium rates depending on the vehicle category. KG Krishnamoorthy Rao, managing director and chief executive officer, Future Generali India Insurance, said, The motor third party losses are rising as courts are awarding higher compensation (to the victim s family) due to rising inflation. They are not only asking insurers to compensate for the loss in income but even for the possible future income, multiplying it with inflation. Earlier the courts never considered the loss of future income while announcing the awards, added Krishnan. An official of a leading private insurer said, The increase in premium is inadequate. The industry will lose at least Rs 5,000 Crores on account of third party claims. Insurers had asked the regulator to increase the premium rates by 5-100 percent depending on the category of the vehicle. IRDA slapped a fine of nearly Rs 5 Crores during 2012-13 on 12 insurance companies. In all, penalties were levied on 10 life insurance companies and two non-life insurance companies for non- compliance with various regulatory stipulation. Apart from monetary penalty levied on insurers, penal actions were also initiated on various non-compliant intermediaries as well, it said. Insurance companies are taking their time about investing in new categories of assets approved in the past 12 months by IRDA, including infrastructure debt funds, equity Exchange Traded Funds (ETFs) and Alternative Investment Funds (AIFs). The reasons cited for the caution is that the fund sizes of the insurers are smaller than those of other investors while the risks are higher in these platforms. IRDA has set up a committee to provide advice on customer services. Members of the committee hail from life insurers, non-life insurers, and the industry bodies - the Life Insurance Council and General Insurance Council - among others. The regulator is also studying whether the Policyholder Protection Act needs a revamp. IRDA has set up a working group to explore the possibility of introducing a stand-alone insurance marketing firm (IMF) as another channel of insurance distribution. Such an intermediary could sell the products of multiple insurers and also mutual funds and other financial services. It formed an 11-member working group comprising of officials from life and non-life insurance companies to recommend to IRDA matters like the capital required for the IMF; geographical spread of operation; distribution costs; remuneration; and incentives to be paid to IMF, reported the IANS news organisation. IRDA had proposed a lower solvency margin for insurers at 145 per cent against 150 per cent currently after including a risk charge. In an exposure draft on a riskbased solvency approach, IRDA had said it has constituted an expert committee to suggest the roadmap to move to Solvency-II norms was in the process of deliberations. Insurance companies can now settle their inter-company balances in a quicker and easier manner, thanks to the Insurance Clearing House (ICH), proposed by the IRDA. In a draft proposal released recently, IRDA had said intercompany balances in reinsurance and coinsurance businesses were at very high levels and still rising. In order to enable timely and effective reconciliation of these balances as well as to achieve transparency, the insurance regulator said a clearing house is established. ICH will clear the reconciliation and settlement of inter-company balances through Electronic Transaction Administration and Settlement System, an electronic platform on which the reinsurance and coinsurance business in India is conducted by all parties - insurers, reinsurers, and brokers among others. ICH will have a CEO and a compliance officer to enforce its business objectives. When IRDA's proposal is finalised, all insurers and reinsurers operating in India intending to conduct reinsurance or co-insurance business will be required to be members of the clearing house. Government update To check misuse of health insurance schemes the Government has drafted a list of over 2,179 medical treatment procedures including those under general surgery, gynaecology and obstetrics, orthopaedics, physiotherapy, endoscopic and heart-related diseases for which one can avail the insurance benefits. It will be used as a master list of procedures under various Government Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 7

and private insurance schemes, said a senior Union Health Ministry official. The Bombay High Court has asked IRDA to check whether the insurance companies had issued guidelines to third party administrators (TPA) on how to recommend claims amounts for mediclaim and health insurance policies. The Indian government wants state-owned banks to change from corporate agency model for the broker model, a top finance ministry official has indicated. A newly-formed panel, comprising of banks, insurers, regulators and financial services officials, looking into the issue, will only explore ways of smoothening the transition from agency to broker, Financial Services Secretary Rajiv Takru told the Economic Times. "The committee's mandate is to define the exact road map or the smoothest way to implement the multi-company sale model," he said. The insurance broking model also has the backing of the Insurance Regulatory and Development Authority. A senior IRDA official said that the broker guidelines will be the same for both state and private sector banks. IRDA has indicated that it may set a deadline for banks to adopt the insurance broking model to ensure that they sell policies of multiple companies. The regulator may, however, relax norms that prevent broker-banks from generating more than 25% of their business from an insurance company within the group. The Reserve Bank is likely to soon issue guidelines to allow banks to act as insurance broker with a view to boost business and arrest decline in insurance penetration. Under the existing bancassurance guidelines, a bank can act as a corporate agent and sell policy of one life insurer and one non-life insurance company. The government plans to formulate a safety rating system for cars based on their robustness, in the light of several issues being raised over the quality of vehicles made in the country, and the rules if implemented may be linked to lower insurance premiums. Talks will be held with the Insurance Regulatory and Development Authority (IRDA) on improving safety and lower insurance premiums to entice the customer. The issue of safety in cars built in India had hit the headlines after the UK-based independent testing agency 'Global NCAP', said four out of five popular small cars plying on the Indian roads that account for nearly 20 percent of car sales in the country had failed the independent test. Insurance companies may be allowed to invest more of their funds in banks and financial institutions, as the government explores ways to infuse additional capital into state-run lenders. The government has asked IRDA to raise insurance companies' exposure limit to the banking sector to 30% from 25 percent, a senior government official is reported to have said. Competition for the Rashtriya Swasthya Bima Yojana (RSBY), the state-sponsored group health insurance scheme that has 36.9 million cards in use, is driving down bids by insurance companies to un-viable levels. The scheme was launched by the labour ministry to provide health insurance to families living below the poverty line. The government is rethinking about its flagship health insurance scheme that has earned a lot of critical acclaim from the likes of the World Bank, Harvard University and global think tanks. The scheme offers healthcare benefits worth INR 30,000 per year to a poor household that can be accessed at empanelled private and public hospitals across the country through a smart card. The Centre has directed insurance companies to settle all claims under its flagship health insurance programme, Rashtriya Swasthya Bima Yojana (RSBY), within a month. The scheme is the world s largest health insurance initiative, covering 3.58 crore poor families. Since its inception in 2008, the scheme has covered 6 lakh hospitalisation cases. In a circular to insurance companies, the Ministry of Labour and Employment said: This Ministry has been receiving various references (from hospitals) about enormous delays in settlement of hospitalisation claims by the insurance companies and TPAs (third party administrators). Distribution Insurance firms launching mobile apps to woo customers With m-commerce picking up, insurance companies too are coming out with mobile applications offering customers the comfort of choosing products at their will. Companies like New India Assurance and Cholamandalam M S General have already launched their mobile apps that enable customers to renew their policies or buy new ones. A senior official of New India Assurance said the company had launched two applications -- one for the customer and other for the agent -- on operating systems including Blackberry, Android and Windows. Citibank and Apollo Munich to offer specialised health insurance services Citibank India along with Apollo Munich will offer healthcare solutions to its affluent and high networth clients. The healthcare solutions will target 16 million households. They combine financial protection and health & lifestyle management support for non-communicable diseases such as hypertension, diabetes, heart disease, cancers and tumours. The net widens With growing mis-selling in insurance, online polices are becoming increasingly popular. Most insurers are creating a robust online channel for distribution as it can enable seamless switching between channels and can give a transparent comparison of products. Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 8

Currently, online sale of various insurance products accounts for Rs 700 Crore (117 Million USD) annually. Digital sale of life insurance accounts for Rs 300 Crore (50 Million USD), motor insurance contributes around Rs 200 Crore (42 Million USD) and other insurance, such as health and travel, make up around Rs 150 Crore (25 Million USD). By 2020, online life insurance sales are expected to grow 3-5% of the individual annualised new business premium and non-life insurance sales are expected to grow faster to 15-20% of the retail business. A recent report says that by 2020, online insurance sales market in India will be around Rs 3,500-6,000 Crore (584-1001 Million USD) for life insurance and about R11,000-15,000 Crore (1835-2503 Million USD) for general insurance. The industry aggregate would be in the range of Rs 15,000 Crore-20,000 Crore (2503 Million-3337 Million USD). Moreover, digital influence in insurance sales is likely to grow to 50% for life insurance and 75% for non-life. The percentage of health insurance policies sold online has gone up from 13% in 2012 to 19% in 2013 and motor insurance saw an increase from 13% to 16% in the same period. New India s strategic tie up with BPCL for transport sector New India Assurance Co. Ltd. and Bharat Petrochemical Corp (BPCL) have entered into a MoU to provide a package of three policies to registered transport contractors of the oil industry major. The online facility developed and delivered by the insurer will enable transport contractors of BPCL to take Carrier s Legal Liability Insurance, and Public Liability (Act) Insurance & Motor Insurance at special prices, make payment online and receive the digitally signed policy in soft forms. Canara Bank ties up with Apollo Munich Canara Bank has tied up with Apollo Munich Health Insurance to offer health cover to those bank customers who are afflicted with diabetes or hypertension. The policy, called Energy, combines health insurance, wellness and counselling, and will be offered across eight cities in the country. Canara Bank customers who buy Energy will have access to the network of Apollo Munich s hospitals and clinics for pre-policy check-up, wellness tests and treatment. StanChart enters into bancassurance tie-up with Max Bupa Standard Chartered Bank and Max Bupa announced their bancassurance corporate agency arrangement to provide Max Bupa s health insurance products to the bank's customers. The product suite will include Max Bupa s flagship product Heartbeat, one of the most comprehensive offerings in the market with exclusive product and service propositions like coverage up to Rs 50 lakh (83.42 thousand USD), 24X7 customer service helpline, coverage for day care procedures, OPD benefit, among others. Karur Vyasa Bank ties up with Bajaj Allianz General Karur Vyasa Bank has tied up with Bajaj Allianz General Insurance for the roll-out of a co-branded health card. The bank is looking to issue 25,000 health cards in 3 months. And it will not be restricted to our customers, but any individual seeking a health cover, a senior official of the bank said. Banks hope for flexibility in insurance distribution role Banks in India are hoping for flexibility from the Reserve Bank of India (RBI), the country's central bank, in its moves to get them to change their insurance distribution role from corporate agent to broker. The banks are concerned about exclusive distribution arrangements that many of them have entered into with insurance companies as agents. Another concern is that the investment already made in training employees to sell insurance plans would go to waste as the training syllabus for those engaged in broking is completely different from that for training as a tied agent. The banks will also need a grace period to make the switch from corporate agent to insurance broker, particularly in training bank staff and in conforming to prudential regulations even as they service existing customers. The ministry said: "Public sector banks may join insurance broking business in order to increase insurance penetration and avoid mis-selling of insurance products," The banks were asked to report compliance and progress on the issue. Low commissions blamed for lack of micro-insurance agents Insurers are struggling to recruit agents to sell microinsurance products, blaming the low commissions and small ticket sizes for the lack of interest in the sector. At 15 percent commission, there is no incentive to sell, Mr K G Krishnamoorthy Rao, managing director and CEO of Future Generali India Insurance told the Times of India. Data from insurance company disclosures show that the majority of insurers do not have any micro-agents. Existing regulations allow district cooperative banks, non-governmental organisations, micro-finance institutions (MFIs), regional rural and urban co-operative banks, primary agricultural cooperative societies, companies appointed as banking correspondents and individual owners of small businesses like convenience stores and petrol stations in rural areas, are allowed to act as micro-insurance agents. However, a senior distribution head of a private life insurer says that since NGOs and MFIs have a different set of business, insurance is not a core area for them. Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 9

At the same time, insurers believe that it is not economically viable to set up branches in rural areas to sell micro-insurance products. Insurers say that they are not interested in selling more micro-insurance policies above mandatory minimum requirements. IRDA requires them to derive at least 25 percent of new life insurance business and at least 7 percent of total general insurance business from rural areas. To increase the attractiveness of microinsurance, IRDA has proposed that agents with higher persistency will be paid more commissions. IRDA chairman, Mr TS Vijayan, has also said recently that it would be more effective to have a single policy, with options for customisation, which covers all basic insurance needs including life and non-life. Sub-broking on the cards Insurance brokers may be allowed to expand into small towns and cities through sub-brokers so that the non-life insurance needs of retail customers can be better served, under a plan currently being finalised by the IRDA. Broker penalized by IRDA IRDA has imposed a total penalty of INR 35.3 lakh (USD 60,000) on India Infoline Insurance Brokers Ltd. for violating certain norms, including distance-marketing guidelines. The regulator, which conducted an inspection of the broker during March 6-9, 2012, based on complaints against it, also approved the renewal of India Infoline Insurance's licence up to November 2014. IRDA penalised the broker for violating norms on free look cancellation of insurance policies and short premium payment by customers, among others. IRDA also fined the company for distributing free insurance to prospective customers, calling it "nothing but inducement." Products Some companies are experimenting with the concept of customers not having to pay when they visit an outpatient department, or OPD. Insurance companies only started covering outpatient treatment a few years ago, but strictly through reimbursements. That meant the customer paid and then put in a claim for the money. It wasn't covered before that, with medical insurance policies only kicking in when there was a minimum 24 hours of hospitalisation. Apollo Munich's Maxima is now offering vouchers for various services such as consultation and pharmacy. It is offering vouchers for OPD treatment with sub limits in designated outlets. It reimburses if the hospital is not in our network list. There are limits for consultations, the insurance company gives a voucher of INR 600. There are also caps on the number of times a customer can seek a consultation to check against misuse. The average premium for such plans is INR13,000-15,000, providing for coverage of INR 3-5 lakh (USD 5,000 8,350). ICICI Lombard is planning a similar product. It plans to bring OPD on cashless platform, and will soon start a pilot. Public-sector general insurance companies are planning to join their private-sector rivals in launching healthcare policies offering cashless outpatient department (OPD) medical cover as well as the reimbursement of medical expenses incurred overseas. OPD consists of almost 60 percent of overall medical spending in India, so we need to get into that space and offer reasonably priced products in a few months, said the top official of New India Assurance. The insurer is also planning to offer cover for treatment outside India, he said. The four public-sector insurers New India Assurance, United India, Oriental Insurance and National Insurance control 70 percent of the health insurance market. Healthcare insurance in India typically covers medical expenses incurred during a hospital stay of at least 24 hours. According to a recent report by ICICI Lombard, only 2 percent of the health insurance products currently available cover OPD. These are sold by private-sector general insurance companies and standalone health insurers. Health insurers in India have increased the number of daycare procedures for which they provide cover - a marked departure from the previous standard practice of requiring at least 24-hour hospitalisation for medical cover to come into force. Star Health and Allied Insurance now covers over 200 daycare procedures. Similarly, HDFC Ergo provides insurance for over 100 daycare procedures. "Increasingly, health insurance covers are becoming more inclusive as the industry gains more experience from claims data and history," Mr Mukesh Kumar, head, human resource, marketing and strategy planning, HDFC Ergo, told The Times of India. At present, while the majority of the banks have insurance cover for theft and damage related incidents involving ATMs, hospitalisation cover taken out by banks for victims of physical attacks in ATM kiosks is not widespread, according to Business Standard. Individual customers are not provided cover for any medical expenses incurred due to injuries from physical attacks during ATM usage, said the general manager of a large public general insurer. Insurance officials say that a recent attack on a lady in an ATM kiosk in Bangalore shows the vulnerability of the public who use ATMs. Many banks provide personal accident covers as a value-add for their credit and debit card customers. Such personal accident policies also provide a cover against attacks on individuals while using ATMs. Though compensation is provided in these covers Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 10

for accidental deaths, providing cover against injury could be difficult due to high cover prices," said Mr. M Ravichandran, president, insurance, Tata AIG General Insurance. The company offers ATM Assault and Robbery Cover for ATM withdrawals lost due to a robbery, shortly after - within 15 minutes of - the cash retrieval. Further, it provides for emergency first aid expenses, if one is injured during the robbery. The demand for family floater plans in on the rise with higher level of awareness about health insurance and medical inflation. Most insurance companies expect the contribution of family floaters to the health premium to go up in the future with the addition of new customers. For New Indian Assurance, family floater contributes 20 percent to the total health premium; the company has set a target to take it to 50 percent in two years, Of late there is an increased demand for family floater plans as they provide cover to the entire family. In terms of premium too, family floaters are 10-15 percent cheaper when compared to having individual policies for each member for a family, said the top official of New India Assurance. The trend suggested by IRDA s annual report 2012-13 says the industry has witnessed an increase of 20 percent in premium contributed by the family floater cover plans, said the CEO of Royal Sundaram Alliance Insurance. Cigna TTK Health Insurance today launched a health insurance product ProHealth with an add-on Critical Illness option. ICICI Lombard General Insurance has launched a first-ofits-kind Outpatient Department (OPD) to provide real time cashless outpatient services to customers. i-health Card can be swiped at the OPD centre to avail cashless OPD benefits on a real time basis. Sanjay Datta, Chief- Underwriting & Claims, ICICI Lombard said The OPD segment, despite comprising 60 per cent of healthcare expenses faces a dearth of relevant insurance offerings. ICICI Lombard s Cashless OPD is best suited to meet customer needs towards payment of OPD expenses. L&T Insurance launched my:health Medisure Super Top Up plan, which provides an option of buying top-up cover ranging between INR 3 lakh (USD 5,000) and INR 20 lakh (USD 33,370) over the existing policy. With a general upward trend in the cost of health care, it is imperative that higher cover is required at all levels of life expectancy. To fulfil this, we launched this plan, L&T Insurance CEO and Whole-time Director Joydeep Roy said. New India Assurance will soon seek IRDA's approval to sell a combined policy covering personal accident, household and health insurance. The combined feature is expected to increase retail penetration of personal accident and household insurance on the back of growing sales of health insurance. Cholamandalam MS General Insurance (Chola MS) has launched Chola Protect for trucks with 11 add-on covers. This is the first value-added insurance product for truck owners, claims a company release. The company has also launched emergency road-side service for trucks. The new package product, with wide range of add-on covers, offers complete protection with features such as 100 per cent depreciation waiver, reinstatement value in case of total loss, monetary compensation for loss of key, driving license, registration certificate, and permit, payment for road tax, registration and insurance cost. It is India s first packaged complete protection policy for trucks that offers maximum coverage and service to the customer. It has also launched Chola Swasth Parivar Health Insurance Policy. The family floater policy offers a combination of health and personal accident covers. New India Assurance is making good money out of handset insurance. It has tied up with Nokia, Saholic.com and is in talks with others. Handset makers, online sellers and retail outlets are providing, among others, insurance against theft, loss and damage caused to device by dropping / water. For insurers, this rush to offer insurance has opened a new business window. The scheme is working very well and our claims experience has been good so far. We are in talks with other service providers to expand the insurance cover, said G. Srinivsan, Chairman and Managing Director, New India Assurance. Most other insurance companies, including ICICI Lombard, Oriental Insurance and Bajaj Allianz General Insurance, offer mobile insurance as a part of their all-risk cover for corporate clients, but not on a standalone basis for retail. Industry experts believe that if the market for handset insurance continues to grow, other players will also start offering this service. Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 11

Contact details Towers Watson s Risk Consulting team covers the length and breadth of India with associates based in Gurgaon and Mumbai. Vikas Newatia Director & Practice Leader, General Insurance Consulting, India vikas.newatia@towerswatson.com Gautam Mazumdar Senior Consultant, General Insurance Consulting, India gautam.mazumdar@towerswatson.com Gurgaon Mumbai 2nd Floor, Tower B Unitech Business Park, South City-1, Sector-49 511/512, Solitaire Corporate Park Andheri-Kurla Road, Andheri East Gurgaon- 122002 Mumbai 400 093 Tel: 91 (124) 432 2800 Tel: 91 (22) 4232 9900 Fax: 91 (124) 432 2801 Fax: 91 (22) 2837 0700 The India General Insurance Update has been prepared by Towers Watson for general information purposes only and does not constitute professional advice. The information, opinions and projections contained in this Newsletter are derived from various sources and have not been independently verified by Towers Watson. If you require professional advice or require any further information please contact any of the above named individuals. For more information, please visit www.towerswatson.com ABOUT TOWERS WATSON Towers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk, and financial management. With 14,000 associates around the world, we offer solutions in the areas of benefits, talent management, rewards, and risk and capital management. Copyright 2014 Towers Watson. All rights reserved. towerswatson.com 12