Understanding Insurance Penetration


Two of the most important and mostly used terminologies in insurance industry throughout the globe are insurance penetration and insurance density. In fact, these two are also used to compare the insurance industry of various countries and plays an important parameter for judging the insurance growth in any economy. In this post, I will discuss about Insurance penetration and will try to a make readers understand about the same and will be discussing Insurance density in a separate post.

Insurance Penetration: Technically, Insurance Penetration is the ration of premium underwritten in a particular year to the Gross Domestic Product (GDP) of the country and is expressed as a percentage. In other words, insurance penetration is the percentage contribution of the insurance sector to the GDP of the country. Let us understand with an example. Suppose the total premium underwritten in a Financial Year in a country is INR 1,00,00,000 and the GDP of the country of that Financial Year is INR 50,00,00,000. To calculate the insurance penetration, divide the premium underwritten to the GDP which means, (1,00,00,000/50,00,00,000 = 0.02) and expressing this as a percentage will come up to 2% (0.02*100 = 2). This means, the insurance penetration is 2%. Insurance Penetration is widely used and you will encounter this jargon in almost every insurance journals, reports, research papers etc.

As per the latest Insurance Regulatory and Development Authority of India (IRDAI) Annual Report 2017-18, the insurance penetration of India in 2017 was 3.69% which is a slight increase from 3.49% in 2016. Further, the insurance penetration can be segregated in to life insurance and non-life insurance. As per IRDAI Annual Report, the life insurance penetration and non-life insurance penetration of India in 2017-18 were 2.76% and 0.93% respectively.  For 2016-17, life insurance penetration and non-life insurance penetration were 2.72% and 0.72% respectively. This indicates a marginal increase in life insurance and non-life insurance penetration from 2016-17 to 2017-18. Let’s look at the insurance penetration of some of the countries which is given in the following table:

Insurance Penetration of selected countries (in %)
Country Year 2016 Year 2017
Life Non-Life Total Life Non-Life Total
Taiwan 16.65 3.34 19.99 17.89 3.42 21.32
Hong Kong 16.2 1.41 17.6 14.58 3.36 17.94
South Africa 11.52 2.74 14.27 11.02 2.74 13.75
South Korea 7.37 4.72 12.08 6.56 5 11.57
United Kingdom (UK) 7.58 2.58 10.16 7.22 2.36 9.58
France 6.06 3.17 9.23 5.77 3.18 8.95
Japan 7.15 2.37 9.51 6.26 2.34 8.59
Switzerland 4.72 4.12 8.85 4.41 4.12 8.53
Singapore 5.48 1.67 7.15 6.64 1.58 8.23
India 2.72 0.77 3.49 2.76 0.93 3.69
World 3.47 2.81 6.28 3.33 2.8 6.13
Source: Swiss Re, Sigma volumes, 3/2017and 3/2018

A closure look at the insurance penetration reveals that India is way behind the world average insurance penetration.  Taiwan is the country with highest insurance penetration of 21.32 % followed by Hong Kong and South Africa having insurance penetration of 17.94% and 13.75% respectively. Also, the above table reveals that Switzerland is the country where the gap between life and non-life insurance penetration is minimum. In fact, Switzerland has a proper distribution of life and non-life insurance business and both life and non-life insurance has almost equal contribution to the country’s GDP.

Insurance penetration is an indicator of growth of insurance sector for any economy in a particular year. It is widely used as a comparative tool to measure and compare insurance industry among various countries and hence knowing and understanding of insurance penetration is beneficial for all of us. Hope I was able to make you understand this jargon in simple terms. 🙂

Ashish Kumar

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IRDAI (Reinsurance) Regulations, 2018


The Insurance Regulatory and Development Authority of India (IRDAI) came up with the reinsurance regulations recently in December 2018. This is a first kind of regulation of its type, specific to reinsurance repealing IRDAI (General Insurance – Reinsurance) Regulations and IRDAI (Life Insurance – Reinsurance) Regulations which were released in 2016. This regulation will be called as IRDAI (Reinsurance) Regulations, 2018 which will be effective from 1st January 2019. This article will provide some of the insights of this newly released regulation covering some of the basic terminologies, areas like Cross Border Reinsurer (CBR), cession limit, amendment to previous regulations etc.

There are total 12 regulations contained in IRDAI (Reinsurance) Regulations, 2018. Some of the important points which need to be known from these regulations are as follows:

  • Reinsurance Program: Every insurer need to have a reinsurance program with the objective of having maximum retention within the country. The Board approved reinsurance program need to be submitted to the IRDAI before 45 days of the commencement of the financial year. For any changes made to the reinsurance program, insurer need to submit the final board approved reinsurance program within 30 days of the commencement of the financial year. The reinsurance program along with the retention policy (discussed below) need to be submitted to the Authority i.e IRDAI. (Regulation 3)
  • Retention Policy: The first objective of reinsurance as stated in these regulations, is to maximize retention within the country. Keeping this objective in mind insurers need to formulate a retention policy. Every Indian insurer shall maintain the maximum possible retention in commensuration with its financial strength, quality of risks and volume of business ensuring that the reinsurance arrangement is not fronting. (Regulation 3). Life Insurer should maintain a minimum retention of
  1. 25% of sum at risk under pure protection life insurance business portfolio
  2. 50% of sum at risk under other than pure protection life insurance business portfolio

The retention policy also states that “Every Indian Reinsurer shall maintain a minimum retention of 50% of its Indian business”, as mentioned in Regulation 3(2)(C) .

  • Fronting: This is one of the confusing jargons used in reinsurance. Let us try to understand this with an example. An insurer is having motor portfolio and what it does is instead of keeping some portion of risks within itself, the insurer transfers most or all part of the risks to a reinsurer, thus relieving itself from the financial burden. This is an example of fronting. Insurer transferring most or all portion of risks to reinsurers. Generally, new insurers use fronting as a risk transfer tool in order to reduce their financial burden at the time of claims. Fronting is defined as a process of transferring risk in which an Indian Insurer cedes or retro-cedes most of or all of the assumed risk to a Re-insurer or retrocessionaire. (Regulation 2(13))
  • IIOs: IIOs is an acronym of International Financial Service Center (IFSC) Insurance Office. This means a branch office of an insurer or reinsurer domiciled in India or outside, which has been granted a certificate of registration by the Authority to set up its office in IFSC-SEZ, to transact insurance business or reinsurance business or both. IIO has been defined in Regulation 2(17) of these Regulations. This is a new concept which specifies setting up of offices in IFSC Special Economic Zone (SEZ).
  • Foreign Reinsurer Branch (FRB): This means a branch of a Foreign Reinsurer who has been granted certificate of registration by the Authority under the Insurance Regulatory and Development Authority of India (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015 or Insurance Regulatory and Development Authority of India (Lloyd’s India) Regulations, 2016, as amended from time to time.

Cross Border Reinsurer (CBR)

CBR, as the name suggests, means a foreign reinsurers including Lloyd’s Syndicates, whose place of business is established outside India and which is supervised by its home country regulator. CBR includes:

  • Parent or Group companies of FRBs (Foreign Reinsurer Branch)
  • Parent or Group companies of IIOs.

CBR can be understood by an example. Consider an Indian insurer wants to transfer its risk to a reinsurer which is not in India but in United Kingdom (UK). Indian insurer can transfer its risk to UK based reinsurer whose place of business is in UK and not in India. Then the UK based reinsurer is a CBR. In order to transact business through CBRs, there are eligibility criteria which a CBR (like the UK based reinsurer) should have. Indian insurer can place their business through CBRs if CBRs meet the following eligibility criteria as defined in Regulation 4:

  • The CBR is an insurance or Re-insurance entity in its home country, duly authorized by its home country regulator to transact re-insurance business during the immediate past three continuous years;
  • The CBR has a credit rating of at least BBB from Standard & Poor or equivalent rating from an international rating agency during the immediate past three continuous years;
  • The home country of the CBR has signed Double Taxation Avoidance Agreement with India;
  • The CBR has minimum solvency margin or capital adequacy, as specified by the home country regulator, during the immediate past three continuous years;
  • The past claims settlement experience of the CBR is found to be satisfactory;
  • Any other requirements as stipulated by the Authority from time to time.

One of the most important aspects related to CBR is what is known as Cession Limits. Cession means transfer of risks and the insurance company which transfers the risks to a reinsurer is known as Cedant. Cession Limits restricts Indian insurer to transfer risks to CBRs based on the rating of CBRs. The rule is simple; better the rating of CBR, more risk can be transferred and vice-versa. The below table provides the maximum cession limit that can be allowed per CBR as defined in Regulation 6.

Rating of the CBR as per Standard & Poor or equivalent Maximum overall cession limits

allowed per CBR

Greater than A+ 20%
Greater than BBB+ and up to and including A+ 15%
BBB and BBB+ 10%
Note: The above percentages are to be calculated on the total reinsurance premium ceded out-side India.

Reinsurance Placements

Regulation 5 describes the way of placing reinsurance placements. According to Regulation 5(1), every insurer (Cedant) shall be free to obtain best terms for its reinsurance protection of domestic risks, subject to the following:

  • Cedants shall seek terms at least from all Indian Re-insurers, who have been transacting Re-insurance business (other than emanating from obligatory cession) during the immediate past three continuous years and at least from four FRBs. (Regulation 5(1)(A) )
  • No Cedant shall seek terms from IIOs and FRBs having credit rating below A- from Standard & Poor’s or equivalent rating from any other International Rating Agency. (Regulation 5(1)(B)(a) and Regulation 5(1)(B)(b) )

Order of Preference

One of the most important aspects of reinsurance placement in Indian context is Order of Preference which has been revised in IRDAI (Reinsurance) Regulations, 2018. Order of preference means in which order, the insurance company in India should place their reinsurance business. In simple terms, which reinsurers should be given preference while placing reinsurance business? As per Regulation 5(2)(A), every cedant shall offer best terms, for participation in the following order of preference:

  1. to Indian Re-insurers, transacting re-insurance business (other than emanating from obligatory cession) during the immediate past three continuous financial years;
  2. to other Indian Re-insurers and FRBs;
  3. to the IIO as under regulation 5(1)(B)(a) which provided the best and lead terms with capacity of not less than 10%;
  4. to the CBR as under regulation 5(1)(B)(b) which provided the best and lead terms with capacity of not less than 10%;
  5. to other IIOs;
  6. To other Indian Insurers (only Facultative) and CBRs.

A thorough look on the above order of preference interprets that the Indian insurers should give first preference to General Insurance Corporation of India, popularly known as GIC Re as it is the only Indian reinsurer transacting reinsurance business for the past consecutive three financial years.  Other Indian reinsurers and FRBs come at second preference followed by IIOs and CBRs.

Reinsurance placements and order of preference as defined in Regulation 5(1) and Regulation 5(2) are not applicable to the following as defined in Regulation 5(3)

  1. Retrocession or reinsurance placements of Indian Re-insurers, FRBs, IIOs and Insurance Pools;
  2. Existing inter-company arrangements of the Indian Insurers transacting direct insurance business;
  3. Obligatory cessions as notified from time to time under Section 101A of the Act;
  4. Re-insurance placements of Indian insurers transacting life insurance business. However, Indian insurers,transacting life insurance business, shall endeavor to utilize the Indian domestic capacity before offering to the CBRs.

Alternative Risk Transfer (ART) and Domestic Insurance Pool

Insurer can initiate the proposal for an insurance pool which needs to be approved by the IRDAI as defined in Regulation 7. IRDAI approval is required for the formation of domestic insurance pool.

As far as Alternative Risk Transfer (ART) is concerned, there is a provision for ART solutions for Indian insurers as per Regulation 8. Insurers intending to adopt ART solutions need to submit their proposal to the IRDAI and after examining various aspects, IRDAI may grant permission to adopt ART solutions. IRDAI approval is required for adopting ART solutions.

What’s new in IRDAI (Reinsurance) Regulations, 2018

After having a walk through on IRDAI (Reinsurance) Regulations, 2018, let us see what is new in these regulations which are mentioned below:

  • Order of preference revised.
  • Order of preference not applicable for life insurers.
  • Every Indian Reinsurer shall maintain a minimum retention of 50% of its Indian business.
  • Amendment to Regulation 4 of IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurance Other than Llyod’s) Regulations, 2015 which has been changed to, An applicant shall make a requisition for registration application under for Re-insurance business wherein the branch office of foreign Re-insurer shall maintain a minimum retention of 50% of the Indian Re-insurance business.”
  • For FRBs, there is no category as such now. The minimum retention is 50%. An applicant shall make a requisition for registration application for Re-insurance business wherein the branch office of foreign Re-insurer shall maintain a minimum retention of 50% of the Indian Re-insurance business. This removes Category B (minimum retention of 30%) of IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurance Other than Llyod’s) Regulations, 2015.
  • Amendment to Regulation 8 of IRDAI (Llyod’s India) Regulations, 2016 which has been changed as, “An applicant shall make a requisition for registration application for Re-insurance business wherein the Lloyd’s India Syndicate shall maintain a minimum retention of 50% of the Indian Re-insurance business.”
  • Provision for Alternate Risk Transfer (ART).

I have attached the IRDAI (Reinsurance) Regulations, 2018 below. One can download the regulation for their reference.

IRDAI (Reinsurance) Regulations 2018

Ashish Kumar

Insurance Terminologies – II


I started this series of posts related to the terminologies used in insurance. In this second installment, let us know few of them which is discussed below.

  • Premium: It is the consideration that one pays in monetary value for buying the insurance policy. The money paid by you to purchase the insurance policy is known as the premium. As per Section 64VB of Indian Insurance Act 1938, premium should be paid in advance before the risk coverage starts. Hence, no coverage will be provided before paying the premium.
  • Indemnity: Indemnity means bringing back to the same financial condition as if the loss didn’t occurred. This is one of the basic principles of insurance which states that there should be no benefit out of the coverage. Meaning that if the person suffers a loss of INR 10000 due to the peril covered in the policy, the insurance company will pay only the amount of loss i.e INR 10000 and not more than that even though the policy cover is of greater value say INR 100000. The amount paid by the insurance company is subject to the total amount covered in the policy. This principle is applicable in general insurance while in life insurance, principle of indemnity is not applicable.
  • Endorsement: This means any alterations or modifications in the insurance policy. Endorsement can be financial or non financial. Financial endorsement includes change in the sum insured, change in premium etc. Non-financial endorsement endorsement includes change in address, change of contact details, email id etc. A written application by the policyholder has to be given to the insurance company for any endorsement.

Ashish Kumar

Insurance Terminologies – I


I have decided to start a new series of post containing various terminologies related to insurance which one can come across in dealing with insurance related matters. This is the first installment of this series. I will keep things simple and straightforward so that any one reading the post can understand. I will not cover too much terminology in one post. Each post will contain three to five terminologies. This may also be helpful to those pursuing or willing to pursue their study in insurance. So let’s start.

  • Insured: Insured is the person who has taken the insurance policy. The other word which is synonymous to this is the policyholder. Both are synonymous to each other. Suppose, if you have taken a life insurance policy, then you are the insured or the policyholder.
  • Insurer: This is the insurance company which provides you the insurance. The company providing life insurance is known as life insurer and the company providing non-life insurance is known as non-life or general insurer. Some of the insurers in India are LIC of India, ICICI Lombard, SBI Life Insurance, SBI General Insurance, HDFC Ergo General Insurance, Bajaj Allianz General Insurance, PNB Metlife etc.
  • Beneficiary: This is the individual who will receive payment due to annuity, life insurance policy etc. Nominee is an example of beneficiary who receives the payment on the event of insured death.

Ashish Kumar

Insurance industry in India


 

Insurance is a part of financial services apart from banking, capital market, money market etc. Insurance is considered as a protection from events which results into financial loss. The insurance industry in India comprises of life insurance, general insurance, stand alone health insurance and reinsurance. The Indian insurance industry is guided by Insurance Act, 1938 which was amended from time to time, the latest amendment happened in 2015.

This post briefly gives an overview of insurance sector in India particularly discussing about the regulator, life insurance, general insurance, stand alone health insurance and reinsurance. The life insurance comprises of around 79% of the market, the rest 21% is occupied by general insurance. Of the general insurance, motor insurance has the highest market share of 44% followed by health insurance having market share of 29%, as per IRDAI Annual Report 2015-16. It is worth to mention that the insurance industry in India has showed a significant growth after it got opened for private sector in the year 2000. Since then, the industry is growing rapidly. In 2015, the reinsurance sector was allowed for foreign players which were solely dominated by General Insurance Corporation of India (GIC Re).  A small discussion about regulator, life insurance, stand alone health insurance and reinsurance is mentioned below.

Regulator:  Indian insurance industry is regulated by Insurance Regulatory and Development Authority of India (IRDAI) which was formed by an Act of Parliament in 1999. The Insurance Regulatory and Development Authority (IRDA) Act was passed in 1999 leading to the formation of IRDAI. IRDAI is headquartered in Hyderabad and has offices in New Delhi and Mumbai. The regulator is responsible for carrying various activities like granting license to insurance companies, framing regulations which the insurers need to follow, protecting policyholder’s interest etc. Breach of IRDAI regulations can have serious implications resulting from penalty to cancellation of license of the insurance company.

Life Insurance: At present, there are 24 life insurers in India, of which, Life Insurance Corporation of India (LIC) is wholly owned by the Government of India. LIC was formed in September 1956 by an Act of Parliament known as LIC Act, 1956.  Some of the private life insurers include ICICI Prudential Life Insurance, HDFC Standard Life Insurance, SBI Life Insurance etc.

General Insurance: Non-life or general insurance comprises of all kinds of insurance except life. It has various segments comprising of motor insurance, health insurance, fire insurance, marine insurance, engineering insurance, aviation insurance, satellite insurance etc. There are 33 non-life insurers operating in India consisting of public and private insurers. The public insurers include the following:

  • The New India Assurance Co Ltd. (NIACL), headquartered at Mumbai.
  • National Insurance Co Ltd. (NICL), headquartered at Kolkata.
  • Oriental Insurance Co Ltd (OIICL), headquartered at New Delhi.
  • United India Insurance Co Ltd (UIICL), headquartered at Chennai.
  • Export Credit Guarantee Corporation of India (ECGC)
  • Agriculture Insurance Company of India (AIC)

ECGC and AIC are known as specialized insurers. Apart from above mentioned public sector companies, some of the private non-life insurers include ICICI Lombard, HDFC Ergo General Insurance, SBI General Insurance, IFFCO Tokio General Insurance, Tata AIG General Insurance etc.

Standalone Health Insurance: These are those companies which are solely carrying their business on health insurance. There are six stand alone health insurers like Apollo Munich Health Insurance, Star and Allied Health Insurance, Max Bupa Health Insurance, Cigna TTK Health Insurance, Religare Health Insurance and Aditya Birla Health Insurance. One of the ways to recognize the stand alone health insurers is that the stand alone health insurers will have the word “health insurance” in the name of the company as in the above mentioned six stand alone health insurers.

Reinsurance: General Insurance Corporation of India (GIC Re) is owned by the Government of India and is the national reinsurer which is headquartered at Mumbai. The reinsurance industry in India is now opened for foreign players to open their branch offices in after the Insurance Act, 1938 was amended in 2015. At present there are 9 foreign reinsurers who have opened their branch offices in India. They are mentioned below:

  • Swiss Re
  • Munich Re
  • Llyod’s India
  • Reinsurance Group f America (RGA)
  • Hannover Re
  • SCOR
  • XL Insurance Company
  • Axa France Vie
  • General Reinsurance AG

It is important to note that apart from GIC Re and the above mentioned foreign reinsurers, ITI Re is the first private Indian reinsurance company which got licensed by IRDAI. Hence the Indian reinsurers include GIC Re and ITI Re.

 

Apart from the above players, the insurance industry also comprises of various intermediaries and distribution channels like agents, brokers, Insurance Marketing Firms (IMF), Web Aggregators etc. which I will discuss in separate post.

One thing to be noted is that the insurers in India can take part in either life insurance or general insurance business and not both. This means that a life insurer cannot start their business of motor insurance, fire insurance etc and vice versa. Health insurance is the only insurance product which can be offered by both non-life and life insurers. Non-life insurers can sell separate health insurance policy while life insurers offer health insurance in the form of riders. Riders are the extra benefits which are covered by paying some extra premium. Example of riders include Accidental Death Benefit (ADB) rider, critical illness rider etc. Life  insurers cannot offer separate health insurance products.

– Ashish Kumar