Analyzing India’s Fast-Growing Insurance Market

Episode Summary

India has emerged as the 10th-largest insurance market in the world by total premium volume, yet its insurance penetration level sits around 3%-4%, well below the global average of 7%. In the eighth episode of Skadden's year-long podcast series on global prudential solvency requirements, host Robert Chaplin and colleague Anika Goodfellow explore the country’s evolving insurance regulatory landscape and outline its goal of transforming the sector to allow for companies to more easily conduct business.

Key Points

• Dual Regulatory Structure: Insurers and reinsurers can establish a presence inside or outside of the country’s GIFT City, located in the state of Gujarat. Inside the GIFT City, these businesses can register to conduct business in a special economic zone called the International Financial Services Center, or IFSC. Outside the GIFT City, the country’s primary regulator is the Insurance Regulatory and Developing Authority of India, or IRDAI.
• GIFT City Advantages: The GIFT City currently is home to roughly 35 insurers, reinsurers and intermediaries, all operating under special offshore status that features regulatory exemptions and favorable tax regimes. These firms can conduct insurance business within the City, other special economic zones and offshore jurisdictions with access to infrastructure in the City and India's vast population and rapidly growing economy.
• International Growth: The Indian insurance market is gradually opening up to international players. In 2000, when India liberalized the insurance sector and first allowed foreign direct investment (FDI), FDI in the insurance sector was capped at 26%. That went up to 49% in 2015 and then to 74% in 2021. In 2020, the FDI limit for investment in Indian insurance intermediaries was increased from 49% to 100%. This year, India’s finance minister announced a proposal to further increase the FDI cap for the insurance sector to 100%. This proposal is still in the consultation process and is subject to any conditions set by the Indian regulatory authorities.
• Risk-Based Capital: As part of its “Insurance for All by 2047” initiative, India is shifting from its current fixed solvency margin regime (with a minimum 150% ratio requirement) to a risk-based capital framework aligned with international standards.

Voiceover (00:02):
From Skadden, The Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.

Rob Chaplin (00:20):
Welcome back to The Standard Formula Podcast. Last episode, we discussed how the insurance and reinsurance sector has been shaping up in China. Today, we want to touch on another important financial hub in Asia: India. This is episode eight in our year-long podcast series on global prudential solvency requirements, which will eventually become part of our forthcoming publication, The Encyclopedia of Prudential Solvency. A special thanks must also go out to our friends at Khaitan & Co in India for their review and input in today's episode. Joining me today is my colleague, Anika Goodfellow. Anika, good to have you here. Why don't you kick things off for us with a bit of background on India's insurance market?

Anika Goodfellow (01:11):
Thanks, Rob. Pleasure to be here. Interestingly, China and India's insurance industries have, to a certain extent, evolved in similar ways. They're relatively young, but are two of the fastest growing insurance markets, not just in Asia, but also globally. Following India's independence in 1947, the government of India nationalized the life insurance market. The Life Insurance Corporation of India Act passed in 1956 and transferred all life insurance business in India to the Life Insurance Corporation of India, essentially creating a government-sanctioned monopoly in the sector. A similar process took place in 1973 when the General Insurance Business Nationalization Act was enacted to nationalize the general insurance business.

(01:51):
However, in 1999, the insurance sector in India was liberalized to become accessible to private players, leading to increased competition and innovation. Fast-forward to now, India is the 10th biggest insurance market in the world by total premium volume, occupying almost 2% of the global market share. But here's the thing, the insurance penetration level — that is a portion of a country's economy that is insured — is only around 3% to 4% in India. This is below the global average of 7% and much lower than what you see in developed countries, where it can reach 13% to 15%. Now that we have some background on the insurance industry in India, Rob, let's dive into the modern regulatory regime.

Rob Chaplin (02:33):
Sounds good, Anika. Let's talk about how things are now regulated. Insurers and reinsurers can either establish a presence inside or outside of the GIFT City, which is the Indian state of Gujarat. GIFT City is the home of India's first, and so far only, International Financial Services Center, or IFSC, which is essentially a special economic zone. Outside of the IFSC, the Insurance Regulatory and Developing Authority of India, or IRDAI, is the primary regulator of the insurance industry in India. The IRDAI was established in 2000 under the Insurance Regulatory and Development Act to promote orderly growth in the insurance industry and to protect the interests of policyholders. The primary pieces of legislation regulating the insurance sector are the Insurance Act 1938 and the Insurance Regulatory and Development Authority Act 1999. IRDAI has also issued various other regulations governing the licensing and functioning of insurers, reinsurers and insurance intermediaries. Anika, please walk us through the regime in the GIFT City in India.

Anika Goodfellow (03:55):
Thanks, Rob. As an alternative, insurers or reinsurers can choose to establish a presence in the GIFT City by registering as an IFSC insurance office, or IIO for short. IIOs registered in the GIFT City are regulated by the International Financial Services Centers Authority, or IFSCA. The IFSCA was established in 2020 under the International Financial Services Centers Authority Act and serves as the unified regulator of the financial institutions, financial services and financial products in the GIFT City. The GIFT City operates under a special offshore status within India and is positioned as a destination for foreign investors to set up businesses in the areas of insurance and reinsurance and banking and investments. Businesses in the GIFT City benefit from the infrastructure within the city and have access to the rapidly developing economy and vast population of India. Businesses in the GIFT City also enjoy regulatory exemptions and are subject to a more favorable tax regime.

(04:52):
IIOs registered with the IFSCA can conduct life insurance business, general insurance business, health insurance business and reinsurance business. However, an IIO set up by way of a branch will only be able to operate within the class of business permitted by the regulatory authority in its home country. IIOs which are registered to conduct direct insurance business can only undertake such business within the GIFT City, other special economic zones in India and offshore jurisdictions, but not in the rest of India. However, IIOs which conduct reinsurance business are permitted to take on risks from cedents based in the GIFT City, other special economic zones, offshore jurisdictions and the domestic market in India.

(05:33):
There's an important caveat though. In the case of risk ceded from insurers based in the domestic market in India, IIOs rank behind the domestic reinsurers under India's "order of difference regime," which essentially sets out an order of priority which Indian insurers must follow when ceding risk. Right now, there are around 35 insurers, reinsurers and intermediaries set up in the GIFT City. For potential market entrants, it would be helpful to look into the requirements for formation of new insurance and reinsurance companies in India. Rob, could you start with insurance businesses outside of the IFSC?

Rob Chaplin (06:07):
Certainly, Anika. Insurance or reinsurance businesses under the IRDAI regime must be undertaken by an Indian company that is registered with the IRDAI. Life, general and health insurers must have a minimum paid-up equity capital of 1 billion Indian rupees. That's about $11.6 million. Reinsurers require at least 2 billion Indian rupees or about $23.2 million. If you're setting up a reinsurance branch, you'd need a minimum assigned capital of 500 million Indian rupees, which is about $5.8 million. As you may recall from our last episode, Chinese insurance and reinsurance companies are required to maintain a minimum paid-in capital of 200 million and 300 million Chinese yuan, respectively, which are equivalent to around $27.8 million and $41.8 million. So, the paid-in capital requirements for insurance and reinsurance companies in India are less stringent than those in China. Last May, the IRDAI published guidelines on collateralized reinsurance transactions as part of the Master Circular on Reinsurance 2024, which is now applicable to all reinsurance programs in India. Anika, could you tell us more please about the new requirements?

Anika Goodfellow (07:33):
Thanks, Rob. As you have mentioned, the IRDAI now says that if Indian insurers want to place reinsurance business with cross-border reinsurers (CBRs), there will be collateral requirements. The idea is to, in IRDAI's own words, ring-fence the interest of Indian cedents to maintain their ability to meet obligations towards policyholders in India while continuing their growth trajectory. As CBRs have been receiving a significant amount of premiums from India and their share in the Indian insurance and reinsurance market has been increasing, the new regime requires all Indian cedents placing reinsurance business with CBRs to collect collaterals for such reinsurance placement either by way of an irrevocable letter of credit from or withholding of the premium or funds by the cedent. The minimum proportion of collateral in case of a letter of credit ranges from 75% to 100% of the aggregate of the outstanding claims, liabilities and incurred, but not reported reserves.

(08:29):
The applicable percentage depends on the credit rating of the CBR. If the CBR is rated A- or above by Standard & Poor's or an equivalent credit rating agency, the minimum percentage is 75%. If their rating is below A-, the minimum percentage is set at 100%. In case the collateral for the reinsurance placement is by way of premium retention, Indian cedents are required to withhold at least 50% of the premium ceded to the CBR. However, this requirement is not applicable to reinsurance transactions with total premiums below 750 million Indian rupees during a financial year, which is about $8.65 million, subject to the CBR having a credit rating of A- or above.

(09:09):
There are also some other exceptions, including premiums retro-ceded by foreign branches or Indian reinsurers to CBRs or premiums ceded in respect of government schemes. While the effect of this collateral requirement is yet to be fully seen, early indications are that this has led to an increase in reinsurance premiums, which is likely to trickle down to the end consumers in the form of increased premium on most insurance products. It'll be interesting to see whether the existing CBRs will instead register and operate as IIOs in the GIFT City or as reinsurance branches. Now is a good time to dive into the regulatory requirements for the GIFT City. Rob, over to you.

Rob Chaplin (09:46):
Great. Thanks, Anika. To register as an IIO in the GIFT City, applicants must secure approval from the Office of Administrator of IFSCA or the IFSCA itself depending on the type of IIO to be set up. They should also bear in mind the need to rent office space within the city. Let's begin with IIOs set up as companies in the GIFT City. In this case, the equity capital requirements for insurers and reinsurers are the same as those under the IRDAI regime, which are 1 billion Indian rupees for insurers and 2 billion Indian rupees for reinsurers. Also, the paid-up capital should be maintained within the GIFT City. Anika, what if we're setting up a foreign branch office?

Anika Goodfellow (10:36):
If an IIO is set up as a branch office, the assigned capital requirement will be $1.5 million, which is lower than that under the IRDAI regime. The assigned capital could be held at the parent’s level in the home country, but must always be maintained as long as the IIO remains registered. Though it can be invested in compliance with the requirements of the IIO's home country. Also, branch offices of foreign insurers and reinsurers must maintain solvency margin as required in their home country. If you are a foreign reinsurer looking to set up a branch office in the GIFT City, you will also need net owned funds of around 10 billion Indian rupees, which is around $115.6 million. In addition to becoming eligible to set up an IIO in the GIFT City, applicants should also satisfy the fit and proper criteria. Applicants and their promoters, partners or controlling stakeholders must also be from a Financial Action Task Force, or FATF, compliant jurisdiction and comply with international standards set by the FATF to combat money laundering and terrorism financing. Rob, is it a good time to discuss foreign investment and market access?

Rob Chaplin (11:41):
Absolutely, yes. The Indian insurance market is gradually opening up to international players. Back in 2000 when India liberalized the insurance sector and first allowed foreign direct investment, FDI in the insurance sector was capped at 26%. That went up to 49% in 2015 and then to 74% in 2021. In 2020, the FDI limit for investment in Indian insurance intermediaries was increased from 49% to 100%. This year, the finance minister of India announced a proposal to further increase the FDI cap for the insurance sector to 100%. This proposal is still in the consultation process and is subject to any conditions set by the Indian regulatory authorities. However, if this proposal is rolled out in the future, it further opens up opportunities for foreign investors interested in Asian insurance markets. Of course, as an alternative, as we've touched on earlier, foreign insurers and reinsurers can always set up as IIOs within the GIFT City. Now, Anika, tell us about the solvency regime in India.

Anika Goodfellow (12:58):
Certainly, Rob. Right now, the insurance sector in India is shifting toward a risk-based capital, or RBC, regime. This is part of IRDAI's Insurance for All by 2047 initiative to bring the Indian insurance industry in line with international standards and to catch up with India's competitors in North America and Europe. As things stand, the IRDAI enforces a fixed solvency margin regime. Under this regime, the solvency ratio is calculated as a ratio of available solvency margin, or ASM, and required solvency margin, or RSM. ASM is the sum of net amounts in the Policyholders Fund and the Shareholders Fund, while RSM is a calculation based on the parameters prescribed by IRDAI, typically linked to the equity capital investments of the insurer. The IRDAI requires all insurers to maintain a minimum solvency ratio of 150%.

(13:47):
The IRDAI published a circular in 2023 which showcases its ambition to transform the Indian insurance industry to align with what it describes as global best practices with the aim of making doing business in India easier. One of the key initiatives is the development of the RBC regime. The IRDAI also mentioned in the same circular that it has made a detailed study of the Insurance Capital Standard and Insurance Core Principles of International Association of Insurance Supervisors and the RBC frameworks of other jurisdictions. The IRDAI initially expected the RBC regime framework to be available by the end of this year, though we now expect some delay. We'll of course keep you updated on anything interesting and any features that are worth keeping an eye on once it is available.

Rob Chaplin (14:31):
Thanks, Anika. That's a great place to wrap up. As we've seen, the insurance and reinsurance industry is relatively young, but the India market is growing fast. We'll be watching closely for the ongoing development of the regulatory landscape in India and, in particular, the proposal on the relaxation of the FDI cap, as well as the migration to a risk-based solvency regime. Thanks for listening today. Stay tuned for our next episode in our series on global prudential solvency requirements. In the meantime, if you have any questions, comments or suggestions, we'd love to hear from you. Until next time.

Voiceover (15:06):
Thank you for joining us on The Standard Formula. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don't miss any future episodes. Additional information about Skadden can be found at skadden.com. The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP and affiliates. Skadden is recognized for its deep experience in representing insurance and reinsurance companies and their advisors on a wide variety of transactional and regulatory matters. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.