Upload
donguyet
View
214
Download
1
Embed Size (px)
Citation preview
June 2014
A framework for developing a reinsurance hub in India
Contents Foreword
1
Executive Summary
3
I. Objective
6
II. The Indian insurance sector
7
III. Pivotal role reinsurance can play in supporting the insurance sector
12
IV. Framework for developing a reinsurance hub in India
17
V. Key elements: Regulations – Taxation – Dispute resolution A. Recommendations for changes to key
legislation and regulations B. Taxation framework C. Dispute resolution
23
24 39
VI. Appendices: Appendix 1: ONE Insurance Vision Appendix 2: International reinsurance hubs
44
VII. References
64
1
Foreword
India has exceptional demographics, high savings rate and a massive demand for
infrastructure development. It is projected that India will grow to a significantly large
economy in the next few decades. With a view to tap demographic dividends, heavy all-
round investments is needed.
Financial services including insurance, exert a major impact on the long term economic
growth of a country, several research studies show that countries with well developed
financial systems tend to grow faster.
Insurance penetration in India is very low and offers tremendous long term growth potential.
India is also one of the most Nat Cat prone countries in the world.
Most financial services and products are internationally tradable and are termed as
`international financial services' (IFS). However, their production is concentrated in a handful
of `international financial centers’ (IFCs). One of the offshoots of this is, the need for an
International Reinsurance Hub in India, which needs to be developed by having the best of
Reinsurance markets, companies and in providing them with a conducive platform to let
them perform their authorised functions.
London, New York, Frankfurt, Singapore, Tokyo, Hong Kong as international financial hubs are
great success stories for the global economy and for the respective countries. The
reinsurance sector features very strongly in major global financial centres. Other financial
centres such as Shanghai and Dubai are fast catching up, and India needs to act swiftly
Reinsurance is an industry that is truly global in nature. Reinsurers’ presence in India would
generate economic benefits for industries beyond the insurance sector, help create skilled
jobs and enable the dissemination of technical, managerial knowledge and expertise to the
wider Indian insurance industry helping support the modernisation of the Indian insurance
sector.
An Indian reinsurance hub will attract major international financial service brands to India; it
will also firmly demonstrate that India is committed to its sustained economic growth, and
open for business with its international trading partners. Furthermore, reinsurers will be able to
play a fundamental role in developing India into a significant international financial centre.
Indian Merchants’ Chamber (IMC), in January 2013, organised a symposium on Developing a
reinsurance hub in India, and engaged with the market and key stakeholders such as Mr.
Yashwant Sinha and Mr. Piyush Goyal, who endorsed the concept wholeheartedly.
Following on, in October 2013 the City of London organised a roundtable discussion with
leading international reinsurers and insurers in London.
The January 2014 round table organised by IMC and the City of London in Mumbai discussed
the desired framework for a reinsurance hub in India with a panel of distinguished Indian and
international insurance and reinsurance firms, GIC Council and other financial sector experts,
law firms and tax consultants.
This paper is a compilation of all the previous deliberations, comments and contributions from
all the participants and industry stakeholders and provides a framework for creating a
reinsurance hub in India. We are delighted to present this to the policy makers in India.
Prabodh Thakker
President – IMC
2
Acknowledgements We would like to thank the representatives from the following firms for their inputs and
invaluable feedback:
Ashvin Parekh Advisory Services
AZB & Partners
Catlin Group
General Insurance Council
GIC Re
GIFT – Gujarat
Global Insurance Brokers
ICICI Lombard General Insurance
JMP Advisors
Khaitan Sud & Partners
L&T General Insurance Company
LCIA India
Lloyd's of London
McKinsey& Co.
New India Assurance
Oxford International
SPM Capital Advisers Pvt. Ltd.
Swiss Re
Travelers
Tuli& Co.
3
Executive Summary
India needs a modern, transparent and progressive framework and a global reinsurance
platform.
One Insurance Vision has the following key focuses:
a. Currently, there are myriads of laws (primary legislation) in India, which impinge on the
insurance industry in India, involving number of Central Government Ministries and
departments, with their own motivations. The objectives need to be aligned and be
amalgamated into one overarching primary level insurance legislation.
b. It is equally important that the framework to govern prudential regulation should not be
addressed in primary legislation; instead the Insurance Regulatory and Development
Authority (IRDA) should be conferred with powers to draft and implement such
regulations. Setting down detailed requirements in primary legislation, restricts the ability
to modify regulations quickly and effectively. In contrast, granting the IRDA the authority
to draft and set the prudential regulatory framework would enable it to amend the rules
with changing circumstances, events - an important tool required in a dynamic
supervisory environment.
c. There is a need for a calibrated shift to prudential regulations, and a shift from a rules-
based regulatory frame work to a principles based approach with minimal, focused
interventions to elicit a robust market response. To strive to promote a regulatory regime
that embodies minimum regulation and maximum supervision.
d. Introduce environmental and behavioural improvements in line with global best
practices, in order to allow the Indian market to realise its full potential. Deepen
professional practices and services which are transparent and growth oriented that
ensure accountability at all levels
e. Develop effective risk based capital and solvency norms, along with early public listing of
all insurers
The objective of the ONE Insurance Vision is letting the regulator set the tone in the market; to
encourage sustained non-inflationary economic growth, and enable the development of a
sound and progressive global reinsurance centre in India.
Role of Re insurance
In essence, reinsurance is insurance for insurance companies. Internationally, reinsurance is
conducted as a business to business transaction concluded freely cross – border. The
function of reinsurance is to transfer risk from insurers to re insurers, reducing volatility by
pooling and diversifying risks across diverse classes of business & markets.
Reinsurance is an industry that is truly global in nature. Reinsurers are able to assume some of
the world’s largest and most complex risks because they spread risk on a global basis.
4
Major international financial centres such as London, New York, Singapore, Frankfurt, Tokyo
and Hong Kong have evolved into well developed international reinsurance hubs. Several
new centres such as Dubai and Shanghai are fast developing into regional hubs.
India will benefit enormously by developing itself as a reinsurance hub; to do so it will need to
create a strong financial services platform and infrastructure, to attract the best of re
insurance markets and companies to come and set up operations in India.
Reinsurance Branches – Benefits for India
1. An on-the-ground presence in India will enable - reinsurers to increase their
understanding of the risks to which the Indian economy is exposed, enabling their
underwriters to introduce new and innovative products tailored to serve the needs of the
Indian clients.
2. Transfer of Expertise and Market Modernisation - A reinsurer’s presence in India will both
create skilled jobs for Indians and enable the dissemination of its technical and
managerial knowledge and expertise to the wider Indian insurance industry
3. Support for India’s continued economic growth - Reinsurers’ presence and activities in
India would generate economic benefits for industries beyond the insurance sector.
Lloyd’s has established local platforms in the key emerging economy financial centres,
including Singapore, Rio de Janeiro and Shanghai. In each of these cases, Lloyd’s presence
has significantly contributed to the development of a cluster effect, with other insurers and
auxiliary services such as brokers, lawyers, accountants and IT service providers establishing
operations to service reinsurance activities.
The entry of major international financial service brands in India will firmly demonstrate that,
India is committed to its sustained economic growth, and open for business with its
international trading partners. Furthermore, as has been the case in the above mentioned
examples, reinsurers will be able to play a fundamental role in developing India into a
significant international financial centre.
5
FRAMEWORK FOR DEVELOPING A REINSURANCE HUB IN INDIA
ONE INSURANCE VISION
* Gujarat Internal Finance Tec-City (GIFT) aspires to cater to India’s large financial services potential by
offering global firms a world-class infrastructure and facilities
Step1: Legislative and administrative changes required
Passage of the Insurance
(Amendment) Bill, 2008
Implement Taxation Framework
Recommendations
Implement robust Dispute Resolution
Mechanisms
Improve social infrastructure to
attract global talent
Step 2: Creation of reinsurance regulatory framework
Policy Framework
Indian reinsurance companies to adopt principles governing licensing, capital
adequacy, risk management and governance as highlighted by the
International Association of Insurance Supervisors
Foreign Reinsurance branches in India
The legal and regulatory framework governing foreign re insurer branches in India should recognize the home state regulation. IAIS framework to govern
prudential regulation aspects of foreign re insurer branches in India to be adopted
Cedent Responsibility model
Legal framework to govern the prudential regulation of foreign re insurer branches should focus on the ability of the ceding
insurer to demonstrate that it understands and can manage its reinsurance cedant
risks
Step 3: Creating the right ecosystem for the primary insurance market
One Insurance Vision
Need for Government / regulatory support for ONE
Insurance Vision
Regulator as a facilitator
The regulator to operate a robust performance
framework
Insurance Cluster
Identifying / creating a geographic location with a concentration of insurance
service providers.
Step 4: Developing an International reinsurance hub in India under International Financial Services Centre (IFSC) route of SEZ (GIFT)*
Implement broad recommendations on IFSC rules
Move towards fuller capital account convertibility (CAC)
6
I. Objective
The objective of the paper is to substantiate to the policy makers and regulators; the key
benefits for the Indian economy, especially to its financial services sector and the Indian
insurance market - if India developed itself as a reinsurance hub;
Reinsurance is distinct from insurance; and this paper emphasises the critical role
reinsurance can play in supporting the Indian economy and its financial system. The
paper is based on the premise that the development of India’s reinsurance sector is
deeply connected and critical to the insurance sector; as well as for the overall
development of the financial services sector in India.
This paper highlights the significant benefits for India - in developing a global reinsurance
hub, critical reasons that make India attractive to foreign reinsurers, the rationale for the
need for 100% ownership by foreign reinsurers and the reason why it is important to have
the option to establish branches rather than subsidiaries.
It highlights the critical reforms and amendments that will be required in regulations,
infrastructure, taxation norms, legal and professional services.
The paper illustrates how the entry of major international financial service brands will be
beneficial to India..
7
II. The Indian insurance sector The emerging risk landscape for India is massive; with risks ranging from earthquakes,
landslides, tsunamis, sub-normal monsoons, food insecurity, water scarcity, health
pandemics, exposure to cyber-attacks or other technological threats. Macro-risks are not just
confined to the cyber world, climate change and space. Perhaps a bigger challenge in
India is, the lack of robust historical data available for modellers, actuaries and underwriters
to evaluate and assess these risks.
India’s topography is acutely vulnerable to natural hazards. Of the 35 Indian states and Union
Territories, 27 are known to be exposed to several types of disasters. More than 50% of the
land is prone to earthquakes of moderate to very high intensity; about 12% of the land is
prone to floods and river erosion; 5,700 km of coastline is susceptible to cyclones and
tsunamis; a significant part of India’s agricultural land is vulnerable to drought and almost all
of its mountainous regions face the risk of landslides and avalanches.
India’s insurance market has experienced impressive growth in the last decade, yet
penetration remains low at 3.96%. According to the IRDA’s projections, the life insurance
industry will need additional capital of at least Rs 400 billion (or about $6.5 billion) to achieve
an insurance penetration level of 8% of GDP. According to another source, the country's
insurance sector needs capital of around US$12 billion up to 2020.
Key impediments for the insurance sector to address are:
1. Poor penetration and density of the market: As stated above, for the size of the Indian
economy, India has a poor level of insurance penetration and density. Total penetration
at 3.96% is less than world average of 6.5%. India is currently among the top ten
economies in nominal GDP, and third largest in terms of purchasing power parity
however insurance penetration in India is well below the national averages of many
similar sized economies.
2. Life: Though there has been growth in this sector, a higher penetration ratio than the
current 3.17% is very much needed. In India, there is virtually no social security cover ;and
only a limited pension benefit is provided to those employed outside the remit of the
organised1 sector. A 2008 survey by the National Council for Applied Economic Research
(NCAER) with Max New York Life shows that while 78% of the people were aware of life
insurance, although ownership of products was only 24%. Furthermore, less than 11% of
the total workforce in India – which the survey puts at 28.7 million people -are covered by
insurance. The existing life insurance penetration is driven by the salaried and self-
employed, which are influenced to a large extent by tax incentives offered in return for
investments in insurance. As India deliberates, on the necessary tax reforms and works out
its approach for a new Direct Tax Code (DTC), there is a likelihood of many exemptions to
be weeded out and several others made taxable. The levels of penetration in (life) are
relative to tax benefits, and one cannot presume these current levels will continue to
sustain.
3. Non-Life: Although India has the third largest cluster of micro, small and medium
enterprises globally (estimated 26 million), and over 15 million small retail outlets.
1Organised sector firms in India refer to those firms/establishments that are registered by the
government and have to follow its rules and regulations which are given in various laws such as the
Factories Act, Minimum Wage Act, Payment of Gratuity Act, Shops & Establishment Act, etc.
8
Penetration levels for ‘general’ (non-life) insurance products are abysmally lower; at a
meagre level of 0.78%..
4. Density: Poor penetration of insurance is accompanied by low density (per capital
spend). This is illustrated by the absolute numbers in insurance spend, across sectors in
India. Currently insurance density in India is US$ 64.4. That is just about 1/10th of the world
average of US$627.3. India compares poorly with its Among the BRIC – density in Brazil is
over five times higher at US$ 327.6 over four times in Russia at US$ 296.8 and three times in
China of US$ 158.4. When the overall density is spliced by segment, the picture is far
worse. In the ‘life ‘segment density is at US$ 55.7; which is low when compared to other
countries. The total premium collected was around Rs 3 trillion in the life segment. In ‘non-
‘life’, the numbers are still lower , India has a density of US$ 8.7, compared to China for
instance, which has a density of US$ 52.9.This demonstrates clearly that the economy is
under-insured, vulnerable to severe shocks.
5. Health: Only a small proportion of the population is covered by medical insurance. The
Planning Commission estimates that nearly 300 million people in India have health cover,
but these numbers refer to those covered by central government and employees’ state
insurance schemes. In a population of 1,265 million, barely 55 million pay for private
health insurance. More importantly, the present structure of health insurance covers only
hospitalisation; all out-of-pocket expenses have to be borne by individuals, in the event
of any critical illnesses there is limited support from the health insurance schemes often
triggering downward economic mobility for the families of those affected by major
illnesses. Government spending on public health is low, and nearly 80% of health
expenditure is borne by individuals. A World Bank study states that only 7 out of 100
Indians are currently buying health insurance. Going forward, this cannot be sustained, as
healthcare costs continue to escalate.
The reality of the healthcare structure is that over 80% of doctors, 49% of beds, 60% of in-
patient care and 78% of the ambulatory services are private. Eventually the government
will have to partner with the private sector to expand coverage of healthcare services.
Private healthcare providers running small family clinics, hospitals and hospices run by
charitable institutions are a dominant feature of the Indian healthcare sector. Although
government sponsored health insurance schemes are increasingly enrolling private
providers for in-patient care-these needs to be expanded to accommodate ambulatory
care, which accounts for two-thirds of critical out of pocket expenses in India today. With
barely 9 hospital beds per 10,000 people vis-à-vis the WHO norm of 30 per 1000, India is
grossly under-equipped in terms of its capacity to provide healthcare. Sufficient
investments for wider healthcare provision simply will not be possible without substantially
enhancing and expanding the private health care insurance. India has had ‘insured’
health care since 1950s, when the employees state insurance scheme was launched,
followed by the central government health scheme. But the expansion of health care
outside the ambit of formal employment (especially in the public sector) is significantly
limited. Globally across income strata it is well established that universal healthcare can
only be provided, with a mix of private funded insurance which is driven by tax incentives
and government funded schemes. A number of developing countries like Argentina,
Brazil, South Africa, Kenya, South Korea, Iraq, Iran, Thailand and Sri Lanka have evolved
single-payer mechanisms to provide universal access to healthcare. India has the
opportunity to innovate and create the necessary capacity for universal healthcare;
through an appropriately priced model of insurance that involves private service
providers, partnering with the government. Insurance creates the necessary mechanism
to balance the supply of and demand for healthcare.
6. Agriculture: Agriculture is India’s largest sector of employment accounting for nearly 60%
of the working population. Nearly two-thirds of these have little or no access to credit and
barely a fraction have crop insurance. Crop insurance was first introduced in the 1980s
9
by the Government of India, the General Insurance Corporation (GIC) was the first
company tasked with the implementation of the concept. In 2003, the Agriculture
Insurance Company was given the responsibility of implementing the concept of
agricultural insurance. In the years since the expansion of crop insurance, this
government-led initiative has led to the coverage of nearly 10 million hectares and over
eight million farmers. The government’s initiative has managed to cover only 180 million
farmers in ten years; reflects the variance between need and capacity. Crop insurance
coverage is largely limited to those who have access to bank credit. India has a total
cropped area of land of 193 million hectares, nearly half of which is rain-fed and
dependent on the vagaries of the weather. In 2011-2012, total coverage of crop
insurance was barely 10 million hectares. The expansion of insurance will not only enable
innovation, but also bring substantial extension of advisory services to enable farmers to
improve yield by shifting to demand-led cropping patterns. These forward and backward
linkages in methods of cultivation, in the choice of timing and selection of the types of
crops along with the introduction of new technology will help farmers align their output to
market demands – particularly in price sensitive produce; such as spices and horticulture
where the risks are relatively higher.
Challenges
1. Financial Inclusion: World Bank studies rank India poorly on many indices of financial
inclusion. A well developed financial system naturally results in a higher level of financial
inclusion. Access to banking, availability of credit, affordability and access to insurance
are basic amenities for all citizens. The persistence of poor financial inclusion results in
lower growth, but also promulgates inequality. A study commissioned by the United
Nations Development Program (UNDP) titled “Building Security for the Poor - Potential and
Prospects for Micro insurance in India” states that 90% of the Indian population (i.e.
approximately 950 million people) in India are not covered by insurance.
2. Imperatives to manage under insurance: A recent global report by Lloyd’s of London
shows that there is a total shortfall of US$ 168 billion across the 17 severely underinsured
countries and in India alone, there is an annualised shortfall of US$ 20 billion in insurance.
In 5 of the 17 severely underinsured countries, the average uninsured loss for major
catastrophes is at least 80%. The average uninsured cost of a catastrophe is US$ 1.96
billion in India. Data shows that uninsured losses incurred by both government and the
private sector, reduces by 13% for every 1% rise in insurance penetration.
The independent study by the Centre for Economics and Business Research (CEBR)
commissioned for Lloyd’s highlights; how under-prepared many high growth countries are
to face natural disasters. In 5 of the 17 severely underinsured countries, the average
uninsured loss for major catastrophes was at least 80%. The average uninsured cost of a
catastrophe was US$18.91 billion in China, US$ 1.96 billion in India. It is significant to note
that uninsured losses, both for governments and the private sector, reduce by 13% for
every 1% rise in insurance penetration.
The study raises the question, whether high growth countries like China, India and Brazil
are ignoring the risk of rising costs for natural disasters as they grow and create wealth
and develop supply chains and become increasingly interconnected.
The study concludes, that businesses should establish, risk management as a priority area
of focus, governments need to invest in protecting and preparing for calamities, and
insurers need to take steps to better understand risks in high-growth economies and
develop relevant products.
10
Opportunities
1. Demographic benefits and a growing middle class segment: India has several factors
that it can leverage and convert to opportunities. Every year, 11 million students
graduate and join the Indian workforce; by 2015 this number is likely to touch 15 million.
The size of the Indian middle class segment is variously estimated at around 150 million
households; with incomes ranging from Rs 90,000 to Rs 500,000. India has perhaps one of
the highest savings rate globally, nearly 41% of financial savings find their way into bank
deposits and 26% into tax-incentivised life insurance schemes. This bankable class needs
a choice of long-term instruments to preserve their earnings. This group will have a
formidable impact on the demand for insurance – both life and non Life.
2. Deepening of the financial markets: developing new long term savings instruments - India
needs to create a source of long term debt to fund and manage its expenditure.
Currently the Central and State governments together spend over Rs 5 trillion or roughly
US$ 100 billion, on social sector programs. Long term funding is required to finance
governments social programmes, infrastructure as well as for the expansion of the
industrial productivity - which require efficient channelling of savings. India needs to build
an adept financial system to accumulate and allocate long term savings efficiently – one
of the critical requirements is developing the corporate bond market in India. The
government of India currently borrows nearly Rs 16000 million every calendar day, to fund
its operations. It needs to develop deeper long-term debt markets to even out costs and
limit volatility in liquidity conditions. It is currently over-dependent on bank deposits. This
typically results in banks borrowing for the short term and then lending long term to the
government. This leads to liquidity hiccups, influences inflation and raises the cost of
borrowings in the country.
A wider and deeper insurance market in India will enable aggregation of long term debt.
This is a good opportunity for the government to develop long term savings instruments –
pension, insurance and hybrids that result in the expansion of the financial sector. It will
also enable the government to dovetail its social intent into economic planning.
In the case of developed countries, pension funds and insurance companies have
contributed and shaped their respective financial systems. In the UK and the US, pension
funds and insurance companies grew very rapidly, as the financial system became more
sophisticated and people cared more about saving for their retirement as they grew
richer. In the UK, pension assets grew from 20 % to 80 % of GDP and insurance company
assets increased from 20 % to 100 % of GDP between 1980 and 2009. At the same time,
pension funds and insurance companies started to invest more in equities and in
corporate bonds instead of government bonds. As a result, huge amounts of stable, long-
term funds were channelled into capital markets. In the UK, these funds drove the
development of the stock market into one of the most liquid and sophisticated financial
centres in the world. In the US, institutional investors not only contributed to the
deepening of equity markets, but were also central to the development of the corporate
bond market.
In India insurance companies have increased their investments in both equities and
corporate bonds but compared to the US and the UK, their participation is limited.
Pension funds barely invest in equities and do not invest in corporate bonds at all.
Much room exists for insurance companies and pension funds to shift asset allocations
from government bonds to equities and corporate bonds.
Keeping in view the long term funding requirements of the infrastructure sector in India,
insurance, provident funds (PFs) and pension companies are best suited for making
investments in corporate bonds. Hence, there is a need to revisit the investment
guidelines of such institutional investors; since the existing mandates of most of these
institutions do not permit major investments in corporate bonds. Prudential requirements
11
need to be balanced with the need for a developed corporate bond market, which
ultimately would be in the interest of all financial market participants.
12
III. Pivotal role reinsurance can play in supporting the Indian insurance sector Definition of reinsurance: In essence, reinsurance is insurance for insurance companies. By
sharing some of their risk with reinsurers, primary insurers are able to offer cover against a
more diverse range of risks and keep prices for consumers at affordable levels. Reinsurance
helps insurers to manage their risks by absorbing some of their losses. Reinsurance stabilises
insurance company results and enables growth and innovation to continue. Due to the large
sums of money that they invest in financial markets, reinsurers also contribute significantly to
the real economy.
Though they were relatively little known in the past, reinsurers are gaining recognition in light
of recent major disasters for the role they play in helping insurers, governments and society as
a whole to deal with today’s risk landscape. Reinsurers essentially have the following
functions:
Risk Transfer Function - Stabilise financial results by smoothing the impact of unexpected
major losses and peak risks
Risk Finance Function - Offer reinsurance as a cost effective substitute for equity or debt,
allowing clients to take advantage of global diversification
Information Function - Support clients in pricing and managing risk, developing new
products and expand their geographical footprint
Reinsurance following liberalisation in India:The mandate to the Authority in respect of
reinsurance lies in the provisions of Section 14 (1) and 14 (2) Sub Section (f) of the IRDA Act,
1999 as well as Sections 34 F, 101 A, 101 B and 101 C of the Insurance Act, 1938.
In addition the Authority has framed regulations pertaining to re insurance by non life insurers
which lay down the ground rules for placing re insurance with the re insurers. Under the
provisions of the Insurance Act, 1938, the General Insurance Corporation of India has been
designated as the “Indian Re insurer” which entitles it to receive 5% from all the direct non life
insurers. The limits have been laid down in consultation with the Reinsurance Advisory
Committee.
The Authority has stipulated that every insurer shall obtain the approval of its Board for its re
insurance program. The regulatory framework provides for the filing of the re insurance
program for the next financial year with the Authority at least 45 days before the
commencement of the said year.
The regulations also require that every insurer should maintain the maximum possible
retention possible retention commensurate with its financial strength and volume of business
– the guiding principles are a) maximum retention within the country b) developing the
adequate capacity c) securing the best possible protection for the re insurance costs
incurred d) simplifying the administration of business.
Current status: According to the Asia Insurance Review January 2014, “Since the privatisation
of the insurance industry in India in 2000, numerous foreign insurers have set up joint
ventures(JV) in India; however no foreign reinsurer has set up a JV or fully-fledged operations
in the country”. With rapid economic growth over the past few years and the country
emerging as the major world power, the time is ripe for a reinsurance hub in the country. The
entry of global reinsurers can further support the underwriting activities of Indian insurers and
encourage more domestic investment in Indian insurers”.
13
Due to existing legislative and regulatory restrictions, currently international reinsurers only
service the Indian market on a cross-border basis.
In depositions made to and mentioned in the 41st Report of the Standing Committee on
Finance 2011-2012 – Fifteenth Lok Sabha (Lower House of Parliament), Ministry of Finance
(Department of Financial Services) on the Insurance Laws (Amendment) Bill, 2008, the IRDA
explained that existing FDI restrictions on the establishment of reinsurance companies in
India, present a commercial barrier to reinsurance groups from operating in India. In their
deposition, the IRDA articulated the fundamental differences between insurance and
reinsurance companies, clarifying that reinsurers generally operate in foreign markets
through branches, with regulatory recognition given to their substantial parent company
balance sheets in their home countries. Accordingly, the regulator explained that the reason
why India has not yet fulfilled its ambition of becoming a reinsurance hub; is because it
would not be commercially viable for a foreign reinsurer to establish a joint venture with an
Indian reinsurance company (whilst branches are not permitted in India and will not be until
the Insurance Laws (Amendment) Bill, 2008 is promulgated). Furthermore, the IRDA
highlighted the need for additional reinsurance capacity in India, noting that the GIC’s
capacity is insufficient to meet the substantial needs of the growing Indian economy. The
establishment of foreign reinsurer branches in India would also increase the reinsurance
capacity accessible to the Indian economy.
The existing legislative set up in India; do not allow foreign reinsurers to set up branches or set
up their market structures - as they have in London or Singapore. Coincidently, there are no
such limitations imposed on 100% foreign ownership of investment banks, asset management
companies or NBFCs in India. In banking the RBI allows foreign banks’ to incorporate wholly-
owned subsidiaries and acquire stakes in local banks, this is in stark contrast to the limitations
imposed in the insurance sector that limits foreign ownership to 26%.
Table 1: FDI cap in the insurance sector – a comparison
Country FDI cap in the insurance sector
(Asia)
India 26%
China 51%
Malaysia 51%
Indonesia 80%
Japan, South Korea, Vietnam, Hong Kong and
Taiwan
100%
As India embarks on building the necessary foundation required for double digit growth and
invests in infrastructure across sectors - it will be critical for Indian businesses and projects to
have access to sophisticated insurance products. This is vital for mitigating risks associated
with large projects, in management of capital and in improving efficiency standards.
A strong insurance industry enables entrepreneurs to take risks and thus fuels innovation. In
order to build the infrastructure to sustain India’s economic growth, investors will need
sophisticated insurance coverage. Reinsurers’ presence in India will not only provide the
14
financial strength to sustain this, but moreover supply intellectual capital, acting as trusted
partners to the local insurance industry, lending support in pricing, product development, risk
mitigation, risk management and claims handling. Besides, it will attract inflows of foreign
insurance and reinsurance capital, expertise and innovations.
Reinsurers are not sources of liquidity and do not cause systemic risks. In fact, the liabilities of
reinsurance companies are much more illiquid than banks’ liabilities and are based on the
occurrence of events that occur completely independently of financial market risks.
Moreover, reinsurance is not sold to the general public, but transacted in a wholesale market
by professionals. The risk profile of insurers is more diversified than that of banks in terms of
breakdown of economic capital for European banks, and insurers and reinsurers provide long
term capital to the economy.
Advantages reinsurance can provide to the Indian insurance sector and consumer
By operating through branches in India, foreign reinsurers would increase their understanding
of the risks to which the Indian economy is exposed, enabling their underwriters to introduce
new and innovative products tailored to serve the needs of Indian clients. This would benefit
the local insurance industry and Indian consumers who would get local access to specialist
coverage.
International reinsurers would also be better positioned to provide Indian clients with greater
access to coverage, relieving the strain on the government and taxpayers following major
losses, caused by natural disasters which India is known to suffer from in the form of
earthquakes, tsunamis, floods and cyclones and which all pose a considerable strain on its
developing infrastructure and economy.
International reinsurers will also be able to actively support the modernisation of the Indian
insurance sector, shifting some of the burden which is currently borne in this area by the
government and the IRDA. Reinsurance requires close co-operation between reinsurers and
the insurance companies to whom they provide coverage. A reinsurance branch in India
will be subject to the same comprehensive underwriting, claims; risk management,
governance, and operational standards under which they operate in their respective home
jurisdictions. The enhanced co-operation that would naturally result from the increased
interface between a reinsurer’s branch and the local insurance sector will enable reinsurers
to share their operational practices with the local industry; international reinsurers will
therefore help raise standards in India.
Finally, the presence of world renowned reinsurance entities in India supporting the
underwriting activities of the Indian insurance industry will encourage domestic investments in
Indian insurers, boosting the sector and improving the capitalisation of Indian insurers.
Benefits global reinsurers could provide to the Indian financial sector
The entry of major international financial services brands in India will firmly demonstrate that
India is committed to sustained economic growth, and open for business with its international
trading partners. Furthermore, as has been the case in so many countries round the globe,
reinsurers will be able to play a fundamental role in developing India into a significant
international financial centre. In the existing international financial centres such as London,
New York, Singapore, the presence of global reinsurers has significantly contributed to the
development of a cluster effect with other insurers and auxiliary services such as brokers,
15
lawyers, accountants and IT service providers establishing operations to service reinsurance
activities.
1. Reinsurers are stable :
A study of the US insurance market over a period of 30 years shows that only 3% of all
insurance insolvencies were caused by the failure of reinsurers
Reinsurers are not sources of liquidity and systemic risks. The liabilities of reinsurance
companies are much more illiquid than banks’ liabilities and are based on the
occurrence of events that are fundamentally independent of financial market risks
Reinsurance is not sold to the general public. It is transacted in a wholesale market by
professionals
2. Risk profile of insurers is more diversified than of banks in terms of breakdown of economic
capital for European banks and insurers
3. Re/insurers provide long-term capital to the economy
Re/insurers are long-term institutional investors as they need to match their liabilities.
Increasingly, re/insurers are investing more in Asia’s infrastructure sector.
An example is re/insurers joining force with other financial institutions and the Asian
Development Bank to launch the ASEAN Infrastructure Fund last year (with equity of
US$ 485million).
4. New risk transfer solutions adopted by other governments
Funding disaster relief - Caribbean Catastrophe Risk Insurance Facility - reinsurance
facility which provides funding for governments’ immediate relief efforts after a
hurricane or an earthquake; payments triggered by the intensity of the event.
Funding disaster relief in Mexico – World Bank Catastrophe Bond Program - Capital
markets instrument which provides liquidity for disaster relief and emergency actions;
payments triggered by intensity of event.
Drought protection for the government of Malawi - payments to the government in
case of extreme drought affecting maize production: payments arranged by the
World Bank.
5. Reinsurance branches - Reinsurance branches afford all the benefits of subsidiaries
without the inherent limitation on capital. Advantages of reinsurer operating as a branch
include:
Access to the global balance sheet of the parent company;
Able to enjoy high level of security;
Benefit from the broad expertise and financial strength of the parent company;
Cost of reinsurance will be lower because of the advantage of global diversification,
additional capacities and more competition;
The parent company is legally responsible for the liabilities of its branch, so little
chance of defaulting on valid claims;
Required to pay local taxes on all India related business it generates;
In addition, under branch operations, foreign reinsurers:
i. Will help develop India into a reinsurance hub.
ii. Will facilitate the development of local capital markets by investing locally (as
well as in overseas).
16
iii. Will attract more Foreign Direct Investment (FDI) inflows from multinational
corporations.
iv. Will still be subject to local regulatory oversight.
v. Can bring in capital (although part of the fund inflows should be allowed to meet
operating expenses of the branch).
vi. Can bring skills to India and train local staff.
vii. Can offer a wide spectrum of specialized services, at lower cost than is generally
possible from comparable local independent operations.
In conclusion, reinsurance has a fundamental role to play in developing insurance
penetration in India and the local insurance industry more widely. Reinsurance helps to
unlock the full potential of insurance as a catalyst for economic growth. A strong insurance
industry enables entrepreneurs to take risks and thus fuels innovation. In order to build the
infrastructure to sustain India’s economic growth, investors will need sophisticated insurance
cover. Reinsurers’ presence in India will not only provide the financial strength to sustain this
but moreover supply intellectual capital, acting as trusted partners to the local insurance
industry, lending support in pricing, product development, risk mitigation, risk management
and claims handling.
17
IV. Framework for developing a reinsurance hub in India The case for emerging reinsurance hubs
The traditional powerhouses for reinsurance of global risks have been centred in global
financial centres such as London, New York, Paris, Zurich, and Munich. The traditional centres
have a concentration of capital, technical expertise and first-world business standards.
Over the last few years new reinsurance hubs have developed in Singapore that is focussed
on the Asian markets and of late Dubai is developing itself as a reinsurance hub for the MENA
region.
This raises the question of what do these emerging reinsurance hubs have to offer; and why
should India develop itself as a regional reinsurance hub?
The emerging reinsurance hubs offer a number of advantages2:
Proximity to emerging markets which offer encouraging growth prospects. The ability for
international reinsurers to have a business presence close to these new markets will allow
reinsurers to understand the local markets better and build local knowledge regarding
the underlying risks.
Enhancing customer service by having local offices, operating in local time zones.
Developing regional skills that are targeted at the emerging markets through regional
staff who deal with local markets on a day to day basis.
Promoting the development of localised wordings that are fit for purpose in the local
context. This will avoid the all too common phenomenon of international wordings being
used to underwrite local business without being adapted to fit the local context.
A business-friendly approach within a sophisticated regulatory operating environment.
The frameworks created by Singapore and the Dubai International Financial Centre
(DIFC) are world-class, and are backed up by sophisticated regulators and judicial /
arbitration frameworks.
The ability to streamline and enhance the distribution process through interaction and
continuing development of local brokers and intermediaries.
It is clear from the pattern emerging from hubs such as Dubai and Singapore, that the hubs
are not replacing the established centres. Rather, they are serving to extend the global
reach of the market players based in those hubs, India will definitely benefit by developing
itself as regional hub. Although most of the entities established in the new hubs are still
managed from London, Zurich etc., and are reliant on technical support from those centres.
However, increasingly one can expect to see regional management centres being
developed and strengthened in these hubs as businesses grow.
The significance of these regional reinsurance hubs will increase alongside the development
of the emerging markets which they service. In the long run, this will be beneficial for the
growth of a truly global industry.
2Global Reinsurance Intelligence May 2014 : Clyde & Co
18
Framework for developing a reinsurance hub in India
ONE INSURANCE VISION
* GIFT city aspires to cater to India’s large financial services potential by offering global firms
a world-class infrastructure and facilities
Step1: Legislative and administrative changes required
Passage of the Insurance
(Amendment) Bill, 2008
Implement Taxation Framework
Recommendations
Implement robust Dispute Resolution
Mechanisms
Improve social infrastructure to
attract global talent
Step 2: Creation of reinsurance regulatory framework
Policy Framework
Indian reinsurance companies to adopt principles governing licensing, capital
adequacy, risk management and governance as highlighted by the
International Association of Insurance Supervisors
Foreign Reinsurance branches in India
The legal and regulatory framework governing foreign re insurer branches in India should recognize the home state regulation. IAIS framework to govern
prudential regulation aspects of foreign re insurer branches in India to be adopted
Cedent Responsibility model
Legal framework to govern the prudential regulation of foreign re insurer branches should focus on the ability of the ceding
insurer to demonstrate that it understands and can manage its reinsurance cedant
risks
Step 3: Creating the right ecosystem for the primary insurance market
One Insurance Vision
Need for Government / regulatory support for ONE
Insurance Vision
Regulator as a facilitator
The regulator to operate a robust performance
framework
Insurance Cluster
Identifying / creating a geographic location with a concentration of insurance
service providers.
Step 4: Developing an International reinsurance hub in India under International Financial Services Centre (IFSC) route of SEZ (GIFT)*
Implement broad recommendations on IFSC rules
Move towards fuller capital account convertibility (CAC)
19
Developing a reinsurance hub in India will require four major steps.
Step 1: Legislative and administrative changes required
a) Passage of the Insurance (Amendment) Bill, 2008
The passage of the Insurance (Amendment) Bill, 2008 in the Parliament would allow
establishing reinsurance branches and society of underwriters at Lloyd’s, London and
enable regulatory impetus required for the robust growth of our insurance industry. It is a
precursor for other changes to create a modern and progressive insurance industry in
India.
b) Implement taxation framework recommendations
The taxation framework recommendations included in this paper (Chapter V), both for
direct and indirect taxes will go a long way in creating the level playing field and
providing incentives for the participants to cater to business opportunities.
c) Implement robust dispute resolution mechanisms
The dispute resolution mechanism framework recommendations included in this paper
(Chapter V) will enable in creating the level playing field and opt for state of the art
insurance and reinsurance contractual implementation mechanisms in line with global
insurance practices.
d) Improve social infrastructure to attract global talent
An open door policy approach by the government towards immigration laws,
developing good infrastructure and housing will encourage global experts to work and
live in India.
Step 2: Creation of reinsurance regulatory framework
Internationally, reinsurance is conducted as a business-to-business transaction concluded
freely across borders. The function of reinsurance is to transfer risk from insurers, reducing
volatility by pooling and diversifying risks across diverse classes of business and markets.
Chapter III on the role of re/insurance legislation and regulations and Appendix
23‘International reinsurance hubs’ demonstrates the environment and framework required
that supports these global reinsurance centres. The success of this approach across different
global and regional reinsurance hubs proves that a similar reinsurance regulatory framework
should be created in India.
a) Policy Framework
In considering how to establish a policy framework to govern prudential regulation
aspects of Indian reinsurance firms, attention would be drawn to the Insurance Core
Principles, Standards, Guidance and Assessment Methodology paper produced by the
International Association of Insurance Supervisors (“the IAIS”), and specifically to
Insurance Core Principles (“the ICPs”) 4, 17, 8 and 7, which respectively address the
principles which should govern licensing, capital adequacy, risk management and
governance.
b) Foreign reinsurance branches in India
Once passed, the Insurance Laws Amendment Bill, 2008 would allow foreign reinsurers to
establish branches in India. In considering the framework to govern prudential regulation
3Appendix 2 International reinsurance hubs
20
aspects of foreign reinsurer branches in India, consideration should be given to the
International Association of Insurance Supervisors’ Insurance Core Principles, Standards,
Guidance and Assessment Methodology, 1 October 2011 and specifically Core Principles
13.3 and 25.
In accordance with these principles, which address branch supervision, the legal and
regulatory framework governing foreign reinsurer branches in India should recognise the
home state regulation that those reinsurers are subject to (as opposed to focusing on the
direct prudential supervision of foreign reinsurer branches in India).
This principle is particularly pertinent in considering the application of collateral
requirements for foreign branches. In supervising foreign reinsurance branches, regulators
already have the power to impose direct control over the purchase of reinsurance by
cedants.
c) Cedant responsibility model
As set out in the IAIS Core Principles the legal framework to govern the prudential
regulation of foreign reinsurer branches should focus on the ability of the ceding insurer to
demonstrate that it understands and can manage its reinsurance cedant risks and
gaining comfort around the regulatory controls in place over reinsurer branches, as
opposed to imposing onerous collateral requirements on foreign reinsurance branches.
This so called responsibility model is at the heart of the EU’s forthcoming Solvency II
directive.
Reinsurance is used to disperse risks around the world, instead of maximising risk retention
within a country. Diversification of risk is the fundamental function through which
reinsurers create value, ultimately providing efficient and effective cedant protection.
This is achieved by writing a mixture of business that is exposed to different, and not
necessarily directly connected, risk factors. This can arise from different lines of business,
but also from different geographical locations. A wise reinsurance programme can
increase an insurer’s financial standing; whereas counterproductive regulatory restrictions
on the reinsurance program can produce financial instability.
An open reinsurance market is an important factor in making insurance markets more
competitive, providing price and product advantages to consumers and creating
opportunities for diversification of risk so that ceding insurers do not end up with
reinsurance recoverable concentrations from a small number of reinsurers.
The IAIS ICP 13 sets out principles for the indirect supervision of reinsurance and is often
referred to as the “cedant responsibility model”. Under this Core Principle, instead of
imposing retention limits on insurance, the regulator focuses its attention on ensuring that
the ceding insurer has adopted a prudent approach to the purchase of reinsurance and
to the management of risk associated with purchasing reinsurance.
According to this model the choice of reinsurance cover should be a commercial
decision made by management within the overall reinsurance strategy of the ceding
insurer. In other words, the cedant should be left to judge whether the risk profile –
including the experience, expertise and solvency position – of all the reinsurers to which it
cedes is acceptable and in line with its operating strategy.
21
The regulatory concerns on Fronting4 can be better managed through an effective
assessment of the annual reinsurance programme submitted by each insurer. In case of
an insurer not adhering to the general approach on avoiding fronting, the regulator can
always penalise the insurance with lower credit on solvency.
Step 3: Creating the right ecosystem for the Insurance Market
One Insurance Vision
Please refer to Appendix 1 for more information on the One Insurance Vision paper.
Regulator as a facilitator
An effective and dynamic regulator is a ne of the important constituents for a robust
financial ecosystem, as emphasised in this paper. The IRDA should ideally be responsible to
undertake oversight over the overall risk and performance management of the Indian
re/insurance market, as well as work to maintain and develop the attractiveness of the
market for capital providers, distributors and customers.
The regulator should operate under a robust performance framework and have responsibility
of the following:
1. Market reputation and market ratings;
2. Policyholder protection;
3. Setting the risk-based capital level that each insurer must provide, to support its proposed
underwriting along with a solvency regime on par with international standards;
4. A performance management framework focused on applying high standards and
maintaining high underwriting discipline across the underwriting cycle;
5. Working with Insurers to improve their performance and intervening directly if stronger
action is needed;
6. Managing financial and regulatory reporting;
7. Ensuring contract certainty falls under the responsibility of the insurers and is addressed at
the time the risks are underwritten;
8. Reserving of claims subject to independent audits
Finally, the regulator should not get involved in the day to day business decisions of the
market participants, and it should not seek to influence the individual underwriting decisions,
including product and pricing decisions.
Insurance Cluster
Clusters and competitive advantage
Clusters are geographic concentrations of interconnected companies, specialised suppliers,
service providers, firms in related industries and associated institutions in particular fields that
compete but and cooperate with each other. More importantly, the presence of a cluster
not only increases the demand for specialised inputs but also increases their supply. When
cluster exist, the availability of specialised personnel, services and components, and the
4A procedure in which a primary insurer acts as the insurer of record by issuing a policy, but then passes
the entire risk to a reinsurer in exchange for a commission
22
number of entities creating them usually exceeds – the concentration of both talent and
firms available at other locations: resulting in a distinct benefit, despite the greater
competition.
Clusters affect competition in three broad ways: by increasing the productivity of constituent
firms; by increasing their capacity for innovation and thus for productivity growth; and by
stimulating new business formation that supports innovation and expands the cluster.
Clusters are a driving force in increasing exports and magnets for attracting foreign
investments.
Mumbai – financial centre: Mumbai is the financial capital of India and has a unique cluster
of insurers, reinsurers (GIC and other representative offices), insurance and reinsurance
brokers, law firms, professional services and other supporting institutions.
Step 4: Developing an international reinsurance hub in India under International Financial
Services Centre (IFSC) route of SEZ
a) Implement broad Recommendations on IFSC Rules
The reinsurance hub would follow the overall structure/features of the proposed IFSC
in areas such as taxation policy, legislative framework, regulatory mechanism and
safeguarding measures against money laundering.
Specific sectors like insurance would be given priority, to support offshore insurance,
reinsurance and captive Insurance activities.
While regulations are being contemplated by the Government of India at a nationwide
level for various financial services sectors including insurance and reinsurance, Gujarat
International Finance Tec-city (GIFT)5 is being developed at Gandhinagar with state-of-
the-art infrastructure designed to host an IFSC, which will promote inter-alia insurance
and reinsurance development.
b) Move towards fuller capital account convertibility (CAC)
In simple language CAC allows anyone to freely move from local currency to foreign
currency and back. The current account convertibility, on the other hand, allows free
inflows and outflows for all purposes other than for capital purposes such as investments
and loans.
In India, the Tarapore6 committee laid down a three-year road-map ending 1999-2000 for
CAC. It was cautioned that this time-frame could be speeded up or delayed depending
on the success achieved in establishing certain pre-conditions. These were primarily fiscal
policy consolidation, strengthening of the financial system and a low rate of inflation.
The move toward full capital account convertibility would help India in its quest for a truly
international reinsurance hub.
5GIFT city aspires to cater to India’s large financial services potential by offering global firms a world-class
infrastructure and facilities 6Reserve Bank of India Committee on Fuller Capital Account Convertibility (CAC), chaired by Mr. S.S. Tarapore.
23
V. Key elements: Regulations – Taxation – Dispute Resolution
A. Recommendations for changes to key legislation and regulations
To bring India’s low insurance penetration and density to match global standards and for a
sustained and credible insurance delivery, India requires a cutting edge, transparent and
progressive insurance framework and a global reinsurance platform in India.
Currently, there are myriads of laws (primary legislation) in India, which impinge on the
insurance sector in India and which involve a plethora of central government ministries,
departments and regulators. A more effective system would be for with all policymakers and
regulators to work in collaboration with each other and create - one primary level insurance
legislation mechanism.
It is equally important that the framework to govern prudential regulation should not only
address primary legislation, but that the insurance regulator (IRDA) should be conferred with
powers to draft and implement the same. Setting down detailed requirements in the primary
legislation restricts the ability to modify regulations quickly and effectively. In contrast,
granting the IRDA the authority to set and modify the prudential regulatory framework would
enable it to amend the requirements based on the changing circumstances: this is an
essential mechanism for a dynamic supervisory environment.
1. Some Legislative reform measures (illustrative but not exhaustive)
i. International reinsurance hub in India – The current legislative set up does not allow
the foreign insurers with the ability to set up their branch office operations, including
Lloyd’s of London to set up their market structure much in the same way available in
London / Singapore.
The Insurance Amendment Bill, 2008 goes some way to address this. Therefore, its
immediate parliamentary approval is critical.
It should be followed by wide ranging reforms as elaborated in the IMC paper, “An
Agenda for Indian Insurance Industry – ONE Insurance Vision with Global
Benchmarks”, as highlighted in the Appendix 1.
ii. The current regulatory approach consists of stringent control over all aspects related
to the management of distribution, including arrangements for remuneration within
the limits of section 40A of Insurance Act19387. An alternate approach could be to
consider relaxing the management of distribution expenses, with continued
compliance to overall expenses of management as prescribed in Rule 17D of
Insurance Rules 1939. This would allow greater flexibility for insurers to manage their
costs, to derive optimal value from the distribution infrastructure and therefore could
result in enhanced productivity.
iii. Removing service tax from all “personal lines” policies, and improving tax regimes in
line with other global markets, such as Singapore.
740A. Limitation of expenditure on commission
24
2. Some government reform measures (illustrative but not exhaustive)
i. An enabling government support and regulatory process has a great promise in the
area of Role of Insurance in Disaster Risk Financing in India. A list of compulsory
insurance covers requires Regulatory backing and Government support, to lower the
gaps between the economic and insurance losses in the wake of ever increasing
disasters – both manmade and natural.
ii. The successful functioning of any sector depends on effective grievance redressal
mechanism and there are disruptive thoughts available to re calibrate some of the
insurance laws and regulatory rules. Along with the above, Alternative Dispute
Resolution mechanisms are required, in line with best international practices.
3. Some regulatory reform measures (illustrative but not exhaustive)
i. The bedrock for a modern and global platform remains contract certainty suited to
India; and to create better trust in the system. The Regulatory regime has to partake
of minimum of regulations with maximum supervision. A gradual shift to prudential
regulations than a prescriptive management is the first requisite. A similar shift from the
rules based regulatory frame work to that of principles based approach that has
minimalist and focused interventions which draws robust market response and
compliance results.
ii. Since the agenda is disruptive, deep and development oriented, the framework
requires, at the policy level, a combination of regulations as well as self regulations
(through Self Regulatory Bodies) - both of which are required to be prudent,
proportionate and pragmatic. Consistency and continuity of regulations is equally an
important key.
iii. Risk based capital requirements for Insurers and the solvency on par with Solvency II
standards and early public listing of all insurers.
B. Taxation framework
A consistent and simple regulatory and tax environment is essential for developing a modern
insurance set up, and also for setting up an international reinsurance hub in the country. In
achieving this, clear and stable regimes are a must in order to build up confidence to attract
foreign firms.
Reinsurance is a price-sensitive sector, which means very low interest rates make it difficult for
reinsurance companies to make money (this is not the case however for reinsurance
brokers). The UK sector has benefited from the Government’s setting of competitive tax rates
as well as its involvement in G20 discussions on affiliated reinsurance premiums. However, the
clarity and stability of taxation regime is more important than the rates set. Although the
cases of retrospective tax in India have been few in number, the possibility of it has removed
the certainty over rates, reducing market confidence.
25
There have been many cases of disjointed efforts from the revenue authorities to look at the
insurance sector with their perspectives setting aside the larger One Insurance Vision8.
Direct Tax Issues
In the case of insurance business, the complexities involved in the computation of total
income get compounded as a result of the long term nature of the transactions, which may
sometimes even span decades.
The Income tax Act, 1961 (‘the Act’) recognizes the said peculiarity of insurance business
and therefore contains special provisions for computation of income of insurance business.
Section 44 of the Act deals with the computation of income from insurance business and
provides that income from insurance business is to be computed in accordance with the
rules contained in the First Schedule to the Act. The special provisions override the general
provisions applicable to the computation of income in the case of other business.
Further, the Act contains separate provisions for computation of income in the case of Life
Insurance and Non-Life insurance businesses.
Basis of taxation of non-life insurance business
Rule 5 of the First Schedule deals with the computation of taxable income from non-life
insurance business. As per the said rule, taxable income of non-life insurance business is to
be computed as the profit before tax and appropriations as computed in accordance with
the principles laid down in the Insurance Act. The same is subject to the following
adjustments:
a. any expenditure or allowance (including provision for any tax, dividend, reserve or any
other provision as may be prescribed) which is not deductible in accordance with the
normal provisions for computing profit of business, to be added back;
b. gain or loss on realisation of investments to be added or deducted as the case may be, if
not already considered in the computation of profit;
c. provision for diminution in the value of investment to be added back;
d. prescribed amount carried over to a reserve for unexpired risks to be allowed as a
deduction.
Broadly, the issues involved in the computation of income of non-life insurers are as under:
1. Insurers Provision charged to Revenue accounts to meet Statutory and Regulatory
prescriptions aimed to protect policyholder interests
Considering the particular nature of the Insurance industry, the taxation law adequately
recognizes that the normal principles of computation of taxable income cannot be
applied to insurance companies. IRDA (preparation of financial statements and
auditors’ report of insurance companies) Regulations, 2002 mandates every non-life
insurance company to follow regulations prescribed to provide for:
Outstanding claims including provisions determined actuarially for claims incurred
but not reported on the date of the balance sheet;
8Appendix 1 One Insurance vision
26
To create a reserve for unexpired risks representing that part of premium written that
is attributable to subsequent accounting periods etc. that is prescribed by Insurance
Act, 1938; including premium deficiency, if any.
The implication is that the profit before taxes and appropriations as disclosed in the final
accounts prepared under IRDA regulations shall be the basis for the tax computations.
In recent instances, revenue authorities have disallowed reserves for outstanding claims
as well as premiums that are provided as per Section 64V(ii) of Insurance Act,
Accounting principles for preparation of financial statements (Schedule B part I) of IRDA
(Auditor’s report) Regulations 2002 and Rule 6E of Income tax Rules,1962 (‘the Rules’).
There are various court judgments which state that the ITO has no power to make
additions to the profits as disclosed in the annual accounts, except to the extent
permitted by Rule 5(a) of the First Schedule to the Act. This would mean that the
revenue authorities are required to accept the declared profits before taxes as shown in
the profit and loss account as final. The revenue authorities have re-opened the issue
despite various judicial rulings in favour of non-life insurance companies.
The reserve for unexpired risks is required to be created in respect of the amount
representing that part of the premium which is attributable to and to be allocated to
succeeding accounting periods, but shall not be less than the amount required under
section 64V(1)(ii)(b) of the Insurance Act, 1938.
Rule 6E of the Rules prescribes the limits for amounts that can be carried to a reserve for
unexpired risks - 50% of net premium in case of fire or miscellaneous insurance business,
100% of net premium in case of marine insurance business and 100% of net premium
where insurance business relates to fire insurance or engineering insurance and which
provides insurance for terrorism risks.
(IBNR & IBNER) Incurred but not reported and incurred but not enough reported
provisions are created towards outstanding claims to ensure that sufficient funds are
available to meet the dues of policyholders in future.
During the course of assessment of general insurance companies, the Income tax
department has been seeking to deny the deduction for such provisions for outstanding
claims and reserves for unexpired risks, particularly in computation of book profits under
section 115JB of the Act considering the same as contingent liability.
In view of the above, specific clarifications need to be issued by CBDT to ensure the
following:
Provisions for outstanding claims and reserve for unexpired risks made in accordance
with IRDA regulations/orders should not be added back to the computation of
income, both under the normal computation provisions as well as in the
computation of book profits under section 115JB of the Act.
It should further be noted that Rule 6E of the Rules prescribes that the amounts of
reserve for unexpired risks which are disallowed in accordance with the said Rule
should not be subject to tax again in the subsequent year in which the reserve is
written back, as this amounts to double taxation of the same income.
27
2. Gain/Loss on realisation of investments
Taxation of general insurance companies is governed by section 44 of the Act read with
Rule 5(b) of the First Schedule to the Act. Capital gains earned by General Insurance
Companies were chargeable to tax till 1988 and thereafter exemption was granted for
the industry by deleting Rule 5(b) of First Schedule to the Act. This was done to enable
insurance companies to play a more active role in capital markets for the benefit of
policy holders.
Subsequently, Finance Act 2004 inserted section 10(38) and section 111A to provide
exemption/preferential rate of taxation to all investors, on capital gains earned from the
transfer of listed securities. Finance Act 2010 taxes all realized gains by reinserting Rule
5(b) in the First Schedule.
The amendment reverses the exemption enjoyed by insurance companies in respect of
capital gains since 1988. Further, the general insurance industry is placed at a singularly
disadvantaged position as compared to any other sector which enjoys the benefit
under sections 10(38) and 111A of the Act. General insurance companies are paying
Securities Transaction Tax (STT) on all transactions of sale of securities. By virtue of the
amendment to the First Schedule by Finance Act 2010, all such gains on the sale of
investments are taxable as business income. In view thereof, the benefit of indexation
which is available in the computation of capital gains as well as the benefit of
exemption available under section 10(38) of the Act is denied to general insurance
companies.
Considering the key role played by the sector it is important that the general insurance
industry be allowed to operate on a ’level-playing field’ and treated at par with the
other corporates in the country with respect to taxation of capital gains. This can be
achieved by deleting clause (b) of Rule 5 of the First Schedule to the Act. Accordingly,
the exemption in respect of long term capital gains provided by section 10(38) of the
Act and the applicability of concessional rates as provided in section 111A of the Act
would be restored.
These measures aimed at restoring level playing field for non-life insurance companies
would enable building up a sustainable non-life insurance industry in the country.
Table 2: Tax treatment of insurance companies in other jurisdictions
Singapore
In a recent case, Singapore's Court of Appeal has issued a landmark ruling on the
income tax treatment of investment gains made by insurance companies. In the first such
case heard here, the ruling of the island state's highest court makes clear that gains from
the sale of assets held by regulated insurance companies in insurance funds mandated
by the Insurance Act are not automatically considered taxable income.
To ascertain whether investment gains are taxable, the reason for which the assets are
held needs to be first determined. If the assets are held for the purposes of trade, the
gains would likely be considered taxable income; if they are held for the long-term
strategic interests of the business, then the assets would be considered capital - and the
gains not taxable.
The Court of Appeal released its judgment grounds recently over a case brought by the
Comptroller of Income Tax (CIT) which had attempted to tax the nearly S$100 million
(US$78.9 million) an insurer made from selling certain shares. The CIT's case had earlier
28
been rejected by the Income Tax Board of Review, and then the High Court.
The CIT argued that the shares were bought using the proceeds of insurance premiums
linked to the insurer's business. So the gains were part of the company's income, which is
taxable. The insurer, represented by the legal firm, Wong Partnership, argued that it held
the shares as part of its corporate strategy and sold them only due to a takeover and not
to make a profit to fund its business.
The Court of Appeal decided that the shares were actually "structural" assets, and any
appreciation should be treated as capital gains, which are not taxable under the
Income Tax Act. The key question was whether the gains were driven by profit-making.
The Court made it clear that this was a question of fact to be decided based on the
circumstances of each case. In this case, the court decided profit was not the motive. It
noted that the insurer did not acquire the shares with the intention to trade in them.
The Singapore-registered firm, part of a group of companies, carried on the business of a
general insurer in Singapore and was registered under the Insurance Act until December
2009. It had used its investment funds to buy shares in the group. In 2001-2002, as part of a
takeover of the group by a third party, the insurer sold all of its group shares to the new
company. From the sales, the firm made a gain of S$98,633,380. The shares had been
held for up to 30 years, in line with the firm's plan to hold them indefinitely as part of its
corporate strategy.
It is understood that the Court of Appeal ruling saved the insurance company more than
S$20 million in tax. The company cannot be identified under income tax laws in
Singapore.
According to Wong Partnership (Singaporean law firm) “In particular, it is significant that the
Court of Appeal has determined that there is no invariable rule which taxes the gains
realized by an insurance company upon the sale of an asset. The inquiry as to whether such
gains amount to income or capital ultimately depends on an assessment of the totality of the
evidence”.
3. Applicability of Minimum Alternative Tax (MAT) to the Non-life industry
Objective and purpose of MAT provisions
With effect from April 1, 2013 (Finance Act 2012), MAT provisions under section 115JB of
the Act have also been made applicable to general insurance companies.
It is pertinent to note that the original purpose of introducing MAT provisions was to tax
companies that were disclosing book profits and distributing dividends but was not
paying income-tax on account of dubious tax planning.
General insurance is a highly regulated industry and general insurance companies are
mandated to prepare their accounts in accordance with IRDA Regulations. Thus, the
profits disclosed in the financials of general insurance companies are profits computed in
accordance with the IRDA regulations that are taxed as normal rates. MAT provisions
were not meant to be applied to such highly regulated companies.
The ITAT has also supported the industry view that provisions of Section 115JB of the Act
are not applicable in the case of insurance companies as they are not required to
prepare their accounts as per Schedule VI of the Companies Act 1956.
Further, given the basic structure of the provisions of the Act wherein section 44 overrides
all other provisions of the Act as regards computation of income, it should be clarified
that section 44 of the Act overrides section 115JB of the Act. However, the Revenue
29
Department is holding the view that section 115JB of the Act is applicable to the
insurance sector
MAT provisions and special features of insurance industry
However, if the above requests are not accepted, it needs to be ensured that at least
the basic features of the insurance industry are not completely ignored.
For instance, section 115JB of the Act, inter alia, mandates adding back of all
unascertained liabilities. In the general insurance industry, the liability towards claims,
especially in the case of liability lines of business, motor third party related claims etc.,
the crystallization of the exact claim amounts happen over a longer tenure (over a
period of 5 to 7 years)
If the peculiar features of the insurance industry are completely ignored, then during
the course of assessment proceedings, any provisioning made could be construed as
an unascertained liability leading to add-back and tax outgo. In some cases the tax
authorities have treated UPR etc. as unascertained liability and added back the same.
In view of the above, liability towards outstanding claims and unexpired risk should not be
considered as unascertained liability required to be added back to the profit and
suitable clarifications/instructions should be issued by the CBDT in this regard.
Considering the original intent of introducing MAT provisions was to target the zero tax
companies indulging in dubious tax planning activities, it should be specifically legislated
that MAT provisions do not apply to highly regulated companies like non-life insurance
companies. Such provision [section 115JB (5A) of the Act] has already been created for
life insurance companies. Similar exception needs to be carved out in section 115JB of
the Act for general insurance companies as well.
4. Deduction in respect of insurance premium
Like Life insurance sector, it would be a progressive idea that a separate deduction
toward premium paid under personal accident policy, home insurance & travel be
allowed to the policy holders under a separate section to the extent of Rs. 50,000/-
5. TDS on interest component included in Motor Accidents Claim Tribunal (MACT)
Compensation Awards to victims of Motor Accidents
MACT awards to victims of motor vehicle accidents include compensation and interest
thereon. Generally, most of the victims are poor .and are unlikely to have taxable
income; may not even have bank accounts. Interest component has been held by
Delhi High Court as a capital receipt in the hands of the recipient.
As per Section 194A of the Act, tax is deductible at source if the interest amount on
MACT awards exceeds Rs. 50,000 in the aggregate during a financial year.
Non-life insurance companies accordingly deduct TDS on the interest component. The
Delhi High Court (Order No. MACA 441/2012 dated 12.04.2013) has now ordered
insurance companies to refund such tax deducted to the claimants.
Section 194A of the Act needs to be amended to exclude interest component on MACT
awards from the application of TDS. Pending such an amendment, appropriate
30
instructions could be issued by the CBDT providing relief to both, claimants of
compensation as well as non-life insurance companies.
6. Disallowance of Notional Expenditure in respect of exempt income computed on the
total investment portfolio of non life insurance companies
As per Section 14A of the Act read with Rule 8D of the Rules, no deduction is allowed for
expenses incurred in respect of any income which is exempt from tax. Further, if the
Revenue Authorities are not satisfied with the correctness of the claim of the assesses,
they can compute the quantum of disallowance of notional expenditure at 0.5% of the
average value of the investment portfolio. In the context of an insurance company this
discretionary provision and the disallowance of notional expenditure is quite significant.
The investments of non-life insurance companies generating exempt income are in
respect of investments made in tax free bonds issued by entities in the infrastructure
sector. The exempt income would not exceed even 10% of total investment income of
the insurance companies. Also, the expenses incurred to earn such exempt income
would be very negligible as these mostly pertain to custodial charges, stock holding
expenses, investment expenses, transfer fees etc.
The income tax authorities disallow notional expenditure calculated at 0.5% percentage
of the total investment portfolio of the individual non-life insurance companies (on an
ad-hoc basis).This disallowance becomes substantial and exceeds the actual
expenditure by a very large margin.
Courts have held that computation of income of non-life Insurance companies is
covered by the provisions of section 44 of the Act read with Rule 5 of the First Schedule
and section 14A of the Act cannot be applied for calculating allowable expenditure.
However, it would be helpful if the CBDT issues a specific clarification in this regard.
7. Basis of taxation of reinsurance business
The tax laws pertaining to insurance business have not kept pace with the regulatory
developments. There are no separate provisions in the Act for the taxation of
reinsurance business.
Rule 6 of the First Schedule to the Act prescribes the manner of computation of profits
of insurance business in the case of non resident persons. As per the said Rule, in the
absence of more reliable data, the profits of the foreign branches carrying on
insurance business in India will be considered as that proportion of their world income
which their premium income derived in India bears to their total premium income.
Further, the world income in respect of life insurance business is to be computed in
accordance with Rule 5 of the First Schedule to the Act, i.e. in the manner in which the
income of Indian life insurance companies is computed. However, nothing has been
provided in connection with the computation of world income of non-life insurance
companies.
Considering the recent developments in the reinsurance sector and the peculiarity of
the global reinsurance business, in the absence of specific provisions for the taxation of
reinsurance there would be ambiguities in the allocation of expenses. It would
therefore be difficult to compute the world income of reinsurance business thereby
31
giving rise to litigation. An amendment in the said Rule is therefore necessary to
provide that in case of non-life insurance industry, the world income computed as per
the laws of the respective countries should be accepted for the purpose of Rule 6 and
no further adjustments should be made to the same under the Act.
In view of the above, the following amendments in law may be requested:
i. Separate provisions for computation of profit from reinsurance business.
ii. Presumptive taxation provisions similar to current provisions for shipping business
(7.5%), aircraft business (5%) and civil construction, turnkey power projects (10%) i.e.
taxation of gross premium received at specified legitimate rate considering the
industry margin of reinsurance business. Credible industry study is required to
determine the appropriate profit percentage.
iii. Proportion of worldwide profit before tax should be accepted on the basis of world
income computed in the respective countries, which will recognise claims/liabilities
instead of computing world income in the manner laid down in the Act.
8. No withholding tax on reinsurance premium
Reinsurance is an arrangement where an insurance company having accepted a risk,
cedes (passes on) a part or whole of such risk to another insurance company, called
Reinsurer. As a result, the insurance company pays premium to the reinsurer. Of the
industry premium size of Rs. 583.76 billion in 2011-12, a sum of Rs. 40.15 billion (7.52%) is
reinsured with overseas reinsurers. The Indian reinsurer, GIC Re, in protecting its balance
sheet, also adds to the overseas reinsurance remittances. Reinsurance is an important
risk mitigation and risk spreading mechanism for insurance companies. When the
reinsurance premium is paid, it is only a gross receipt and not ‘profit’ to reinsurers, as they
carry the risk transferred to them and would have to honour the claims arising during the
period of risk.
Reinsurance is an alternate capital to the insurance industry. Reinsurance with overseas
reinsurers helps in protecting the capital of the country (in a catastrophic event, it is a
substantial cash inflow that happens into the country and softens the impact for the
economy).
The UN Model Convention specifically exempts reinsurance from deeming accrual of
income notwithstanding the fact that the premium or risk may pertain to the territory of
any particular country. Historically, foreign reinsurers have never been taxed in India for
the reinsurance premium received from the Indian insurance companies.
The income tax authorities are taking the view that the reinsurance premium paid to the
Non-resident Re-insurer (NRRI) is held to be accruing or arising in India and therefore is
chargeable to tax under section 5(2)(b) of the Act. However, the industry contends that
the reinsurance premium payments are not taxable in India as per the Act on the
following counts:
Income is not received in India. All the payments to foreign reinsurance companies
are paid to foreign reinsurance companies outside India and therefore no income
has been received by foreign reinsurers in India.
32
Income does not accrue or arise in India and is also not deemed to accrue or arise in
India. The law provides that income can be deemed to accrue or arise in India if the
NRRI has a business connection in India, which includes activities carried out through
a dependent agent. The transaction between the Indian insurer and the foreign
insurer is on a “principal to principal” basis and there is no privity of contract between
policy holder and reinsurers. Also, an insurer is not an agent of the foreign reinsurer
and therefore reinsurers are not entitled to receive part of original premium. The
contract between insurer and reinsurer is a separate contract of insurance, distinct
from the contract between the insurer and the policy holder and therefore the same
does not create any business connection in India
Without prejudice, even if it is assumed that the foreign insurers have any business
connection in India, the reinsurance payment cannot be taxed in India for want of
their business operations being conducted in India. We reiterate that the NRRI
companies do not and cannot carry out their operations in India.
Provisions of Double Taxation Avoidance Agreement (‘DTAA’) relating to payment
made to reinsurers. India has entered into DTAA with various foreign countries and
whereby the business income arising in India can be taxed in India only when the
Non-Resident has a Permanent Establishment (‘PE’) in India. Article 7 of all the DTAAs
that India has entered into with other countries provides that the income arising to a
non-resident enterprise from doing business in India shall not be taxed in India, unless
the non-resident enterprise has a PE (defined in Article 5) in India. According to the
insurance industry, neither the overseas reinsurer by itself nor because of the presence
of a broker in India constitutes a PE in India in the absence of physical presence. In
fact, some of the DTAAs that India has entered into specifically exclude reinsurance
from the definition of PE (e.g. India – Swiss Confederation, India - Finland, India -
Luxembourg).
Therefore, it is submitted that the intent of the DTAA is to exclude re-insurance
business receipts from the ambit of taxation in the other contracting state and thus,
where a DTAA exists, reinsurance premium is not taxable in India in the hands of the
foreign reinsurance company.
Non applicability of section 40of the Act to General Insurance Companies. Section 40
of the Act deals with disallowance of expenses incurred towards any interest, royalty,
fees for technical services or other sum chargeable under the Act payable outside
India or payable in India to a non-resident not being a company or to a foreign
company, for non deduction of tax at source on the same. As section 44 of the Act
which deals with the computation of income from insurance business overrides the
provisions of section 28 to section 43B of the Act, the provisions of section 40 are not
applicable to general insurance companies.
33
Table 3: Two relevant areas to consider – international position on taxation and
impact on the industry
International position with respect to taxation
Under the UN Model Convention, a foreign insurance company is deemed to have a PE in
the other country only if it collects premium or insures a risk through a person other than an
independent agent. Even, so, under the UN Model Convention there is an explicit exclusion
not to cover reinsurance companies with such deeming clause. Though, the OECD Model
Convention does not have a similar clause, the OECD commentary states that the OECD
member countries can insert similar clauses in their tax treaties.
Internationally in countries such as France, Switzerland, UK, USA no income tax is levied on
payment of reinsurance premium to a resident of another country. While DTAAs provide for
taxation of specific payments, reinsurance premium is not one of them and typically
internationally, reinsurance premium is taxable only in case where there is a PE of the
overseas enterprise in that country. Further, in the Indian Context, a Director of Income Tax-
International Taxation, Mumbai, has in 2006 , held that a foreign reinsurer does not have a PE
in India based on the facts in case of Munich Re, Germany on the reinsurance transaction
with Birla Sun Life Insurance.
Industry impact
In the absence of any clarification as to circumstances when the reinsurance premium can
be taxed in India, the tax authorities will persist with their approach of holding the
reinsurance premium paid to the NRRI as accruing or arising in India and therefore as
chargeable to tax under section 5(2) (b) of the Act, resulting in serious financial hardship to
the industry.
This, in turn, will inflate the premium rates to the “end consumers.” Also, this will discourage
foreign reinsurers from investing in the Indian Market and further limit the capacity of the
Indian Insurance Market where insurers will not be able to write risk beyond their retention
capacity or underwrite mega risks. This may have an impact on the economic growth of the
nation as a whole.
In view of the above provisions in the Act, reinsurance premium paid to NRRI is not taxable in
India and no withholding tax is required to be deducted on the same. Specific clarification in
this regard may need to be issued by the CBDT.
9. Direct Taxes Code
Under DTC 2013, insurance/reinsurance premiums payable for covering any risk in India is
deemed to be income accruing in India and would be liable to withholding tax rate at
the rate of 20%.
Income tax authorities have failed to appreciate that when reinsurance premium is
paid, it is only a receipt of premium and not a profit to reinsurers, as they carry the risk
transferred to them and would have to honour the claims arising during the period of
risk.
Further, in the absence of any specific provision for computation of income from
reinsurance business, considerable difficulty arises with regard to the calculation of cost
allocation and thereby computation of taxable profit.
34
Following recommendations may be made in respect of reinsurance premium:
Introduction of presumptive taxation provisions for non-residents conducting
business of reinsurance. This should remove the difficulty of calculation of profit
taxable in India i.e. gross premium can be charged at specified rate of tax (DTC
proposes a very high withholding rate at 20%);
Overseas reinsurance premium remittances to be exempted from withholding tax in
accordance with the UN Model Convention and suitable clarifications / instructions
be issued by the CBDT.
10. Branch vs. Joint Venture
Currently, a foreign company is permitted to carry out reinsurance business in India only
through a joint venture with companies registered in India. The foreign holding in such
insurance companies is restricted to 26%, which is proposed to be enhanced to 49%. It is
also proposed to permit foreign insurance companies to set up branches in India.
If reinsurance business is carried out in India through a joint venture
The joint venture company would be considered as a separate legal entity in India. As
there are no separate provision for the computation of income in respect of reinsurance
business, the income of the joint venture company would be required to be computed
in accordance with Rule 5 of the First Schedule to the Act and the said income would
be taxable at the rates applicable to an Indian company, i.e. at 30% plus applicable
surcharge and education cess.
If reinsurance business is carried out in India through a of foreign branch of an insurance
company
According to Rule 6 of the First Schedule to the Act, the profits and gains of foreign
branches in India carrying on any business of insurance, may, in the absence of more
reliable data, be considered to be that proportion of the world income which
corresponds to the proportion that its premium income derived from India bears to its
total premium income.
While Rule 6(2) specifically provides that world income of life insurance business should
be computed in the manner laid down in the Act for the purpose of computation of
profits of insurance business carried out in India, there is no specific provision for the
computation of world income of non-life insurance business. It is therefore not clear as to
whether the world income of non-life insurance business should be computed in the
manner laid down for the computation of income of non-life insurance business carried
out in India, i.e. as per Rule 5 of the First Schedule.
If the Insurance Act is amended to permit the setting up of a foreign branch in India,
then as discussed in paragraph no. 7 above, an amendment may need to be made in
respect of computing the worldwide income of non-life insurance companies.
Further, under DTC 2013 every foreign company is liable to branch profits tax at 15% in
respect of branch profits of a financial year, in addition to income tax. The branch profits
refer to the income attributable, directly or indirectly, to the permanent establishment or
an immovable property situated in India, included in the total income of the foreign
35
company for the financial year, as reduced by the amount of income tax payable on
such attributable income.
To recapitulate, since reinsurance premium does not accrue or arise in India it is therefore not
taxable as per the present Act. However, as per DTC 2013, any insurance premium including
reinsurance premium accrued from or payable by any resident or non resident in respect of
coverage of any risk in India is deemed to accrue or arise in India.
Considering the protection to the overall economy that overseas reinsurance offers, overseas
reinsurance remittances should be exempt from withholding tax in accordance with UN
Model Convention by amending the current Income Tax Act and the DTC 2013.
Indirect Tax issues
1. Service Tax under coinsurance premiums
The coinsurance agreement is executed under the aegis of General Insurance Council
signed at the industry level among all general insurers. The term “Coinsurance” means
the Insured has an option to spread their risk amongst many insurers and allocate shares
to insurers. The general insurance company bearing the largest share of the risk is
called the lead insurer (or leader) while the other insurers sharing the risk are called the
participating co insurers.
The Insured decides the Insurers and it is the Insured’s prerogative to decide who will be
the lead insurer. Though the insured chooses to place business with more than one
insurer on the same risk/policy, he has the benefit of paying the premium, and receiving
the claims from only the lead insurer. In effect in all matters of servicing, service is
rendered only by the Lead Insurer to the Insured.
Insurance Rules pertaining to Section 64VB of Insurance Act also recognizes this
practice. Accordingly, the practice followed across the general insurance industry over
the years is that the leader under coinsurance policy collects 100% service tax from
the insured on the full premium and discharges in entirety the service tax liability to the
government. The co insurer(s) who is not the leader gets his share of coinsurance
premium. The participating co insurers are not involved in any manner in discharge of
service tax liability. This is the industry practice followed by all general insurers from the
day of inception of service tax in 1994 and continues till date.
This stance is support by Service Tax Instruction F. No. 150/1/94-CX. 4 dated 2nd May,
1996 issued by the CBEC (Appendix 8).
Recently, the authorities have demanded levy of service tax amounting Rs.3.62billion
along with interest and penalty on the share of premium collected by a company as a
participating co-insurer for the period 2005-06 to 2009-10 considering the same as
reinsurance premium being liable to service tax and was also given a show cause
notice.
Insurance premiums collected by the insurance company are already liable to service
tax. Payment of service tax again on the distributed coinsurance premium would lead
to dual payment of service tax on the same premium amount.
36
Hence, taxing the same insurance premium in case of reinsurance services without
providing credit on the entire amount and taxing coinsurance services would lead to
taxing twice on the same premium amount. Hence, premium paid in case of
reinsurance business and premium distributed in case of coinsurance business should
not be liable to service tax. Accordingly, the premium amount in case of reinsurance
and coinsurance services should be covered under the negative list of services or
made exempted under the mega exemption notification.
Further, as per the CENVAT Credit Rules, 2004 (‘CCR’), reversal of CENVAT credit is
required in case of provision of exempted output services. Hence with making
reinsurance and coinsurance exempt, simultaneously suitable amendment should be
made in Rule 6 of CCR such that both reinsurance and coinsurance service should
not be considered as exempt service and thereby not requiring reversal of credit.
The said show cause was strongly contested by citing the provisions of law and
documents including the coinsurance agreement under the aegis of General
Insurance Council signed at the industry level among all general insurers clearly stating
that it is the lead insurer who will discharge the full service tax liability to the Govt., with
proof of certificates from general insurance companies confirming in unequivocal terms
their adherence to the codified rule and the industry practice
The Insurance Industry requests that a clarification be issued by CBEC stating that the
Service Tax Instruction F.No.150/1/94-CX. 4 dated 2nd May, 1996 cover all coinsurance
transactions and that the leader continues to pay service tax on behalf of all insurers, as
is the current practice.
Service tax levied on the premium amount collected in case of reinsurance and
coinsurance transactions
General insurance companies provide both taxable and exempt services. Taxable
services included the various insurance covers like asset, motor, fire, marine etc. exempt
service would include Rashtriya Swastha BimaYojana (National insurance health plan),
and other services which are covered under sr. no. 26 of mega exemption notification.
The issue in case of reinsurance services
As a part of insurance business some amount of risk is always ceded to reinsurers. The
insurance company while providing insurance cover to the policy holder pays service
tax on the premiums collected. Further since, most of the reinsurance companies are
located outside India, the insurance companies also pay service tax under reverse
charge mechanism on the premium it pays to the reinsurance companies.
2. Further in some cases the reinsurance is ceded on a portfolio basis rather than on an
individual product basis. In such a situation, the portion of reinsurance ceded does not
differentiate between taxable and exempt service. Hence, service tax in case of
reinsurance service is also paid on services, which are primarily exempt under the mega
exemption notification.
3. Disallowance of CENVAT Credit on reinsurance services: The department seeks to
disallow credit on the ground that reinsurance service is not an input service for
providing output service. Here, it is pertinent to consider the following:
37
The word ‘input service’ is of wide import and includes all service required by an
assesse to provide output services. By a catena of judgments, the Courts have
time and again held that credit of service tax paid on services used in relation to
the business would be available as credit.
Reinsurance is essential for General insurance companies to render insurance
services to insured.
Reinsurance services are not specifically excluded from the definition of the ‘input
services’. Therefore, such reinsurance services would also get qualified under the
definition of ‘input services’, as the circular no.120(a)/2/2010-ST issued by the Tax
Research Unit, Central Board of Excise & Custom clarified that every insurer dealing in
insurance business is required to avail the services of a re-insurer (Appendix 6). It also
clarifies that it is the reinsurer which provides insurance service to the insurance
company. Hence CENVAT credit should be available on reinsurance ceded. It is settled
law that the clarifications of the CBEC are binding on the department officers. They are
used for providing output insurance services by the insurance companies. The industry
strongly recommends that the circular issued by CBEC to be extended and should bind
the service tax officers under the Negative list of service tax regime as well.
Service tax on Health Insurance Schemes
By the Notification No. 5/2012 issued by Ministry of Finance, the health care services by a
clinical establishment, an authorized medical practitioner or paramedics have been
exempted from the whole of the service tax leviable.
The services of preventive health check-up provided by hospitals, clinical establishments
will also be covered under the above exemption. However, when the health insurance
cover is provided covering preventive health check up services, the same is subject to
service tax. The service tax imposition renders the health insurance schemes on
preventive health check-ups incompatible with the health care services in terms of
costs.
The health insurance services should be made a zero rated service and accordingly the
disallowance provisions should also be amended.
Schemes for Social welfare
All the insurance schemes sponsored by Central Government or State Government
mainly for the benefit of below poverty line people, social sectors should be made
exempted from service tax. Presently some schemes of Government like Rashtriya
Swasthaya Bima Yojana (National insurance health plan), Weather Insurance Schemes
under MNAIS & other Schemes which are already mentioned under the negative list of
services are exempt from service tax.
However, some schemes are still subject to service tax for example health & personal
insurance schemes for handicrafts, handloom & weavers under schemes of Ministry of
Textiles. It is essential that similar exemption may be extended to all such schemes.
It is also essential that while calculating the disallowance the undue hardship is not
imposed on the service providers. At present in respect of services provided to Special
38
Economic Zone and services falling under export of services are not required to be
considered for the purpose of calculation of disallowance.
Amendment made in Rule 6 (3D) of the CENVAT credit Rules -Trading in securities
Per amendment in explanation 1 (point d) to Rule 6(3D) of CENVAT credit rules, in case
of trading of securities, value for the purpose of sub rules (3) & (3A), shall be the
difference between the sale price and the purchase price of the securities traded or
one percent of the purchase price of securities traded, whichever is more.
Insurance Companies are making investments in accordance with the prudential norms
and the investment policy under the Regulations prescribed by IRDA. Further, as per
Schedule B to IRDA (Auditor's report) Regulations, 2002 which prescribes the accounting
treatment to be given for different types of investments all investments by insurance
companies in debt securities shall be treated as held to maturity. The investment in
equity shares are generally kept from long term point of view. Hence insurance
companies by virtue of above provisions are not trading in securities. The
redemption/sale in securities is necessitated for the purpose of meeting working capital
needs such as payment of claims liability, reinsurance settlements etc.
By introducing the said explanation, undue hardship is being imposed on insurance
companies to disallow a certain proportion of their investment income while calculating
the proportionate disallowance under the provisions of service tax.
Therefore it is logical that insurance companies be excluded from the applicability of
above provisions.
Served from India Scheme
To accelerate growth in export of services, Directorate General of Foreign Trade
Government of India (“DGFT”) issues Duty Credit Scrip to Indian Service providers who
have free foreign exchange earning of at least Rs 10,00,000 in the preceding financial
year.
Duty Credit scrip may be used for import of any capital goods including spares, office
equipment and professional equipment, office furniture and consumables. Imports shall
relate to any service sector business of applicant.
Utilization of Duty Credit scrip earned shall be permitted for payment of duty in case of
import of only those vehicles, which are in the nature of professional equipment to the
service provider.
Duty Credit scrip should also be allowed to be utilised against payment of service tax
liability.
39
C. Dispute resolution
Litigation: An Indian Overview
Effective litigation is a fundamental requirement for a vibrant financial services sector. India
has a developed and codified legal system but litigation in India is slow. There are reportedly
over 32 million cases presently pending before Indian courts, of which the bulk, circa 28
million, are before the lower Courts, circa 4.3 million before the High Courts and circa 67,000
before the Supreme Court. With about 14,576 Judges hearing these cases and virtually no
case management, often a single Judge has to hear 40- 60 cases a day making a speedy
result impossible. Proceedings can, therefore, be prolonged and are expensive given the
significant number of appearances in court.
This is due to a variety of factors, such as lawyers seeking adjournments without reasonable
explanations or rationale, and equally the courts granting them adjournments without much
ado. Furthermore, there are rather long breaks between hearings given the backlog of
cases, during which the judges hearing the matter may retire or may be either transferred or
promoted delaying the process even further. There is seldom a matter in the Indian courts
that is heard from commencement to conclusion by the same presiding judge.
As a result, cases are delayed or left unresolved for years in many instances. For instance,
the National Commission is still hearing matters filed in the year 2000. On an average, if
lawyers of both parties remain committed to a timely resolution, it can still take 4-6 years for a
case to be resolved.
The successful party is entitled to a costs award but, in practice, courts award nominal costs
that bear no relation to the actual costs incurred. Judgments do carry interest at the
discretion of the courts, and usually this is within a range of 8%-14% per annum from the date
upon which the cause of action accrued to the date of payment of a judgments sum.
However in the case between and an insured party and individual; an individual may find it
daunting to initiate action. He may have to wait for nearly a decade for a judgement; whilst
in the meantime the insured has to fund the costs of the litigation. One of the unspoken
strategic defenses, an insurer may have to a claim - is the sheer duration of time it would
take for an insured person/entity to obtain a decision.
Although the Ministry of Law and Justice formulated a National Litigation Policy in 2010 to
address pendency and to reduce average pendency from 15 to 3 years, this well-meaning
initiative is yet to be implemented. The legal system is evidently broken and needs repair.
There can be no real progress towards India becoming a more sophisticated destination for
(re)insurance businesses, as there are inherent limitations in the legal system. This perhaps is
one of the biggest challenges for any foreign investor looking to do business in India. The
ownership to fix the system resides with the insurance, legal and key decision makers in the
country.
Furthermore, the state-owned insurers are in a peculiar position, as it is not easy for them to
settle disputes on a commercial basis without attracting attention of the numerous authorities
such as the Comptroller and Auditor General (CAG), and the Central Vigilance Commission
40
(CVC).
Arbitration & Conciliation
Arbitration is a medium which provides for an effective and expeditious dispute resolution
framework unlike court proceedings which takes number of years in resolving disputes
between the parties. Parties submit themselves to arbitration, as it enables faster resolution of
disputes and leaves very little scope for prolongation of disputes. For this reason it inspires
greater confidence in foreign investors to invest in India and reassures international investors
in the reliability of the Indian legal system to provide an expeditious, cost effective and
flexible dispute resolution mechanism.
Dispute resolution in India is slowly but surely coming of age. Indian companies now
appreciate the benefits of an efficacious and speedy dispute resolution. Due to the backlog
of cases, litigation in India is long drawn out and arduous. Whilst time spent on such delays
has reduced, arbitration has emerged as the preferred alternative mode of resolution for
commercial disputes. The Arbitration and Conciliation Act, 1996 (ACA) contains the law in
respect of arbitration in India. The ACA is based on the UNCITRAL Model Law. The ACA
preserves party autonomy in relation to most aspects of arbitration, such as the freedom to
agree upon the qualification, nationality, and number of arbitrators (provided it is not an
even number), the place of arbitration, law governing the arbitration agreement and the
procedure to be followed by the Tribunal.
Arbitration in India is primarily ad hoc but there is a move for promoting institutional
arbitrations. There are however, frequent complaints by parties that the time, as well as costs
incurred in arbitration does not in the present times render it as an attractive option.
The Indian Council of Arbitration (ICA) and the Delhi Chapter of the London Council of
International Arbitration (LCAI of India)established in 2009 are two of the most prominent
arbitration centres in India. Recently, Indian Merchants’ Chamber has launched the IMC
Suresh Kotak International ADR Centre in Mumbai.
The number of disputes currently being heard at the ICA and the LCIA is relatively a small
number compared to the large number of ad hoc arbitrations which are on going at any
given point of time. An arbitration agreement, as per the ACA, needs to be in writing and
should reflect the intention of the parties to submit their dispute(s) to arbitration. It is not
necessary for an arbitration agreement to be incorporated into an insurance / reinsurance
contract. An arbitration agreement can come into existence if it is contained in a
subsequent exchange of letters etc. so as to provide a record of the agreement.
The Law Commission is in the final stages of finalising a set of recommendations for
amendments to the Arbitration and Conciliation Act, 1996, to strengthen the arbitration
system in India. It is hoped that the newly elected government will introduce these
recommendations in the form of an amendment bill in the parliament.
The IRDA mandates that shareholders of an Indian insurance company should resolve their
disputes by an arbitral tribunal seated in India. In order to attract substantial interest and
investment (which would be a pre-requisite of insurance Industry) from foreign investor, clarity
of the applicable law is of utmost importance. Of late, there have been various regulatory
and legislative changes (including in taxation laws) that have raised question marks on the
scope of such provisions. While ideally one would want to get rid of the ambiguity
41
completely, as an interim measure, akin to the Authority for Advance Ruling in case of
Income Tax issues, there should be similar regulatory windows which may be made available
- so that appropriate prior clarifications can be sought before proceeding in a certain
direction.
There have been debates about establishing commercial courts in India so that a dedicated
tribunal is established to deal with such matters. The commercial courts would be distinct
from the courts dealing with other areas like real estate, administrative law or regulatory
disputes. This model has been successfully implemented in India when it comes to authorities
like TRAI or several regulatory electricity commissions, etc. Dubai has for instance taken an
initiative of setting up specialized tribunals in order to establish themselves as centres of
dispute resolution. Taking guidance from such instances, the Commercial Courts
Amendment Bill, 2009, was introduced in parliament to create special divisions in high courts
to deal exclusively with commercial disputes above a certain threshold value. The Bill has
been passed by the Lower House of Parliament (Lok Sabha) and is pending in the Upper
House of Parliament (Rajya Sabha). The Bill has been drafted in a manner which will ensure
that all such disputes are concluded within a span of a year of filing.
Section 89 of the CPC also embraces the provision for settlement of disputes outside the
court. The Alternative Dispute Resolution (ADR) mechanism as contemplated by Section 89 is
arbitration or conciliation, or judicial settlement including settlement through ‘Lok Adalat’ or
mediation. There are a number of mediation cells, associated with various High Courts but
the consent of the parties is a pre-condition for mediation.
Most arbitration clauses in insurance policies are restricted to resolution of disputes over
quantum; whilst leaving liability related to the disputes beyond its scope. This can also at
times, encourage insurers to reject liability because then an insured would need to resort to a
court or consumer forum - where the time taken for a dispute resolution would be onerous
and lengthy.
Another disturbing trend in the Indian scenario is; the losing party will invariably challenge the
arbitral award. While the scope of challenge is limited, this challenge has to be referred to
the judiciary and has to be determined by the slow moving courts, which can take up much
time to determine the validity of the challenge. This trend of a routine challenge and refusal
to accept an unfavourable award means that arbitrating a dispute ; may become more
time consuming - as parties will first arbitrate and then get relegated to the same tardy
judicial system, which they had initially wished to avoid.
While the endemic delays in the Indian judicial system require a comprehensive overhaul
and repair rather than a “band-aid” approach, some of the ways in which a start could be
made is by;
introducing the pre-scheduling of trials in advance;
a strict refusal for adjournments absent limited (and serious) exceptions;
introducing the system of part-time judges to address the caseload;
disallowing consumer forums to hear matters concerning commercial and financial line
claims; discouraging litigants from raising frivolous claims or defences by awarding of
realistic costs to the winning party and
specialised training of judges in relation to insurance and reinsurance claims.
42
Role international law firms can play
Insurance and reinsurance law is a specialised subject meriting a more focussed and
comprehensive expertise. Most sophisticated jurisdictions accordingly, have specialist
lawyers and law firms to support the insurance and reinsurance sector. In India, however,
such a specialisation is conspicuously absent. Most Indian law firms have now developed
focussed practices around other areas such as infrastructure, telecom, oil and gas, etc., but
specialisation in the insurance and reinsurance sector is very limited in India. To build such
specialisation in Indian firms need the assistance and advise that that can perhaps be best
achieved by engaging with experts from jurisdictions that have necessary specialisation
and expertise. While opening up of the insurance and reinsurance sector; further in terms of
capital participation will attract foreign insurers and reinsurers what is equally needed are
well developed support services such as the access to international insurance and
reinsurance lawyers.
Under section 7(1) of the Advocates Act 1961, foreign law degrees are recognised by the Bar
Council of India on a reciprocal basis, and legal academicians can teach and engage in
legal research without any bar. However, foreign nationals are prohibited from “practicing
law” in India as per the same Act.
While the Indian government has stated that the entry of foreign law firms in India is
inevitable, it has left the onus on the Bar Council of India to make rules in this regard. The Bar
Council of India has yet to make any conclusive statements on this aspect.
There has been a change in the government’s policy as well. The government has shown
interest in making Limited Liability Partnerships (LLPs) a reality in India and has taken efforts to
have an enactment in place to govern it. This would enable such law firms (as well as
accounting firms) to grow as they would no longer be required to keep their partnership
restricted to 20 Lawyers. The Bar Council is also looking into the requests for relaxing the
constraints on advertising the legal profession.
A greater number of foreign clients are now involved in Indian transactions, , which is why the
foreign law firms are to establish a base in India, to better serve their clients here; rather than
serve them from Singapore or Dubai. The reinsurance hub would both accelerate and
benefit from this process.
There are numerous arguments to the opening up of the Indian market: increased
professionalism may be the primary one, but reciprocity and international law obligations is
definitely a strong one as well. The entry of large MNCs into India has created a niche for
foreign-Indian legal collaboration which can take place if the Advocates Act is amended
and the Bar Council takes the necessary steps to build a consensus on the issue.
As long as the basic principles set out by International Bar Association, that is, fairness,
uniform and non-discriminatory treatment, clarity and transparency, professional
responsibility, reality and flexibility are met, the entry of the foreign law firms should be a
possibility.
So far as reciprocity is concerned level playing field and uniform code of conduct will have
to be worked out. For example, there is a cap of 20 on the number of members of any law
firm. However, with the introduction of LLPs this problem might be solved. Further, many
western nations allow their lawyers to market their services; whereas in India the lawyers are
43
not allowed to do so. Reciprocity should be clearly defined and must be effective. Also, the
“single window services" concept of the FLFs, that is, services which not only include legal but
also accountancy, management, financial and other advice to their clients may be
problematic in terms of the current legal and regulatory framework governing the practice
of law in India. Also, privileged legal information being passed on to the wrong people could
be a concern. The Advocates Act 1961, Bar Council Rules and Code of Conduct would
need to be reviewed and amended to bring international legal practice within its fold.
To conclude, if India plans to develop itself as reinsurance hub, it is imperative to have a
robust legal system, an effective arbitration system and access to international legal and
professional expertise.
44
VI. Appendices Appendix 1: One Insurance Vision
Need for Government / Regulatory support for ONE Insurance Vision and its delivery with
Global Benchmarks
Introduction
The Indian (re)insurance market requires an enabling environment for a modern, transparent
and profitable global market place, attractive to both capital providers and policyholders as
a place to do business.
The additional requirement is to make the insurance market even more transparent to the
regulator and key external commentators, in line with the mandate given to the Indian
Insurance Regulator, “to protect the interests of holders of the insurance policies, to regulate,
promote and ensure orderly growth of the insurance industry and for matters connected
therewith or incidental thereto”.
Prudential Regulation in primary legislation
At a general level, it is important that the framework to govern prudential regulation should
not be addressed in primary legislation, but instead the IRDA should be conferred with
powers to draft and implement such regulations. Setting down detailed requirements in
primary legislation restricts the ability to modify regulations quickly and effectively. In
contrast, granting the IRDA the authority to set the prudential regulatory framework would
enable it to amend its requirements in the light of experience and changing circumstances,
an important tool in a dynamic supervisory environment.
Currently, there are myriad laws in India which are part of the primary legislation involving
number of Ministries and Government Departments at the Central Government, ranging
from Ministry of Finance, Transport, Labour, Health, Law and Revenue to name a few, with
different and differing goalposts, at times.
Having all of these at the primary legislation level involve following issues:
1. There is a problem of alignment - lack of ONE Insurance Vision.
2. Since the stakeholders are many and constituencies are dispersed, it is difficult to weave
a common fabric – the inevitable fragmentation and delays continue in the system.
The fundamental principle being deployed at the matured markets needs to be deployed:
the Government providing broad thrust and direction to the economic activity and the
Regulator then growing and supervising the market. In essence, the Regulator is not taken as
the extended arm of the Government.
Lot of primary level and secondary level laws and rules / regulations in India owe their origin
to how insurance took shape and grew in the west, but whereas the matured markets have
moved on and further evolved, our practices are caught in a time warp. For instance, the
Indian Marine Insurance Act, 1963 is based on UK Marine Insurance Act, 1906 which is itself
undergoing revision. The UK Law Commission published its Insurance Contract Law Draft Bill in
late January, 2014 and opened a limited consultation on its draft clauses until February 21,
45
2014. The new rules are set to replace the 100-year-old Marine Insurance Act that forms the
basis for UK Insurance Law. Similarly, the Indian MV Act is a case in point and many more as
can be gleaned from this paper.
Regulator’s role of pursuing the development and growth of the insurance industry
According to the International Association of Insurance Supervisors’ Insurance Core
Principles, Standards, Guidance and Assessment Methodology, 1 October 2011:
1. The principal objectives of supervision promote the maintenance of a fair, safe and
stable insurance sector for the benefit and protection of policyholders.
2. While the precise objectives of supervision may vary by jurisdiction, it is important that all
insurance supervisors are charged with the objective of protecting the interests of
policyholders.
3. Often the supervisor’s mandate includes several objectives. As financial markets evolve
and depending on current financial conditions, the emphasis a supervisor places on a
particular objective may change and, where requested, this should be explained.
4. In addition to this, however, attention is drawn to the model adopted by the
Singaporean Financial Services regulator, the Monetary Authority of Singapore (“the
MAS”).
As industry regulators are in constant and direct contact with market players, they are
ideally positioned to understand the markets they supervise and to identify opportunities
to develop and grow those industries. The MAS has recognized this, and as such has a
stated mission “to promote sustained non-inflationary economic growth, and a sound
and progressive financial centre” in Singapore.
Thus, in addition to being an internationally recognized prudential regulator, the MAS has
a department devoted to developing Singapore as an international financial centre, an
aim it achieves by working to provide an attractive regulatory and fiscal business
environment, that is robustly supervised, whilst actively promoting the development and
growth of Singapore as a financial centre by incentivising business.
This model has been extremely successful, as companies wish to operate in markets that
are governed by a robust and transparent regulatory environment that is conducive to
business, an environment that the MAS has been able to foster through its dual role.
The Global response to the financial crisis of 2007/2008
Fundamentally the G 20 and FSB determined that the insurance sector was neither the
originator nor the transmitter of the financial crisis.
The IAIS (The International Association of Insurance Supervisors) has however implemented a
new set of enhanced insurance core principles and the regulators in G 20 markets are
proactively accelerating their regulatory modernization to add to these minimum
international standards. Solvency II in the European community is one such example.
46
The insurance industry, like other components of the financial system, is changing in response
to a wide range of social, technological and global economic forces. Insurance supervisory
systems and practices must be continually upgraded to cope with these developments.
The Insurance Core Principles (ICPs), Standards, Guidance and Assessment Methodology
from International Association of Insurance Supervisors provide a globally accepted
framework for the supervision of the insurance sector.
The ICP material is presented according to a hierarchy of supervisory material. The ICP
statements are the highest level in the hierarchy and prescribe the essential elements that
must be present in the supervisory regime in order to promote a financially sound insurance
sector and provide an adequate level of policyholder protection.
Standards are the next level in the hierarchy and are linked to specific ICP statements.
Standards set out key high level requirements that are fundamental to the
implementation of the ICP statement and should be met for a supervisory authority
to demonstrate observance with the particular ICP.
Guidance material is the lowest level in the hierarchy and typically supports the ICP
statement and/or standards. Guidance material provides detail on how to implement an
ICP statement or standard.
Needed Regulatory Reforms in India
With a view to promote sustained non-inflationary economic growth and a sound progressive
global insurance centre in India, the regulator in India should be entrusted with a goal of
pursuing the development and growth of the Insurance industry. The Primary Legislation
should therefore empower the regulator to effectively supervise the market.
Subordinate legislation in the form of legislations issued by the regulator can then be used to
introduce new or modify existing principles or rules including the self regulations. This
approach empowers the regulator and affords it the flexibility to respond to the dynamic
supervisory environment it encounters.
The Regulatory agenda could be prioritized around:
1. The Insurance Industry must gradually reflect a global mind set and alignments to cater
more effectively to local needs and aspirations. The Insurance Core Principles of the
International Association of Insurance Supervisors provide an effective framework.
2. An early time frame to move in the direction of RBC regime would be a pre requisite
since any further lengthening of the time line would see more of regulatory interventions
at the micro levels than at the prudential levels.
3. A gradual shift to prudential regulations than the detailed and prescriptive regulatory
management which ties both the Regulatory and regulated entities down to their last
act.
4. A similar shift from the rules based regulatory frame work to that of principles based
approach which has minimalist regulatory interventions but produces better market
response and compliance results. The March, 2013 report of the Financial Services
Legislative Reforms Commission (FSLRC) of the Government of India endorses this
approach.
47
5. Public listing of the insurance companies.
There is a need for self regulations in all areas except the principles which should govern
licensing, capital adequacy, risk management, corporate governance and protection of
Policy Holders Interests. The self regulatory organizations would be held responsible for their
codes of conduct around service standards and strictest rules for stake holders’ engagement
The key to the above framework would require full co-option of the following key
stakeholders, who are an integral part of the entire insurance eco system and there is a need
to let them become fully developed Self Regulatory Organizations, within specific domains
and given mandates:
a) Insurance Councils
b) The Indian Insurance Institute of Surveyors and Loss Assessors
c) Institute of Actuaries of India (IAI)
d) Insurance Brokers Association of India (IBAI)
The Philippine Insurers and Reinsurers Association (PIRA), is applying for a self-regulatory
organization (SRO) status, as its non-life members believe that the industry can police itself by
implementing up-to-date regulations to boost their business while protecting the interests of
the public.
“We are developing ourselves into becoming a self-regulated group. We are now setting up
our own rules and regulations,” the Philippine Daily Inquirer reported, citing PIRA president
Emmanuel Que. Once finalized, the rules and regulations being formulated by the
association would be forwarded to the Insurance Commission for approval, he said.
PIRA, which has 69 non-life insurance companies as members, is also pushing for the
reduction of taxes on nonlife insurance as well as mandatory insurance coverage for
homeowners, and small and medium enterprises.
Regulatory Policy / Self Regulations must have level playing field for all players – foreign,
domestic (private and public) and strong professionals need to be the watch dogs and
three is a need to Improving social infrastructure to attract global talent – immigration laws,
housing, work permits and so on, with the Government adopting an open door Policy.
Changing nature of the Insurance Industry
The insurance industry, like other components of the financial system, is changing in response
to a wide range of social, technological and global economic forces. Insurance supervisory
systems and practices must be continually upgraded to cope with these developments.
The nature of insurance activity - covering risks for the economy, financial and corporate
undertakings and households - has both differences and similarities when compared to the
other financial sectors. Insurance, unlike most financial products, is characterized by the
reversal of the production cycle insofar as premiums are collected when the contract is
entered into and claims arise only if a specified event occurs. Insurers intermediate risks
directly. They manage these risks through diversification and risk pooling enhanced by a
range of other techniques.
48
In addition to business risks, significant risks to insurers are generated on the liability side of the
balance sheet. These risks are referred to as technical risks and relate to the actuarial and/or
statistical calculations used in estimating liabilities, and other risks associated with such
liabilities. Insurers incur market, credit, liquidity and operational risk from their investments and
financial operations, including risks arising from asset-liability mismatches. The regulatory and
supervisory system must address all these risks.
Risk Based Capital Requirement and Solvency II
Risk Based Capital regime for Insurers and aligning of the solvency regimes with global
developments with compulsory listing of all companies, including the PSUs, is the first requisite.
Also needed are differential regulations for better performances e.g. higher solvency margins
for consistently high combined ratios and vice versa – with strong, consistent and equal
disclosure norms for all.
In contrast to the current regulatory solvency capital (which is 150% of the Required Capital
Margin), the Economic capital calculation recognizes the capital requirement for specific
risks a non life company is exposed to.
Whereas the current regime is a combination of regulatory capital and maintenance of
Solvency of Margin, per Insurance Act and the Regulations, the Economic Capital is a key
component of the insurer appetite framework for it provides a measure of risk related to the
business (typically, Economic Capital is calculated by determining the amount of capital
that the insurer needs to ensure that its realistic balance sheet stays solvent over a certain
time period with a pre‐specified probability, for example, the Economic capital may be
determined as the minimum amount of capital required to make 99.5% certain that the
insurer remains solvent over the next twelve months)
The word ‘economic’ indicates the fact that it measures risk in terms of economic realities
rather than Regulatory or accounting rules which may have been designed to support non
economic principles. This word also indicates that part of the measurement process involves
converting a risk distribution into the amount of capital that is required to support the risk, in
line with the insurer’s target financial strength (For example, credit rating).
The Regulatory office in India has therefore been engaging the Indian Insurance market to
get current and the future financial condition of the insurers, based on the technical notes
on Asset Liability Management and the Economic capital modelling. In its estimation of the
Economic Capital for the General Insurance Companies in India, it has drawn heavily on the
standard formulae / methodology used under Solvency II framework.
Solvency II introduces a new harmonized EU-wide regulatory regime. The Key features of
Solvency II include Economic risk-based solvency requirements where the insurers are
required to hold capital against a range of risks, not just insurance risks. It is a total balance
sheet type regime where all the risks and their interactions are considered. The Insurers are
required to identify measure and proactively manage risks.
An insurer must undertake an Own Risk and Solvency Assessment (ORSA) which aims to
ensure senior management have conducted a review of risks and that the insurer holds
sufficient capital against those risks.
49
The focus of the ORSA assessment could incorporate risks posed to the wider economic
environment, including but not limited to Risk appetite and strategy, non core activities,
reverse stress testing, corporate governance, the role of the chief risk officer etc.
Solvency II further ensures harnessing market discipline to support regulatory objectives. It
aims to ensure consistent supervisory reporting and disclosure across the EU. Insurers should
be prepared to disclose more information publicly than at present.
Solvency II and Lloyd’s Framework Directive continues to treat Lloyd’s as a single entity - the
“Association of underwriters” known as Lloyd’s - and the Solvency II capital requirements
apply to Lloyd’s as a whole.
FSA (now PRA), UK is generally cited as a leading regulator globally and one of FSA’s key
strengths is the rigorous approach it brings to policy formulation and implementation. For
instance, in terms of the implementation of Solvency II the attempt is to approach the
expected change in the implementation date to January, 2016 in a way that allows
breathing space without losing momentum.
It is imperative that we work on a definitive time frame in India to align ourselves to the
Solvency II regime as a proactive measure, the lines of businesses strictly following the broad
international practices and definitions. Perhaps 1st April, 2016 would be a good timeframe to
move in the direction of Solvency II
Currently, the gross claims of an Insurance company is being used in a formula for estimating
the solvency which is anomalous since net claims is a better methodology and the regulatory
concerns for re insurance arrangements would be better met with full movement to
economic capital and risk based capital per lines of businesses.
Other areas – illustrative and not exhaustive
1. Section 27 of the Insurance Act says, “No insurer shall directly or indirectly invest outside
India the funds of the policy holders.
In contrast, China has opened its markets to about 45 countries – the iconic Lloyd’s,
London now belongs to Ping An – a Chinese Life Insurer.
2. Under Section 25 if the IRDA Act, 1999 the Insurance Advisory Committee, which advises
the Authority shall consist of members representing commerce, industry, transport,
agriculture, consumer forum, surveyors, agents, intermediaries, organisations engaged in
safety and loss prevention, research bodies and employees’ association in the insurance
sector.
There are two issues here: a) it is prescriptive and b) under the proposed Insurance
Amendment Bill, 2008 the Insurance Council (a body for Insurers) shall have members
beyond Insurers community. This is again not following a visionary script.
3. The Insurance Act, 1938 (primary legislation) defines “general insurance business” to
mean “fire, marine or miscellaneous insurance business, whether carried on singly or in
combination with one or more of them”
50
The issues: a) there are so many business classes, both traditional and modern, which
don’t get reflected b) the definitions defy modern and global business practices c) these
lead to cascading regulatory regimen which are not in sync with global practices.
4. The primary legislation prescribes ceilings on insurance commission, payment of
commission and on Expenses of Management u/s 40, 40B & 40C leaving the Regulator
little scope to steer the regulatory ship and trim its sails according to market priorities.
5. The current legislative set up does not allow the foreign re insurers with the ability to set up
their Branch office operations including Lloyd’s of London to set up their market structure,
much in the same way available in London / Singapore.
The latest Asia Insurance Review, Jan 2014 says, “Since the privatisation of the insurance
industry in 2000, a number of foreign insurers have set up JVs in India. However, no foreign
reinsurer has set up full-fledged operations in the country”.
With rapid economic growth over the past few years and the country emerging as the major
world power, the time is ripe for a reinsurance hub in the country.
“The entry of global reinsurers can further support the underwriting activities of Indian insurers
and encourage more domestic investment in Indian insurers.
The Government and the Regulatory Agenda for Indian Insurance Industry, seen in global
context and with domestic imperatives, must partake of ONE Insurance Vision and allow the
Insurance Industry become a key driver for the economic growth in the country.
Clusters and Competitive Advantage
Clusters are geographic concentrations of interconnected companies, specialized suppliers,
service providers, firms in related industries, and associated institutions in particular fields that
compete but also cooperate. A cluster may thus be defined as a system of interconnected
firms and institutions whose value as a whole is greater than the sum of its parts.
More importantly, the presence of a cluster not only increases the demand for specialized
inputs but also increases their supply. Where a cluster exists, the availability of specialized
personnel, services, and components and the number of entities creating them usually far
exceeds the levels at other locations, a distinct benefit, despite the greater competition.
Clusters affect competition in three broad ways: first, by increasing the productivity of
constituent firms or industries; second, by increasing their capacity for innovation and thus for
productivity growth; and third, by stimulating new business formation that supports innovation
and expands the cluster.
Clusters also create new roles for government / regulator. Removing obstacles to the growth
and upgrading of existing and emerging clusters and Competition should be a priority.
Clusters are a driving force in increasing exports and magnets for attracting foreign
investment.
It is important IRDA becomes a force multiplier in India’s quest for a truly international
reinsurance hub.
51
New Paradigms and a Comprehensive Agenda needed to serve Policy Holders’ Interests
Alvin Toffler identified the emergence of participatory structures and producer/consumers or
“prosumers” as far back as 1980 in “The Third Wave” based on reintegration of the Consumer
and the Producer that means people have a “voice”.
The “Voice” can be lent to the insurance contracts, through
the creation of “Contract Certainty” (the risk appraisals, disclosures and defined cover
terms and the obligations of the contract parties – all reflecting in the Contract);
Creation of robust dispute resolution mechanism, and take care of the evolving
paradigms with increasing globalization.
Ushering into civil liability resolution rather than criminal prosecutions
When risks materialize and give rise to claims, they need to be speedily settled and the
disputes, if any, need to be resolved quickly. A comprehensive institutional mechanism that
casts fairness and responsibility on both sides truly balances the “Prosumer” and is the one
that truly promotes Policy Holders’ interest.
Contract Certainty is achieved by the complete and final agreement of all terms between
the insured and insurer by the time that they enter into the contract, with contract
documentation provided promptly thereafter.
Contract Certainty in the Indian Market would require clear, modern contract wordings for
policies and reinsurance slips and minimum and modern underwriting guidelines as guidance
for the market, with fair degree of innovation and self control on products, pricing and
process areas within a principles based framework.
This would also call for aligning Act Provisions, the Regulatory Interfaces and various Judicial
Pronouncements besides modernizing and updating various Acts / Regulations etc. Few
samples are given here:
i) Section 64UM – Conflicting Judgments
The following are two judgments which are conflicting in views expressed on power of
Insurance Company to appoint a second Surveyor.
(i) Venkateshwara Syndicate vs Oriental Insurance (2009) 8SCC 504) wherein the Supreme
Court held that an Insurance Co had a right to appoint a second surveyor without going to
the Regulatory Authority. See Para 33 to 35; where court holds that under 64 UNM (2) there is
no prohibition in the Insurance Act for appointing a second surveyor by the Insurance Co.
Thus in the opinion of the Supreme Court an Insurance Co has an inherent right to appoint a
second surveyor after giving reasons.
(ii) India Insurance Co Ltd vs Protection Manufacturer's Pvt Ltd. (AIR 2010 SC 3035). In that
case Insurance Co had appointed a second surveyor. It had been contended by Insured
that that 2nd surveyor could not have been appointed unilaterally by Insurance Co having
regard to Section 64UM without first having applied to Regulatory Authority under the Act.
That contention was upheld and second surveyors report was therefore discarded. See Para
35 of that judgment.
52
This Judgment however does not take into consideration Supreme Court’s view expressed in
para s 33 to 35 of the earlier case of Venkateshwara Syndicate vs Oriental Insurance (2009)
8SCC 504.
In the above circumstances, it is not clear which Judgment is the correct law.
It can be argued that Judgment in case of Protection Manufacturer's Pvt Ltd is not good law
as it is per incurium that is bad law as it has not considered and over ruled the earlier
Supreme Court judgment.
On the other hand, there are Supreme Court rulings that its last Judgment is correct law in
which case Protection Manufacturer's case would be regarded as the right and applicable
Law.
The view expressed, however, in case of Protection Manufacturer's Pvt Ltd is in consonance
with the provisions of the Section 64 UM. Per Regulatory Authority a second survey Report
can only be obtained under 64 UM (3) if there are good reasons so pointed out by the
Insurance Co.
While on the subject in Jagannatha Poultries v NIA (2012) where the Protection
Manufacturers case has been referred to, and at paragraph 8, the National Commission has
stated that a second surveyor can only be appointed under the aegis of the IRDA. The case
is important because this is the forum (the National Commission) where most of the insurance
cases are heard and it would be useful to show the recent outlook of this forum.
ii) Section 64VB
There are varying interpretations by the Insurers on Section 64 VB despite the existence of the
Insurance Rules, 1939. These need to be harmonized to achieve greater transparency in
protecting the interests of the Policy Holders.
iii) Public Liability Act, 1991
The Act after its enactment in the year 1991 hasn’t been updated / changed. For instances,
arising out of an incident as defined in the Act, the compensation payable for fatal injuries is
just Rs 25,000.00 which is insignificant in today’s context.
The Act needs to be realigned to reflect the current requirements and obligations to better
protect the Indian consumers.
iv) The implications of Companies Bill, 2012 on D&O Policies
The new Companies Bill 2012 needs dovetailing in the D&O Policies especially on the
following issues:
Class Action suits that can be filed by the investors before the National Company Law
Tribunal
Governance Scores based on Governance Indicators / Strategic Indicators /
Performance Indicators and Policy Indicators.
The Indian consumers should know that the Indian shareholders of Satyam did not receive a
penny as compensation from US Class Action suits whereas a Class Action suit was settled in
53
US against Satyam at USD 125 Million and a Class Action suit was settled against PWC at USD
25 Million.
A detailed research and concerted efforts from the stakeholders would help the Indian
consumers face this challenge.
v) Motor Insurance Third Party Liability Insurance –
The Motor Vehicle Act, 1988 (the ‘Act’), makes it mandatory for every vehicle plying on the
public roads to have an insurance coverage against any third party liability of the vehicle
owner.
There are however lots of discordant notes, and to name a few:
Unlimited period for preferring a claim
No Amendment in the MV Act for the last many years
Fraud against the Insurers
Insured vs. uninsured vehicles – Though only 48% of the vehicles plying on road were
insured in 2009-2010 (statistics sourced from the IRDA and the Transport Ministry) 99%
of the road traffic deaths and injuries are claimed and awarded against the insurers.
Delays in the adjudication of claims – In some of the states, Courts take up to 10 years
or more for awarding compensation to the claimants, which jeopardizes the nature
of summary proceedings.
Inadequate penalty for violation of traffic laws
Limited defences to the Insurers
These need realigning lest it continues to reflect poorly on the effective delivery of insurance
mechanisms. The MV (Amendment Act) has been approved by the RajyaSabha after years
of delay but hasn’t received the assent of LokSabha – this itself is an interim arrangement
and a fresh attempt would perhaps be still required to cater to the recommendations of the
Sundar Committee, which among other things, has suggested divesting Third Party Provisions
from the MV Act and to get a new Act enacted under the Ministry of Finance.
Meanwhile, the Supreme Court of India is looking into the related cases as a consolidated
endeavour to get clarity to the Insurance Industry on application of the Section 64 VB of the
Insurance Act and the issues around gratuitous passengers in goods carrying passengers /
the Driving licenses / Permits for the Commercial Vehicles / recovery rights / Liabilities falling
under the Workmen’s Compensation Act and the Contributory negligence etc.
The years of delays, however, is causing continued misery and leaving all stakeholders
dissatisfied.
vi) Protection of Policy Holder’s Interests –
The IRDA notification of 16th October 2002 and its Regulations on Protection of Policyholders’
Interests has in terms of its Short title and commencement, Definitions such as Cover,
Proposal, Prospectus, Points of sale, matters to be stated in policy, claim procedure, aspects
on Policyholders’ Servicing as well as General regulations are an omnibus provisions for life
and non life markets (though there are segregations as well).
54
These however need to be re cast differently for the non life Industry where the Personal lines
and Commercial lines are so very different in terms of their core composition, focus and
deliveries and therefore need to be discriminated along these lines.
The continuation of the omnibus provisions are bound to have issues with various authorities –
such as Regulatory, judicial or quasi judicial bodies and so for, without necessarily promoting
and /or protecting policy holders interests.
vii) Conclusion
It is important therefore that the Insurers and the Regulatory Authority work towards complete
Contracts Certainty. This would also call for aligning Act Provisions, the Regulatory Interfaces
and various judicial pronouncements besides, modernizing and updating various Acts etc.
One possible benchmark is the attempt in the UK market currently underway is the work
being done by the UK Law Commission in the Insurance Contract Draft Bill. The new rules are
set to replace the 100-year-old Marine Insurance Act that forms the basis for UK insurance
law.
Of key interest to the Risk Management Association of the UK are the proposed changes to
duty of disclosure rules. It wants disclosure requirements made clearer and proportionate to
the size of the company seeking cover and has applauded proportionate remedies where
duty of disclosure is breached. The association is pleased that the draft law encourages
active engagement by insurers in the disclosure process.
55
Appendix 2: International reinsurance hubs
The leading International Insurance Hubs have evolved and flourished, among others,
through:
A sophisticated and supportive regulatory environment
A progressive legal system
Tax Incentives
Good quality facilities and services
Talent Pool
London
Insurance in London began well over 400 years ago, and gained prominence in the 19th
century, reflecting Britain's then dominant role in shipping and shipbuilding. As the British
Empire expanded, London developed into a dominant global financial centre. For most of
this period, the marine insurance industry was dominated by Lloyd's, but a flourishing
company sector also developed and later expanded to embrace emerging aviation and
energy markets. By the 1980s, the company non-marine sector had also grown to match the
Lloyd's market, boosted by an influx of overseas capital.
The London Market
The 'London Market' is a distinct, separate part of the UK insurance and reinsurance industry
centred in the City of London. It comprises insurance and reinsurance companies, Lloyd's,
P&I clubs, and brokers. The core activity of the London Market is the conduct of
internationally traded insurance and reinsurance business. This is mostly non-life (general)
insurance and reinsurance, with an increasing emphasis on high-exposure risks. There is also,
however, a significant amount of life reinsurance activity in London. Despite the growth of
other international centres, London retains its position as the world's leading international
insurance and reinsurance market.
Composition
There may be far fewer companies operating in the market than in the late 1980s, but their
average size has increased, and so has the overall level of business. The London Market's
international character is reflected not only in the sources of its business but also in the
nationalities of its participants and their ultimate owners. A majority of the companies
underwriting in the London Market are foreign or foreign-owned. It is still the only centre in
which all of the world's 20 largest reinsurance groups are represented.
Competitive Strengths
An important competitive strength of the London Market lies in the number, diversity and
expertise of the insurers competing here. Brokers can find the capacity and expertise
required for the underwriting of virtually any type of risk. Brokers control most of the
business placed in the market.
London is largely a subscription market where risks are shared. A key feature is the
presence of highly skilled 'lead underwriters' whose judgments on premium rates to be
charged for different risks are followed by other insurers in London and indeed other
markets across the globe.
56
Another important attribute is geographical concentration with many insurers and
intermediaries and professional services providers located in close vicinity within the City
of London. Thus, brokers can know personally the strengths, specialties and reputations of
the underwriters and the insurers with whom they deal, and readily tap the combined
underwriting capacity for all sectors of the market. The London Market also contains an
unrivalled pool of service providers and technical expertise all located within close
geographical vicinity, such as law firms, accountancy and audit firms, IT support,
surveyors, professional bodies and many others.
The London Market operates under liberal and effective regulatory supervision, and a
transparent and reliable legal system. This enables business to be transacted in a secure,
innovative and attractive environment.
London has a huge pool of skilled personnel.
Other benefits include the use of English and London’s location and time zone part way
between Asia and America.
Key facts on London as a global insurance hub
1. The London Market is the only place where all of the world’s twenty largest international
insurance and reinsurance companies are active.
2. The 19% marine insurance premiums transacted on the London Market in 2011 was higher
than in any other country. London accounts for around a 10% share of total world
reinsurance.
3. In the Global Financial Centres Index 2013, London is ranked as the top financial centre.
And is the top financial centre for insurance. The factors identified as underpinning
London’s status as an international hub are:
A central geographical location between the US and Asian time zones allowing
London to work virtually around the clock.
Easy access to markets combined with a tradition of welcoming foreign firms.
Altogether, there are over 1,400 financial services firms in the UK that are majority
foreign-owned, from around 80 countries.
High quality professional and support services.
Substantial and modern office accommodation and efficient telecommunications
infrastructure.
Concentration of financial institutions. London has more foreign banks than any other
centre. These banks employ around 160,000 people, 40,000 of whom have a foreign
passport.
A consistent, politically neutral legal system that is widely used and understood
globally.
4. In 2012, the total income for the London market was £49.725 billion (US$74.6bn) (IUA,
2012).
57
5. The UK insurance industry is the third largest in the world and the largest in Europe. It
manages investments amounting to £1.8 trillion (equivalent to 25% of the UK’s total net
worth) and contributes over £10 billion in taxes to the Government. It employs around
320,000 people in the UK alone. The insurance industry is also one of this country’s major
exporters, with 26% of its net premium income coming from overseas business (ABI, 2013).
6. The London market is the centre for UK’s “invisible export” business. 46% of the London
company market’s premium income (2012) and 82% of Lloyd’s premium income comes
from outside of the UK (2011).
7. Insurance is the largest single component in the UK’s invisible exports – which in 2008 hit
£54 billion.
8. 66% of Lloyd’s premium income comes from outside of Europe (2011).
9. 68,900 people are employed in insurance in London – over 10% of the 669,600 employed
in financial and related professional services (London Employment Survey, June 2013).
The London financial and professional services sector accounts for 15% of regional
employment.
10. London’s global success as a financial and business centre is founded in its openness to
international business – it is home to around 250 foreign banks, 200 overseas law firms –
and a crucible of global expertise and experience of global deals. London is the
collector and implementer of global best practice and bespoke solutions. It is
liberalization that has made London a great financial centre.
Singapore
It is now a decade since Singapore opened up entry to the direct general insurance industry,
removing the cap which had existed on the percentage of foreign ownership of local
insurance companies. During the intervening period the Singapore insurance market has
markedly developed and matured and can now rightfully lay claim to being Asia’s premier
insurance and reinsurance centre.
The international insurance companies have increasingly opted to base their regional
headquarters in Singapore and as of June 2013 in the non life market there were 51
registered insurers and 17 non life authorized reinsures in Singapore.
These developments have been led by the growth of OIF reinsurance business, with risks from
all around the region now being placed into the Singapore reinsurance market. Gross
premiums of Offshore Insurance Fund (OIF) business have risen rapidly, from just over S$1.7
billion (US $ 1.23 billion) in 2000, to S$ 6.8 billion in 2012. During the same period, Singapore
Insurance Fund (SIF) business also rose, from S$1.7 billion to S$ 3.6 billion in 2012.
As well as establishing itself as the regional hub for reinsurance business, Singapore is also the
largest domicile for captive insurers in the region. As of July 2010 there were some 62 captive
insurers based in Singapore, up 20 per cent from a decade ago. This in turn has prompted
the establishment of numerous captive managers to service this sector of the industry.
58
Technical expertise
The local market has developed rapidly in terms of industry expertise. The Financial Sector
Development Fund has been established to support the training needs of insurance
companies based in Singapore through schemes such as the financial Training Scheme and
the Financial Scholarship Program. Industry initiatives such as the Global Internship Program
are also proving successful.
In addition to local programs focused on training, Singapore’s high standards of living and
services have led to an inward migration of experienced insurance professionals, which in
turn has assisted in further developing existing local expertise.
The growth in the industry has also led to a flood of ancillary providers, such as specialized
reinsurance lawyers, forensic accountants and business recovery experts establishing a local
presence.
Supportive regulatory environment
The Monetary Authority of Singapore (“MAS”) the island’s insurance regulator is very
supportive of the development of the insurance industry and its approach is indicative of the
country’s fair regulatory environment. Various financial incentives have been made
available to global insurers considering setting up regional headquarters in Singapore.
The attraction of Singapore for many foreign insurers is less the market itself than the
opportunities it offers as an insurance hub as a whole, a role that the Monetary Authority of
Singapore (MAS) is keen to promote and, faced with an increasingly competitive local
market, companies are likely to look more and more to offshore business.
The MAS continues to refine its hands-off approach to market supervision, relying increasingly
on self-regulation through the General Insurance Association (GIA) and by means of
legislative instruments such as risk based capital and corporate governance. It has stated its
intentions of continuing to promote Singapore as the main insurance centre in Asia by
encouraging investment in insurers and captives, particularly those writing foreign business.
The MAS enjoys a good relationship with the insurance companies and the GIA. There is a
strong mutual respect and a tradition of consultation in connection with any legislative
change that will affect the market.
The GIA carries out activities that promote and advance the common interests of members
and general insurance industry through:
Fostering public confidence in, and respect for, the insurance industry
Representing members’ interests to government, trade bodies, similar associations and
bodies in other industries
Establishing a sound insurance structure and promoting greater efficiency within the
industry
Promoting education and training in all aspects of insurance
Being a good corporate citizen
The Association has a self-regulatory function that is enforced through market agreements.
59
The association’s objectives include examining and giving guidance on technical matters,
considering enquiries and suggestions from government bodies, private corporations and the
general public, and organizing seminars, workshops, surveys and dialogue between
members and interested parties.
Lloyd’s Asia
Indicative of the movement of underwriting capital into Singapore is the Lloyd’s Asia
Platform, on which Lloyd’s syndicates write local and offshore business through service
companies.
Established in 1999 pursuant to the Lloyd’s Asia Scheme, the Platform has seen rapid growth
in recent years. There are twenty six syndicates trading on the Platform through service
companies.
Syndicates planning to establish a service company to trade within Lloyd’s Asia require
approval from both Lloyd’s and locally from the MAS. In addition to being subject to the
Lloyd’s Asia Regulations in Singapore, they need to comply with Lloyd’s Acts and Byelaws,
such as the Lloyd’s Asia instruments which exist for both Singapore and offshore policies.
Service companies must also sign up to the Lloyd’s Cover holder’s undertaking. Requiring
amongst other things that cover holders agree to comply with local insurance, fiscal and tax
laws, regulations and requirements of the jurisdiction in which they trade.
In parallel with the rapid growth in the number of syndicates there has, unsurprisingly, been a
marked increase in premium income increased from US$ 50.8 million in 2005 to US $ 521.2
million in 2012.
The Legal Framework
A legal system based on tried and tested common law principles and Singapore’s reputation
as an open and fair jurisdiction for dispute resolution have also assisted this development.
Whilst specific legislation has been enacted with regard to the regulation of insurance
business, the law applicable to insurance contracts in Singapore generally follows English
common law which, so for as it was part of the law before 1993, broadly continues to apply
in Singapore. Decisions of the English Courts on matters of insurance and reinsurance are
highly persuasive, providing reassurance to international underwriters familiar with the
approach and application of English law.
In addition, due to local law and regulation in various jurisdictions in the Asia Pacific region,
often fronting arrangements are necessary, with local insurers providing direct cover (usually
subject to local law) to insured and then ceding all but a small retention to reinsures, many
based in Singapore or London seeking to iron out any difference in conditions resulting from
local law.
Law and jurisdiction/arbitration clauses are of particular importance in insurance and
reinsurance contracts but are regularly given insufficient consideration when policy terms are
agreed. Underwriters who may be familiar with English market practice and principles of
insurance may be disappointed if a dispute over the meaning of policy terms leads to
unexpected results if it is litigated in a civil law country such as Thailand of the Philippines.
60
It is in such situations that regional offices of specialized international reinsurance law firms
prove their worth, applying a combination of legal expertise in the industry with local and
regional knowledge and understanding. This is often most valuable in the management of
large and complex disputes but equally can assist in the first place. Many disputes are
successfully concluded without recourse to formal dispute resolution however such legal
expertise is invaluable when managing complex cross-border litigation and arbitration.
A growth centre for arbitration
Related to this, there is another development worthy of note. In parallel with and
complementary to the evolution of the insurance sector has been the growing reputation of
Singapore as a regional and global centre for arbitration. This has been assisted by a judicial
philosophy which is supportive of arbitration and perhaps more obviously, the enactment of
legislative changes to liberalize and update the legal regime for arbitrations and open up
the legal market for practitioners.
In 2004 the Legal Profession act was amended to remove restrictions on foreign lawyers
representing parties in arbitration in Singapore. Foreign lawyers can now appear as counsel
in Singapore law arbitrations and give advice, prepare documents and provide assistance in
relation to or arising out of arbitration proceedings (other than taking steps before the local
courts).
This is of substantial importance for the reinsurance industry as it enables international law
firms with globally recognized reinsurance pedigrees to act on behalf on behalf of clients in
disputes being arbitrated in Singapore. This is particularly relevant as more and more policies
issued are providing for disputes to be resolved by Singapore law and arbitration.
Singapore has bolstered its stance as a regional reinsurance hub by developing its offshore
insurance fund business, which has delivered significant growth and favourable results over
the past decade. For many foreign Companies, the attraction of Singapore is not just the
domestic market but also the opportunities and convinces the country offers as a regional
Asia-Pacific hub.
Singapore is the leading reinsurer market of the Association of Southeast Asia Nations.
Increasing trade and investment activities across ASEAN countries have raised reinsurance
demands. In addition to traditional property lines, marine and energy lines offer substantial
room for further growth in Singapore, as well as agriculture, casualty and specialty risk for the
region.
Singapore aims to become a global insurance marketplace by 2020, according to MAS. To
achieve this vision, MAS Managing Director Mr. Ravi Menon said that the regulator is pursuing
four strategies.
They are to include supply-side capacity by increasing the depth and breadth of the
industry;
to promote Asian insurance demand; to develop a true marketplace, where sellers and
buyers come together to negotiate and trade risk; to foster a conducive business
environment.
Amongst the top 25 reinsurers in the world, Mr. Menon said 16 have regional hubs here.
Singapore has also build up significant expertise in specialty insurance, namely marine,
energy, catastrophe, credit and political risks.
61
Key facts on Singapore as a global insurance hub
1. It is projected that over the next decade, the insurance business in Asia will grow at
about 8% per annum. By 2020, Asia is likely to account for almost 40% of the global
market (MAS, November 2013).
2. Since the liberalisation of the insurance industry in 2000, offshore business has been on a
steady uptrend, growing an average of 13% per annum to US$5.4bn in 2012. The share of
offshore non-life business has increased from 50% in 2000 to 65% in 2012.
3. Amongst the top 25 reinsurers in the world, 16 have regional hubs in Singapore.
4. Singapore now hosts over 70 insurance brokers. Four of the top five brokers in the world
have their regional hubs in Singapore.
5. In Singapore, the market has built up significant expertise in specialty insurance, namely
marine, energy, catastrophe, credit and political risks. Singapore is now the second
largest market for structured credit and political risk worldwide after London.
6. Asia’s first association for risk managers, the Pan-Asian Risk and Insurance Management
Association (PARIMA), was set up in Singapore in April, with strong support from the
insurance industry.
7. Singapore has been chosen to host the Geneva Association General Assembly in 2015 –
only the second occasion it will be hosted in Asia (after 2009 in Japan).
8. Singapore is identified by the Global Financial Centres Index 2013 as a financial centre of
growing importance. It was ranked fourth (after London, New York and Hong Kong), but
was mentioned as the top centre “likely to become more significant”.
China - Shanghai Insurance Exchange
China’s central government is to pilot an insurance exchange in Shanghai, according to the
Head of the country’s China Insurance Regulatory Commission (CIRC). According to
FeiGuang, head, Shanghai Bureau of the China Regulatory Insurance Commission (CIRC), -
the newly established Shanghai Free Trade Zone (FTZ) opened in late September in 2013 will
be positioned as a testing ground for China’s offshore insurance market, and will challenge
existing international insurance centres for business.
FTZ would also be a pilot site for overseas investment operations of domestic insurance funds,
focusing on disaster insurance and risk management. Mr. Pei also reiterated that the zone
would develop key insurance business, namely shipping insurance, high-end health
insurance, liability insurance and credit insurance. Mr.FeiGuang said “the purpose of setting
up offshore business is not to increase competition in the domestic market. Rather, it is to
compete in the international market, particularly to compete against Japan, Singapore,
Hong Kong, etc. We have that late-mover’s advantage. With support from all sides, our
offshore insurance pilot zone should be able to attain satisfactory results.”
62
Leoh Ming Pei, at an investment seminar said that insurance regulations in the FTZ, such as
those governing market access, product supervision and solvency, would be crafted to be
more market-oriented and expects that a shipping insurance association mission is to make
Shanghai an international marine insurance centre.
Foreign players would be allowed to participate, the reports claimed. In future the exchange
might expand to include risk securitizations, catastrophe bonds another derivatives.
China Regulator cracks open the door to captive insurance The China Insurance Regulatory
Commission (CIRC) has made preliminary steps towards the setting up of captive insurers by
giant corporations, following the establishment of the country's first captive insurance
company after more than a year of preparations. The insurance regulator, which is likely to
first run a pilot program on captive insurance, will soon issue a set of rules for setting up
captive insurers, reports the 21st Century Economic Report. It has issued a notice which
serves as temporary regulations governing captive insurance.
Among several requirements, CIRC says that the holding company of the captive insurer
must have total assets exceeding CNY100 billion (US$16.5 billion) and be profitable and
operate on a large scale. Currently, around 50 Chinese enterprises meet these criteria. The
notice says that the capital of the captive insurer has to be commensurate with the risks it
has to cover. The rules also stipulate that the captive insurer is to provide cover for the
group's property, short term healthcare needs of employees and injury due to accidents.
China’s largest oil and gas producer and supplier, China National Petroleum Corp (CNPC)
and its subsidiary Petro China have established the country's first onshore captive insurance
company. The captive is based in Karamay City in oil-rich Xinjiang in western China. It has a
registered capital of CNY5 billion. The group's application for a captive insurance license was
approved by CIRC in October 2012. The captive is seen as a trial project by the CIRC.
Industry sources say that for captive insurance to take off in China, the sector will need
captive-specific regulations. Capitalization, investment, operating and supervisory
requirements need to be set out firmly. Enterprises will also be comparing premium rates in
the insurance market - which are competitive - to the cost of running their own captives.
South Korea
Korean Re aims to be among top 3 worldwide by 2050Korean Re has set out a three-stage
roadmap to achieve its Vision 2050 goal to become one of the top three reinsurers in the
world. This year will be the very starting point for the implementation of the roadmap, and a
strong push will be made to tap further into the global markets, according to a statement
issued by the company, which is now ranked 9th largest internationally.
A specific set of goals has been outlined for each of the three phases. In Phase One from
2014 to 2020, Korean Re will build the foundation of improving global competitiveness. To
achieve this, it will establish an advanced pricing system; develop a pool of underwriting
experts by line of business; improve capacity and credit ratings by enhancing profitability
and issuing subordinated bonds and expand its overseas network to 10 branches and liaison
offices from seven at present. More offices will be switched into branches following its
decision to turn the Beijing office into a branch in December 2013.
In Phase Two from 2021 to 2030, the reinsurer will sharpen expertise in underwriting and risk
management. It will attract overseas strategic investors and issue cat bonds and other forms
of alternative capital to further strengthen capacity and credit ratings; seek equity
63
participation in foreign businesses and establish regional headquarters in Asia, the Americas,
Europe and the Middle East.
In Phase Three from 2031 to 2050, the company would be transformed into a global
insurance group on the back of strengthened capacity and credit ratings. It will establish a
global underwriting system based on an expanded network of 40 branches and offices
worldwide and set up insurance and finance think tank to support the development of
sophisticated products and services. The new vision reflects the company’s recognition that
expanding into overseas markets should be an essential course of action in the face of
challenges such as local economic slowdown and limited potential of the domestic
commercial insurance sector, which has been one of the main lines of its reinsurance
business.
Korean Re CEO, Mr Jong-Gyu Won, said: “Vision 2050 will guide Korean Re to grow into a
global reinsurer built upon a sound risk management philosophy and expertise. And
domestically, it will help us continue to carry out the mission of supporting sustained
development of our economy, industry and society.”
64
VII. References
1. Insurance market report: INDIA: Non life (P&C) October, 2010- Axco Information
Services, London
2. Article: “Path to $45 trillion Economy” – Shailesh Haribhakti, Economic Times dated
24th March, 2011
3. Report of the High Powered Expert committee on making Mumbai an International
Financial centre
4. An International Reinsurance Hub – why India needs it? - IMC Paper of 17th January,
2013
5. Effective Delivery Mechanism for Better Penetration of Insurance in India – IMC Paper
of 25th November, 2013
6. China: Shanghai FTZ throws down offshore insurance gauntlet - eDaily Asia Insurance
Review – 20.11.2013
7. Presentation from Gautam Mehra, PWC – DTC Impact on reinsurance companies
8. Singapore non life market developments – Feb 2011- Axco Information Services,
London
9. Singapore Offshore Business – eDaily Asia Insurance Review – 24.10.2013
10. China Regulator relaxes currency rules for Reinsurers - eDaily Asia Insurance Review –
16.07.2013
11. China Government to make Food Liability mandatory - eDaily Asia Insurance Review
– 31.10.2013
12. Best’s 2011 Special Report – “India non life and life Market review
13. The Lion’s share: Singapore consolidates its position as Asia’s regional reinsurance
centre: Barlow Lyde & Gilbert: Asia Insurance Briefing – Oct 2010
14. World Economic Forum Global Competitive Report, 2012 -2013 On Competition,
Michael E Porter
15. Articles in Asia Insurance Review Asia: Nat CATs expose emerging markets'
underinsurance – Munich Re etc.
16. Forty First Report Standing Committee on Finance (2011-2012) (Fifteenth Lok Sabha)
Ministry of Finance (Department of Financial Services)The Insurance Laws
(Amendment) Bill, 2008Presented to Lok Sabha on 13 December, 2011 Laid in Rajya
Sabha on 13 December, 2011
17. IRDA Regulations on Reinsurance
18. City UK Report
19. Foreign Law Firms entering the Indian Market – more pros than cons, Vrinda
Maheshwari, Chilli breeze writer
20. International Association of Insurance Supervisors’ Insurance Core Principles,
Standards, Guidance and Assessment Methodology, 1 October 2011
21. TheCityUK’s annual Economic contribution of UK financial and professional
services report
22. Lloyd’s Global Underinsurance Report, October, 2012
23. Doing Business in the Dubai International Financial Centre, PricewaterhouseCoopers
24. Effective Delivery Mechanism for Better Penetration of Insurance in India – IMC Paper
of November 25, 2014
25. An Agenda for Indian Insurance Industry – ONE Insurance Vision with Global
Benchmarks – IMC Paper of February 19, 2014 for National Summit on “Financial
Services – A Key Driver for Economic Growth”
26. Law Business Research, 2014
27. AIR daily, 23 Jun 2014
65
About us
Indian Merchants’ Chamber
Set up in 1907, the 107-year old Indian Merchants’ Chamber is a premier Chamber of trade,
commerce and industry in India, an apex Chamber of trade, commerce & industry with
headquarters in Mumbai. It has over 3200 direct members, comprising a cross section of the
business community, including public and private limited companies and over 200 affiliated
member associations through which the Chamber reaches out to over 2,50,000 business
establishments in the country. IMC is also the first Chamber in the country to get ISO
9001:2008 accreditation in India.
IMC, set up in the wake of the ‘Swadeshi Movement’ by the visionary business leaders, has
done a yeoman service during the freedom struggle of India. Hence, the Father of the
Nation, Mahatma Gandhi accepted the Honorary Membership of IMC, the only Chamber in
the country which has this privilege. IMC has always worked towards the cause of upliftment
of the Society, and has been organizing seminars, workshops, etc. for promotion of trade and
investment and extending the hand of cooperation to the Society at the time of natural
calamities like flood, earthquake, etc. IMC is always seized of the contemporary socio
economic issues and make best efforts to find out the solution. We have been constantly
fighting for “good governance” and the issues like corruption, as IMC believes that good
governance is a panacea to the complex problems of India.
A Century of Service to the Nation has three distinct phases:
A crucial role in freedom struggle in the pre-independence era (1907-1947).
A vital and an equally important role in the promotion of trade, commerce & industry in
the planned economy in the post-independent era (1947-1991)
Promotion of business to become globally competitive in the post-liberalisation era
(1991-2012).
IMC celebrated its Centenary in 2006-07. The celebration was launched by former President
of India, Dr. A.P.J. Abdul Kalam. Also as recognition of the services rendered by IMC, a
commemorative postal stamp was released by the Department of Post, Government of
India. The closing ceremony of the celebrations was done at the hands of Mr. P.
Chidambaram, former Finance Minister, Government of India.
In its second century it continues to serve with greater zeal the cause of trade, commerce
and industry, especially in terms of global trade and investment and has in place 142
Memorandums of Understanding with leading chambers of commerce in over 50 countries.
Its annual India Calling programme brings investment and trade opportunities in its target
countries and in India to the attention of business and political leaders. Target countries
hitherto have included Singapore, UAE, U.K., South Africa, Canada, Brussels (Belgium), Turkey,
Vietnam, China and Myanmar.
With its commitment towards social upliftment at the forefront, IMC has selected ‘Growth with
Governance’ as its theme for the year 2014-15. Various programmes and activities
undertaken by the Chamber throughout the year will be centered on this theme.
66
City of London
The City of London Corporation is the local authority of the business district of London, known
as the 'Square Mile'. The City of London has a unique concentration of international expertise
and capital, with a supportive legal and regulatory system, an advanced communications
and information technology infrastructure and an unrivalled concentration of professional
services. The City of London is apolitical and it works on behalf of the UK-based financial
services industry.
In order to strengthen direct links with India, one of the world’s largest and most vibrant
emerging markets, the City of London has established the India Office in Mumbai, to
promote all UK-based financial and related business services. The City of London India Office
works to further strengthen trading and investment links in both directions between India and
the UK through the provision of world class financial services and products.
The City of London India Advisory Council steers the work of the India Office and provides
guidance on the City of London’s engagement with India. Members include: Mukesh
Ambani (Chairman of Reliance); C.B. Bhave (Former Chairman of the Securities and
Exchange Board of India); Jaspal Bindra (Group Executive Director & Chief Executive Officer
Asia, Standard Chartered Bank); Naina Lal Kidwai, Country Head India and Director HSBC
Asia Pacific; Rajiv Lall (Executive Chairman of Infrastructure Development Finance Company
(IDFC)); Rajiv Luthra (Founder and Managing Partner of Luthra & Luthra Law Offices); Rajiv
Memani (Chief Executive Officer & Country Managing Partner of Ernst & Young); Zia Mody
(Senior Partner of AZB & Partners); Nasser Munjee (Chairman of Development Credit Bank);
Ravi Narain (Vice Chairman of the National Stock Exchange of India Ltd); Deepak Parekh
(Chairman of the HDFC Group); Jairaj Purandare (Chairman of JMP Advisors Pvt. Ltd); Ajay
Shah (Senior Fellow of the National Institute of Public Finance and Policy, New Delhi); Shardul
Shroff (Managing Partner Amarchand & Mangaldas & Suresh A Shroff & Co) and Ajay
Srinivasan (Chief Executive Officer (Financial Services) and Director of Corporate Strategy
and Business Development - Aditya Birla Group).
67
Disclaimer
The views presented by the experts are personal and do not necessarily reflect the
views of their respective organisations.
The paper, ‘A framework for developing a reinsurance hub in India’ has been
published by the Indian Merchants’ Chamber (IMC) and the City of London is
intended as a basis for discussion only. Whilst every effort has been made to ensure
the accuracy and completeness of the material, IMC and City of London give no
warranty in that regards and accept no liability for any loss or damage incurred
through the use of or reliance upon this paper or information contained herein.