2006 PARIS

Insurance programme in developing countries

Chairmen: Nick Dexter
Emmanuel Tassin Presenters: Bernard Cohendy

UK
France France

P A Balasubramanian India

1st June 2006 14:15 15:45

AXA in Sub-saharian Africa

Bernard Cohendy

SOMMAIRE/ SUMMARY

1 / P&C market
2 / Specificities

3 / Organisational principles
4 / Implementation of these principles

5 / Policy results

1 P&C market

450M Euros of premiums in 17 countries.

4 main countries (Cameroon, The Ivory Coast, Gabon, Senegal) account for 75% of total premiums. AXA has offices in these 4 major countries, where it ranks n1 or 2, with a market share of around 20%. AXA is the n1 Insurance Group.

2 Specificities
Each insurance company is relatively small.

Commercial lines represent 70% of the business.

As a consequence, reinsurance is important. The legal framework (insurance law, civil law) is very similar to the French one. A common language : French. Insurance products are very close to those distributed in France.

3 Organisational principles Maximise AXAs assets : Being the n1 insurance group, Access to AXA Frances expertise. The 4 insurance companies act as one company : thanks to a management structure, a technical expertise, a financial control and people management driven from AXA France. common means, products, methodologies and procedures.

4 Implementation of these principles

Common policies set in the following areas : technical expertise, sales, accounting and finance, organisation, reinsurance, human resources, IT. Products, rules and procedures conception : in each area, according to set policies. Policies compliance control : reporting, audits, People management : daily, focus groups, seminars, training, Financial year closing : decision making process, conservative rules and norms setting, statutory auditors relation monitoring.

5 Policy results
Operating income reaching 15 % of turnover, recurring despite a high proportion of reinsurance. Growth margin in a developing market.

IACA Conference

June 1st, 2006

Concurrent Session (Insurance) Insurance Programme in Developing Countries Indian Overview

P.A. Balasubramanian

Index 1. Indian Economic Environment

1.1 GDP Growth rate at factor cost 1.2 Gross domestic savings 1.3 Gross domestic investments 1.4 Price situation 1.5 Domestic Financial Markets 1.6 Foreign Exchange Reserves 1.7 Securities Market Equity 1.8 Assets under management of mutual funds

2.

Insurance Industry
2.1 De-regulation 2.2 Market Scenario 2.2.1 Insurance Penetration 2.2.2 Insurance Density

2.2.3 Share Capital 2.2.4 Product Innovation 2.2.5 Distribution Channels 2.3 Life Insurance 2.3.1 First Year Premium 2.3.2 Commission & Operation Expenses 2.3.3 Investments 2.3.4 Profits 2.4 Non-Life Insurance 2.4.1 Premium Income 2.4.2 Commission & Operating Expenses 2.4.3 Investments 2.4.4 Under Writing Profit / Loss 2.4.5 Re-insurance 2.4.6 De-tariffing

3. Supervision and Regulation

3.1 Appointed Actuary System 3.2 Supervision by the Regulator 3.3 Solvency of Insurers

4. 5. 6.

Pension Reforms Actuarial Standards Taxation

6.1 Service Tax 6.2 Corporate Taxation 6.3 Tax Relief on Insurance Policies

7. Self Regulatory Organizations

1. Indian Economic Environment 1.1 GDP Growth rate at factor cost (at 1999-2000
prices) 4.4% ( 2000-01) to 8.1 % (2005-06) Agriculture Allied 2.3% - Industry 9 % and services 9.8 % (2005-06) 1.2 Gross domestic savings 23.5% (2000-01) to 29.1% (2004-05) of which household-sector 22% 1.3 Gross domestic investments 24.2 % (2000-01) to 30.1%(2004-05) of which Private-sector 20%

1.4 Price situation

WPI: 6.5% (2002-03) to 4.1% (2005-06) CPI : 4.1 %(2002-03) to 5.6% (2005-06)

1.5 Domestic Financial Markets

GOI bond Market: Rs. 10515 billion (end 2005) Corporate bonds: ______ GOI bond interest rate:
Notional ZC 1 yr bond: 5.44% (2002) to 6.28% (2005)
Notional ZC 10 yr bond: 6.12(2002) to 7.22%(2005)

1.6 Foreign Exchange Reserves (USD Bn)

42.28 (2000-01) to 141.51(2004-05)

1.7 Securities Market - Equity

NIFTY BSE

2002

2005

2002

2005
12138.7 42.33

End yr market cap (Rs. Bn) 3529.4

Returns %
3.3

13503.94 2769.2 36.34 3.5

Indian Equity turnover (Rs. Bn)

2002 13035

2005 60179

1.8 Assets under management of mutual funds (Rs. Bn)

Particulars 2002 2005

Money Market fund Income fund Growth fund Balanced

108.01 774.69 143.71 141.64

647.11 529.03 671.44 68.33

2. Insurance Industry
2.1 De-regulation of Insurance sector
Insurance companies enjoyed the freedom to determine the rate Life ( prior to 1956); Non-Life ( prior to 1973) Nationalization helped in deployment of massive financial resources Reform process initiated in 1991 Committee on Reforms in Insurance sector 1994 IRDA Act Passed December 1999 Statutory Authority established 19th April 2000 First set of Regulations notified 19th July, 2000 First set of Registration (Licenses) granted 23rd October 2002

2.2 Market Scenario

Nearly six years since the insurance market has been opened up Broadly the insurers can be divided into two categories: Non-Life - Four PSUs (New India, National, Oriental, United), two specialized insurers - ECGC, Agriculture Insurance Co. Ltd. and nine private players Life One PSU (LIC) and 14 private life insurance companies Reinsurance One GIC designated as the national reinsurer 15 players each are operating in the life 12 in the non life segments. In addition there are 2 specialized institutions. One company has been granted license recently

2.2.1 Insurance Penetration (Premium as % of GDP)

Year 1996 2004 Total Business 1.84 3.17 Life 1.29 2.53 Non Life 0.55 0.65

2.2.2 Insurance Density (Premium per capita in USD)

1996 2004 7.00 19.70 5.00 15.70 2.00 4.00

Source: Swiss Re

2.2.3 Share Capital (Rs. Bn) March 2005

Life
Total Private Public 43.48 1.0 FDI (%) 24.24 --

Non-Life
Total 10.49 4.5 FDI(%) 23.47 --

2.2.4 Product Innovation

The opening up of the sector has resulted in introduction of new products, particularly, the unit linked products Wider choice is available to the customer Products tailor made to the needs of the insured. Availability of riders, particularly term rider, Health riders including Hospital benefit rider, Term Rider have been a positive developments Annuity as against guaranteed annuities there is a move to offer variable annuity (guarantee for a shorter term) Insurers putting in efforts to develop products both in the life and non-life segments (credit insurance, mortgage insurance, bancassurance products, term insurance, Micro insurance product) Authority concerned about the policyholder making an un-informed decision, both on the risks he bears and the costs borne by him

2.2.4 Product Innovation..Cont

Authority concerned about the policyholder making an uninformed decision, both on the risks he bears and the costs borne by him Policyholder must recognize that the risks in case of the unit linked products are fully borne by him In the non-life segment, weather insurance was first launched in the country by a private insurer Other products launched by non-life insurers include Mutual Fund Package Policy, Pollution Liability Package Policy and Export Credit (Short Term) Policy, Coverage for pre-existing diseases, index based crop cover initiatives taken by the new players Additional covers have also been launched by ECGC in the area of credit insurance

2.2.5 Distribution Channels

Distribution Channels
Agents Individual and Corporate Agents Brokers Bancassurance Referral Arrangements Direct Marketing Individual Agents 88.65% Corporate Agents 6.82% Brokers 0.35% Direct Business 2.58% Others (Referral Arrangement) 1.60%

Distribution of business channel wise (Life)

 No. of Intermediaries (March, 2005) Direct Agents - 1.254 Mn Corporate Agents 3112 (Life) + 1686 (non-life) TPAs: 24 Brokers: 226 Retail business in non-life channeled through agents, commercial lines handled by insurance brokers and corporate agents

2.3 Life Insurance

2.3.1 First Year Premium Life Insurance (Rs. Bn)
INSURER
PRIVATE TOTAL PUBLIC TOTAL

2005-06

2001-02

102.52 (28.55%) 256.45 (71.44%)

2.68 (1.34%) 195.88 (98.65)

GRAND TOTAL

358.97

198.56

Segment wise Life Premium 2004-05 (Rs. Bn)

Segment Linked Public Private Non Linked Public Private 117.89 11.86 77.43 4.10 42.91 36.94 N.A 26.63 Individual Insurance Group Insurance

2.3.2 Commission & Operating Expenses of Life Insurers (2004-05)

(Rs. Bn)

Commission Operating Expenses

Public
Private

61.97
8.53

62.36
9 22.28 29

% of Gross premium 9 % of Gross Premium 11

2.3.3 Investments- Life Insurers

2004-05 (Rs. Bn) Private Sector Public Sector 101.63 4182.88 2003-04 (Rs. Bn) 46.65 3479.59

2.3.4 Profits of Life Insurers

None of the new Insurance Companies have made any profits so far. There has been increasing losses in the operations especially with the high growth trend Of the 12 new Insurers who have completed 3 or more years of operations, 6 Insurers have started reporting lower amount of losses during 2004-05 compared to previous yrs As compared to the original financial projection at the time of entry, the break-even period has extended by an year or two for the early starters Notwithstanding the loss in operations so far, the Life Insurers have started declaring bonuses on par business for marketing reasons and PRE consideration. This has necessitated transfer of fund from shareholders account to par-business to enable declaration of bonuses

2.4 Non-life Insurance

2.4.1 Gross Premium underwritten within India Non-Life (Rs. Bn)
INSURER PRIVATE TOTAL
PUBLIC TOTAL

2004-05

2001-02

35.58 (20.3%)
139.73 (79.7%)

4.67 (4%)
109.79 (96%)

GRAND TOTAL

175.31

114.46

Segment wise Non - Life Premium (%)

2004-05 Fire Marine Misc 19.05 7.03 73.92 2001-02 22.64 8.94 68.43

2.4.2 Commission & Operating Expenses of Non Life Insurers

Expenses Private (Rs BN) % of Gross premium Public (Rs Bn) % of Gross Premium Commission & Expenses 4.87 27.32 42.21 37.97

2.4.3 Investments- Non-Life Insurers

2004-05 (Rs. Bn)
Private Sector Public Sector 25.55 348.57

2003-04 (Rs. Bn)

18.50 322.25

Total

374.12

340.75

2.4.4 Underwriting Profit / Loss & PBT Non Life Insurance 2004-05
Underwriting profit/loss PBT

Public (Rs Bn)

% of Net premium Private (Rs Bn) % of Gross Premium

-25.79
23.2 0.025 0.14

17.29
-1.80 --

4 out of 8 new insurance companies made profit All the 4 public companies continued to make loss

2.4.5 Reinsurance

National Re-insurer to accept 20 per cent compulsory reinsurance cessions Objective of the reinsurance programme of every company shall be: a) maximise retention within the country; b) develop adequate capacity; c) secure the best possible protection for the reinsurance costs incurred; d) simplify the administration of business Every insurer to maintain the maximum possible retention commensurate with its financial strength and volume of business Re-insurer rating not below BBB (Standard & Poor) or equivalent Net Retentions of Non-Life Insurers 2004-05
Fire Marine Cargo Marine Hull Miscellaneous 76 % 85% 25.6% 88% Engineering Motor Aviation Total 76 % 99.6 % 23.5 % 86.45 %

2.4.6 Detariffing - Non life Industry

Persistent industry demand for freeing the general insurance market from rigidities Presently, regime where tariffs are prescribed by an outside agency System of having tariffs in some risks and free rates for others leading to distortions in pricing Consumer stands to gain in a free market De-tariffing is essential pre-requisite for the healthy growth of the market Absence of data and lack of experience in underwriting could have adverse consequences Roadmap announced for de-tariffing in September, 2005 for orderly transition from the present tariff market to free market Insurers can determine their rates and terms from 1st January, 2007 for all risks that they undertake Preparedness to move to a de-tariff regime being monitored by the Regulator

3. Supervision and Regulation

3.1 Appointed Actuary System
Mandatory for all Life and non- life insurance companies Responsibilities differ between life and non-life companies with highest involvement in life company Duties and obligations include in respect of Life Insurance Company:
Ensuring solvency of the Insurer at all times (adequacy of premiums, expense control, bonus declarations, appropriate valuation of liabilities) Compliance with the Act provisions on certification of assets&liabilities and maintenance of required solvency margin Whistle blowing

In respect of Non-life Insurance Companies:

Certification of IBNR Certification of product pricing

3.2 Supervision by the Regulator

Offsite Monitoring through analysis of financial and periodically On-site Monitoring
Market Conduct inspection Targeted inspection Investment Audit

scrutiny and other reports

3.3 Solvency of Insurers

Sufficiency of Assets Assets equivalent to value of liabilities + a margin (minimum Rs.0.5 Bn) Solvency Margin determined based on a formula factoring mathematical reserves and sum at risk (for life insurers) and factoring gross / net premium and gross/net claims in respect of non-life insurers Assets to be valued at value not exceeding marketable or realizable value with certain assets excluded as prescribed Value to be placed under liabilities in accordance with Regulations (methodology, manner of valuation, basis etc.,) The existing practice of determining solvency margin has safeguards to ensure sufficiency of assets to meet the liabilities as margins are built in the determination of value of assets and value of liabilities and the system to identify on the basis of analysis of financial ratios an early warning signal for appropriate action to be initiated by the Regulator In future move to RBC model could be a possibility but requires adequate study and examination

4. Pension Reforms - India

A better Demographic profile Substantial decline in dependency Ratio No pension benefits to 87% percent of population 74% work force in unorganized sector A New Pension Scheme to Government employees A smooth shift from Defined Benefit to Defined Contribution System Constitution of Pensions Regulator in the offing

5. Actuarial Standards

Appointed Actuary and Life Insurance business Additional Guidance for Appointed Actuary and Actuaries involved in Life Insurance Financial Condition Report Peer Review Appointed Actuary and Principles of Life Insurance Policy Illustrations Appointed Actuary and Principles for determining Margin for Adverse Deviations (MAD) in Life Insurance liabilities Appointed Actuary and General Insurance Business

6. Taxation
6.1 Service Tax 6.2 Corporate Taxation 6.3 Tax Relief on Insurance Policies

7. Self Regulatory Organizations

The Life Insurance Council and the General Insurance Council revived in February 2000 Performing the role of SROs in a limited manner by setting up market conduct standards Industry associations can arrive at consensus on issues like introducing concepts of additional disclosures, pool statistical data to facilitate pricing of products, evolve better risk management system and set codes of best practice for market conduct
Platforms for industry participants to interact and to set up practices for the healthy growth of the industry
Brokers Association Surveyors & Loss Assessors Actuarial Profession Accounting profession