2006 PARIS

Insurance programme in developing countries

Chairmen: Nick Dexter UK

Emmanuel Tassin France

Presenters: Bernard Cohendy 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 n°1 or 2, with a market share of around 20%.

AXA is the n°1 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 AXA’s assets : • Being the n°1 insurance group,• Access to AXA France’s 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 areasCommon 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, Operating income reaching 15 % of turnover, recurring despite a high proportion of recurring despite a high proportion of reinsurance.reinsurance.

Growth margin in a developing market.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 Environment1.1 GDP Growth rate at factor cost1.2 Gross domestic savings1.3 Gross domestic investments1.4 Price situation1.5 Domestic Financial Markets1.6 Foreign Exchange Reserves1.7 Securities Market – Equity1.8 Assets under management of mutual funds

2. Insurance Industry2.1 De-regulation2.2 Market Scenario

2.2.1 Insurance Penetration2.2.2 Insurance Density

2.2.3 Share Capital2.2.4 Product Innovation2.2.5 Distribution Channels

2.3 Life Insurance2.3.1 First Year Premium2.3.2 Commission & Operation Expenses2.3.3 Investments2.3.4 Profits

2.4 Non-Life Insurance2.4.1 Premium Income2.4.2 Commission & Operating Expenses2.4.3 Investments2.4.4 Under Writing Profit / Loss 2.4.5 Re-insurance2.4.6 De-tariffing

3. Supervision and Regulation

3.1 Appointed Actuary System

3.2 Supervision by the Regulator

3.3 Solvency of Insurers

4. Pension Reforms

5. Actuarial Standards

6. Taxation

6.1 Service Tax

6.2 Corporate Taxation

6.3 Tax Relief on Insurance Policies

7. Self Regulatory Organizations

1. Indian Economic Environment1.1 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 situationWPI: 6.5% (2002-03) to 4.1% (2005-06)

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

1.5 Domestic Financial MarketsGOI 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)

End yr market cap (Rs. Bn)

Returns %

Indian Equity turnover (Rs. Bn)

NIFTY BSE

2002 2005 2002 2005

3529.4 13503.94 2769.2 12138.7

3.3 36.34 3.5 42.33

2002 2005

1303560179

1.7 Securities Market - Equity

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

Particulars 2002 2005

Money Market fund 108.01 647.11

Income fund 774.69 529.03

Growth fund 143.71 671.44

Balanced 141.64 68.33

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. Insurance Industry

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 PSU’s (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 Total Business Life Non Life

1996 1.84 1.29 0.55

2004 3.17 2.53 0.65

2.2.2 Insurance Density (Premium per capita in USD)

1996 7.00 5.00 2.00

2004 19.70 15.70 4.00

Source: Swiss Re

Life Non-Life

Total FDI (%) Total FDI(%)

Private 43.48 24.24 10.49 23.47

Public 1.0 -- 4.5 --

2.2.3 Share Capital (Rs. Bn) March 2005

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

Authority concerned about the policyholder making an un-informed 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

2.2.4 Product Innovation…..Cont

Distribution Channels Agents – Individual and Corporate Agents Brokers Bancassurance Referral Arrangements Direct Marketing

Distribution of business channel wise (Life) Individual Agents – 88.65% Corporate Agents – 6.82% Brokers – 0.35% Direct Business – 2.58% Others (Referral Arrangement) – 1.60%

2.2.5 Distribution Channels

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

INSURER 2005-06

2001-02

PRIVATE TOTAL 102.52 (28.55%) 2.68 (1.34%)

PUBLIC TOTAL 256.45 (71.44%) 195.88 (98.65)

GRAND TOTAL 358.97 198.56

2.3.1 First Year Premium – Life Insurance (Rs. Bn)

2.3 Life Insurance

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

Segment Individual Insurance

Group

Insurance

Linked

Public 42.91 N.A

Private 36.94 26.63

Non Linked

Public 117.89 77.43

Private 11.86 4.10

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

Commission Operating Expenses

Public 61.97 62.36

% of Gross premium 9 9

Private 8.53 22.28

% of Gross Premium 11 29

(Rs. Bn)

2004-05

(Rs. Bn)

2003-04

(Rs. Bn)

Private Sector 101.63 46.65

Public Sector 4182.88 3479.59

2.3.3 Investments- Life Insurers

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

2.4.1 Gross Premium underwritten within India – Non-Life (Rs. Bn)

INSURER 2004-05 2001-02

PRIVATE TOTAL 35.58 (20.3%)

4.67 (4%)

PUBLIC TOTAL 139.73

(79.7%)

109.79 (96%)

GRAND TOTAL 175.31 114.46

2.4 Non-life Insurance

Segment wise Non - Life Premium (%)

2004-05 2001-02

Fire 19.05 22.64

Marine 7.03 8.94

Misc 73.92 68.43

2.4.2 Commission & Operating Expenses of Non Life Insurers

Expenses Commission & Expenses

Private

(Rs BN)

4.87

% of Gross premium 27.32

Public

(Rs Bn)

42.21

% of Gross Premium 37.97

2.4.3 Investments- Non-Life Insurers

2004-05

(Rs. Bn)

2003-04

(Rs. Bn)

Private Sector 25.55 18.50

Public Sector 348.57 322.25

Total 374.12 340.75

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

Underwriting profit/loss

PBT

Public (Rs Bn) -25.79 17.29

% of Net premium 23.2 --

Private (Rs Bn) 0.025 1.80

% of Gross Premium 0.14 --

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 76 % Engineering 76 %– Marine Cargo 85% Motor 99.6 %– Marine Hull 25.6% Aviation 23.5 %– Miscellaneous 88% Total 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 Regulation3.1 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 scrutiny and analysis of financial and other reports periodically

On-site Monitoring Market Conduct inspection Targeted inspection Investment Audit

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. Taxation6.1 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