VZCZCXRO9109
RR RUEHAST RUEHCI RUEHLH RUEHPW
DE RUEHBI #0369/01 2120726
ZNR UUUUU ZZH
R 300726Z JUL 08
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC 6472
INFO RUEHNE/AMEMBASSY NEW DELHI 7711
RUEHBI/AMCONSUL MUMBAI 1607
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MUMBAI 000369 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV PGOV IN
SUBJECT: TWO INSURANCE COMPANIES SAY INDUSTRY IS APPROACHING A SHORT 
TERM GROWTH LIMIT 
 
MUMBAI 00000369  001.2 OF 003 
 
 
¶1.      (U)  Summary: The insurance industry, one of the success 
stories of India's financial sector liberalization, maybe 
reaching a short-term growth limit.  According to industry 
executives, the reason for this upcoming slowdown is not lower 
demand, but limited capital due to the 26% limit placed on 
foreign direct investment in the industry.  The two executives 
told Congenoffs and the Treasury Attachi that this restriction 
effectively limited the ability to raise capital in this 
capital-hungry business.  They noted that the industry is still 
in its nascent stages with very low market penetration, nearly a 
decade after the opening of the sector.  Despite recent 
statements from politicians stating a FDI hike was being 
considered, they doubted that the FDI cap can be raised soon. 
Despite the current restrictions, the executives commented that 
insurance has grown to be a USD30 billion business.  Also, they 
mentioned that industry players have learned to work within the 
investment restrictions set by the government though the lack of 
a proper corporate bond market was a hurdle they wished could be 
fixed.  As it grows and Indian partners learn from foreign 
partners, the industry is becoming more inclusive and 
innovative.  End Summary. 
 
FDI restriction 
 
¶2.      (U)  FDI up to 26 percent is permitted subject to 
obtaining a license from the Insurance Regulatory and 
Development Authority (IRDA), the regulator for the insurance 
industry.  A plan to increase this cap and allow participation 
to 49 percent had been blocked by the Left Front parties that 
supported Prime Minister Manmohan Singh's United Progressive 
Alliance. 
 
¶3.      (U)  Prasad Prabhu, Head-Debt Funds Management at IDBI 
Fortis Life Insurance company, a joint venture between three 
financial conglomerates -- IDBI (an Indian development and 
commercial bank), Federal Bank (an Indian private sector bank) 
and Fortis (a European Bancassurer) affirmed the need for more 
capital especially in the case of life insurance companies as 
expenses generally are front loaded and premiums are received 
over a long period of time. [Note: Like a bank, an insurance 
firm must have a certain ratio of capital coverage of its 
liabilities, hence the need for capital to accept new policies. 
End note.] Vishakha Mulye, Executive Director, ICICI Lombard, a 
general insurance company, noted that most companies had been 
growing quickly; however such growth could not be sustained 
unless large capital infusion was allowed.  She suggested that 
raising the FDI limit was the easiest way to allow such capital 
infusion.  She holds that the current non-action by the central 
government effectively acted as a curb to growth for the 
industry.  The penetration level for life insurance is 4.5 
percent and non life is 0.6 percent.  "Given such low 
penetration levels, the potential for the insurance sector to 
grow was tremendous and hence the government would have no 
choice but to liberalize its policy", she added. 
 
¶4.      (U)  Mulye affirmed that she and most market participants 
would want to see that bill passed by the Parliament.  She added 
that the Bill contained financial reforms other than the 
relaxation in FDI cap that would turn out to be beneficial for 
the industry on the whole. 
 
¶5.      (U)  Prabhu doubted that the FDI cap would be removed, 
stating the legislation was not possible to pass in this 
government's term due to unrelated political constraints. 
Nevertheless, of the 21 private life insurance companies 20 are 
in joint ventures with foreign companies. Hence he felt only 
one, Sahara Life, might reject the idea of foreign capital 
infusion on the basis of not helping the competition. 
 
¶6.      (SBU)  Saibal Choudhury, head of Government Relations for 
MetLife India, felt differently, stating that JV firms whose 
local promoters have deep pockets, like Reliance Life or 
ICICI-Prudential, would prefer not to raise the cap. In fact 
some, like Reliance Life, may only have a few percent FDI in 
their JV, demonstrating that the 26% cap does not constrain 
them. He asserted their preference that competitors not have 
access to cheaper capital through FDI, and this has motivated 
them to lobby against lifting the cap. 
 
Industry structure and growth reality 
 
¶7.      (U)  Prabhu described the size of the industry, based on 
annual collection of premiums, at USD 30 billion for FY 07-08. 
He broke down the premiums to USD 22 billion from life insurance 
and USD 8 billion from non-life insurance.  A decade ago India 
had 1 life insurance company, the state-owned Life Insurance 
Corporation, and 4 state-owned general insurance companies.  He 
 
MUMBAI 00000369  002.2 OF 003 
 
 
proudly noted today the sector consists of twenty different 
players in life insurance alone.  LIC is the largest public 
sector company with ICICI Prudential being the biggest private 
player.  Unit linked insurance policies (ULIPS) are the most 
popular insurance product today.  ULIPS resemble defined 
contribution pension plans - a combination of a wealth 
management product and insurance cover.  He revealed that 80 
percent of IDBI Fortis's business is from ULIPS and the balance 
came from traditional life insurance policies. 
 
¶8.      (U)  Mulye told Congenoffs that most general insurance 
companies were profitable or at least cash flow positive. 
However life insurance companies, in general, were making 
losses, the only exception being the government-owned Life 
Insurance Corporation of India (LIC). LIC's profits come from 
booking capital gains amassed on its investments rather than 
operating profit, having had the opportunity to invest in Indian 
equities since the SENSEX was below 1000 (currently hovering in 
the 13,000-16,000 range).  She added that insurance industry 
growth in the last year had slowed down to 11 percent from the 
26 percent of the previous year, but predicted 14 percent growth 
for this quarter.  Also with the landmark move of liberalizing 
previously fixed general insurance premiums from January 1, 
2008, all general insurance companies are using premium pricing 
as a competitive tool.  Hence margins are suffering due to the 
cut-throat competitive premium pricing.  Public sector firms can 
be especially aggressive because of the lack of a profit motive. 
 To a degree this reflects the infancy of risk modeling in the 
industry, having never had to do so under fixed premiums.   She 
expected that as the market matured over the medium term this 
would be corrected. 
 
 Investment patterns 
 
¶9.      (U)  S. Gopalkrishnan, head of investments at ICICI 
Lombard, chalked out the investment pattern for a general 
insurance company.  The IRDA dictates that 75 percent of the 
investments have to be in an approved investment, i.e in debt 
securities having a grade of AA and above.  Out of this 75 
percent, 30 percent are to be invested in government 
securities-- 20 percent in G-secs and 10 percent in oil bonds 
and fertilizer bonds, -- and 15 percent in the priority sector-- 
5 percent in housing and 10 percent in other priority sectors 
like power, roads, railway, etc.  These norms might change under 
the pending legislation.  He did convey an interest in greater 
corporate bond investment but expressed concern over a lack of 
an interest rate futures market and inadequate transparency in 
the corporate bond market. 
 
¶10.     (U)  Prabhu mentioned that ULIPs are a mechanism that 
avoid investment allocation dictates, since funds are managed by 
individual policy-holders rather than the firm. He agreed that 
there was a market for corporate bonds but right now no trading 
infrastructure was in place. Hence secondary markets were less 
liquid with bonds being held-to-maturity.  He pitched for a 
single, screen-based trading platform, repos and a formal 
settlement and clearing house.  He also expected India would 
move towards new solvency norms in the model of what is 
currently being done in Europe but only after this process is in 
a more mature state in Europe. 
 
Inclusion and Innovation 
 
¶11.     (U)  "The Regulator has been encouraging inclusion of the 
rural sector", informed Prabhu, "however such inclusion is a 
difficult task".  First due to the small ticket size (each plan 
would be of small amounts) the cost of providing them would 
shoot up and secondly each plan would have to be designed in a 
simple and easy to understand manner.  Recent news reports 
indicate the government plans to extend life insurance to all 21 
million participants in the National Rural Employment Guarantee 
Act (NREGA). An example of small ticket sizes, this program 
offered through LIC will cost Rs 200 (USD 5) per year with a 
payout of Rs 75,000 (USD 1750)for death. 
 
¶12.     (U)  Prabhu continued that opportunities existed in both 
life and non-life segments.  Foreign participation has already 
brought in a mix of capital and innovation. As an example, he 
listed ULIPS, as likely to fuel the industry's growth.  He also 
cited his company's new product, called Mortgage Reduction 
Payment, which is insurance to pay a person's mortgage in case 
of death.  He stated that this innovation came from his Belgian 
partners, today being sold through Indian domestic banks at the 
time of mortgage origination. The insurance industry has even 
found a way around restrictions on private firms offering 
pensions by offering a pension-like product with an insurance 
element. 
 
MUMBAI 00000369  003.2 OF 003 
 
 
 
Comment: 
 
¶13.     (U)  The growth in the Indian insurance sector was 
launched by allowing private entry at freely competitive rates. 
Foreign participants were key to that growth, and will be key to 
further market development.  With a possible short-term growth 
slowdown on the horizon, the current coalition in Parliament 
appears to be considering bringing the industry and its future 
course to the forefront of its agenda.  Though insurance 
executives are doubtful given the short window the current 
government has, this would be a welcome relief and give 
insurance companies the impetus that they need to continue their 
rapid growth in a largely untapped market. 
FOLMSBEE