P 290525Z SEP 08
FM AMCONSUL MUMBAI
TO SECSTATE WASHDC PRIORITY 6612
INFO AMCONSUL MUMBAI PRIORITY 
AMCONSUL CHENNAI PRIORITY 
AMCONSUL CALCUTTA PRIORITY
DEPT OF TREASURY WASHINGTON DC
DEPT OF COMMERCE WASHINGTON DC
NSC WASHINGTON DC
CIA WASHDC

UNCLAS MUMBAI 000469 
 
 
E.O. 12958: N/A 
TAGS: ECON EINV PGOV IN
SUBJECT: INDIA'S LIFE INSURANCE INDUSTRY IS CHANGING RAPIDLY AS IT 
WAITS FOR LEGISLATIVE ACTION 
 
REF: A. A. MUMBAI 369 
     ¶B. B. MUMBAI 393 
 
 
¶1.  (U)  Summary:  Life insurance is a fast-growing industry in 
India and could be a source of much needed long-term financing. 
Most observers believe that the Indian Parliament will fail to 
pass a bill that would increase the equity limit of foreign 
investment in the insurance industry before the next national 
election.  Though the government-owned life insurer retains a 
market lead and a government guarantee, the industry has been 
rapidly evolving since it was opened up to private firms in 
2000, a change best represented by the proliferation of 
investment-oriented life insurance products.  Private insurers 
have used these products to drive life insurance growth, but 
they have been controversial because they have cut into the 
market share of mutual funds.  The rapid growth of the industry 
has also raised concerns about the quality of the products being 
sold, the agents who are selling them, and whether the insurance 
industry is properly assessing risk.  End Summary. 
 
Life Insurance Growth in India 
------------------------------ 
 
¶2.  (U)  Life insurance dominates the insurance business in 
India.  Of all the insurance premiums underwritten in 2006-07, 
86% were life insurance premiums.  Last year, life insurance 
premiums grew at 47 percent, while non-life insurance premiums 
grew at 22 percent.   India's life insurance industry is 
dominated by the former government-owned monopoly, the  Life 
Insurance Corporation (LIC), which underwrote 82% of life 
insurance premiums issued in India in 2006-07.  Though LIC 
itself is still growing in terms of the value of premiums it is 
underwriting, nineteen private life insurance companies share 
the remainder of the market and are eating into LIC's market 
share.  (Note:  The Indian insurance market is based on an 
agency model, in which agents are not allowed to cross-sell 
competing firms' products, forcing each insurance company to 
roll out its own retail networks through the country.  End 
note.)  Life insurance is important in India not just because it 
presents a mechanism for saving, but because it generates 
long-term liabilities that can be most productively matched with 
long-term assets, such as infrastructure bonds.  (Note: The 
Committee on Financial Sector Reforms noted in its 2008 draft 
report that given the country's infrastructure needs there is a 
dearth of long-term domestic investors.  End note.) 
 
Most Say Insurance Bill Unlikely to Pass Before Elections 
--------------------------------------------- -------------- 
------------ 
 
¶3.  (U)   Until 1999, the insurance industry as a whole was 
restricted only to government-owned companies.  In 2000, the 
government allowed private players to enter the market, but 
foreign direct investment was limited to 26 percent, requiring 
most foreign players to enter into joint ventures with local 
firms.   In 2005, Finance Minister Chidambaram pledged to raise 
the cap to 49 percent, which would require legislation amending 
the 2000 Insurance Act.   However, resistance from the Left 
parties prevented Chidambaram from even introducing the proposed 
legislative change.  After the Left parties withdrew from the 
coalition government in July this year, Chidambaram renewed his 
commitment to seeing the insurance FDI cap raised.  The odds of 
getting any legislation introduced and passed in one 
parliamentary session are very slim, though.  (Ref A). 
Insurance companies have generally supported the passage of this 
bill, as all but two private life insurance companies and one 
private general insurance company are currently at or near the 
26 % maximum. 
 
¶4.  (SBU)  Congenoffs spoke with several life insurance players, 
most of whom thought it is unlikely that the bill will pass this 
year, assessing that the BJP was simply unwilling to cooperate 
after their loss in the trust vote.  The lone exception to this 
came from Gaurav Garg, CEO and Managing Director at Tata AIG 
Insurance, who said that the BJP would not obstruct the passage 
of the bill because if the BJP wins elections, they are also 
likely to pass the insurance bill.  Thus, the BJP has an 
incentive to have the bill passed under the Congress government 
so that they-the Congress party- will have to expend their 
political capital (Note: In Ref B, another Tata AIG executive 
discussed lobbying the BJP to pass the insurance bill).  Shikha 
Sharma, managing director at ICICI Prudential Life Insurance 
noted that the bill would be good for the industry not just 
because of the increased FDI cap, but because the insurance 
business is changing rapidly and the bill would give the 
regulator more power, which is needed so that it can adapt 
quickly to changing circumstances. 
 
¶5.  (U) Vimal Bhandari, Country Head for Aegon insurance, a 
Dutch company with a joint venture with Religare Insurance, told 
Congenoffs that about a third of insurance firms are currently 
priced too aggressively by their domestic promoters to entice 
their foreign partners to raise their stakes.  Hence the 26 
percent limit may not be currently binding.  The bottom third of 
companies (by valuation) are likely to be the most successful in 
attracting additional equity, as foreign companies have a 
long-term growth model for the sector.  In general, he said, the 
divergence between high-valuation and long-term growth models 
has introduced strain in many joint venture relationships, which 
raising the equity cap to 49 percent would not remove. 
 
¶6.  (SBU)  Also at stake in the bill is a diversification clause 
that would extend the period for which a single entity can own 
more than 26% of an insurance firm. The IRDA Act of 1999 allows 
a 10-year period of majority ownership to help build interest in 
starting new firms, but many firms face forced divestiture next 
year.  Private insurance companies are eager to see the bill 
remove the diversification requirement to maintain control over 
any introduction of new ownership.  Bennett, Managing Director 
at Max New York Life told CONGOFF that most companies have MOUs 
with their foreign partners giving them the option to buy at 
market prices up to the 49 percent limit in the event that the 
bill is passed.  If current majority owners are forced to 
divest, new ownership may attempt to renegotiate terms. 
 
 
ULIPs Account for Bulk of Life Insurance Growth 
--------------------------------------------- ---------------- 
 
¶7.  (U)  Since the opening of the sector in 2000, private 
insurers have gradually eaten into the market share of the 
government-owned companies in two major areas:   life insurance 
and  unit-linked insurance products (ULIPs).  ULIPs combine a 
basic life insurance policy with a mutual fund-like investment, 
, so that a single premium will provide returns based both on 
the success of the investment, and a benefit in the event of a 
policyholder's death.  According to the 2006-07 Annual Report 
from the Insurance Regulatory and Development Authority - 
India's insurance regulatory body- ULIP premiums grew from about 
$400 million in 2003-04 to over $6 billion in 2005-06.  ULIP 
growth then leveled off to the still- brisk growth of 159 
percent between 2005-06 and 2006-07. 
 
¶8.  (U)  Rajeev Ahuja, an insurance specialist at the World Bank 
in New Delhi, told Congenoff that the reason for the growth of 
ULIPs was due to regulatory arbitrage.  In opening up the 
insurance market to private players, the government had not 
established guidelines on the ratios of insurance and investment 
for each ULIP.    Private insurers therefore began offering 
ULIPs that were insurance in name only, providing only token 
insurance coverage with the majority of the premium going to a 
capital markets investment.  According to Ahuja, ULIPs quickly 
became attractive because, unlike mutual funds, life insurance 
products enjoy beneficial tax treatment.  Other life insurance 
products are forced to invest mostly in government-issued 
securities, while the IRDA allows for more flexibility in the 
instruments into which ULIP funds may invest. ULIPs were also 
attractive from the insurer's perspective because, unlike most 
insurance products, investment risk is born by the policyholder. 
 However, the rapid growth of ULIPs coupled with the lobbying 
efforts of mutual funds made the IRDA take notice.  In May 2006, 
IRDA issued rules mandating-among other things-minimum insurance 
coverage for ULIPs.  This new regulation, combined with the 
recent drop in equity markets, have helped slow ULIP growth in 
this fiscal year. 
 
 
Confusion Over Tax Treatment Between Mutual Funds and ULIPs. 
--------------------------------------------- -------------- 
---------------------- 
 
¶9.  (SBU) Gary Bennett and Shikha Sharma, managing directors 
respectively at Max NewYork Life Insurance and ICICI Prudential 
Life Insurance, denied that ULIPs received special tax 
advantage.  Sharma, defensively, said that, in contrast, 
equity-linked mutual funds have a tax advantages over ULIPs. 
When asked why ULIPs had grown so much faster than mutual fund 
products, they each argued that life insurers had simply been 
more aggressive and had seen marketing opportunities that the 
mutual funds had not and that life insurers had the advantage of 
having a lot of physical infrastructure already in place to help 
them push sales.  Life insurance sales also provide better 
commissions for the sales agents, providing an incentive to 
market ULIPs more aggressively.  [Note: Section 80C of the 
Income Tax Act exempts both life insurance products and 
equity-linked mutual funds from taxation.  ULIPs are allowed to 
invest tax free in debt. Debt-based mutual funds, by contrast, 
are not exempted from tax.  Recent press has speculated that the 
mutual fund agency model impedes mutual fund market penetration. 
 End note.] 
 
 
Misselling Worries Some Observers 
------------------------------------------- 
 
¶10.  (SBU)  With the rapid growth, several life insurance 
company representatives expressed concern that poorly trained 
sales agents were "misselling" insurance products.    [Note: 
Misselling happens when a customer buys a financial product 
without understanding it, or when an insurance company sells a 
product without an accurate presentation of the risk.  End 
note.]   Shikha Sharma said she was pleased with the recent 
slowdown in premium growth, as it gave ICICI time to ensure its 
sales agents were acting appropriately.  Gary Bennett said that 
the education and training of life insurance sales agents was 
not as rigorous is it should be, and that the standards the 
government requires for the licensing of life insurance sales 
agents should be higher.  Gaurav Garg,  of Tata AIG Insurance, 
told Congenoffs predicted that the life insurance industry was 
experiencing the "soft" part of the insurance cycle-a time of 
great competition and low premiums that precedes a shock that 
gives way to higher premiums and more stringent underwriting 
standards.  Bhandari of Aegon noted that under the current 
agency model, the insurance sector is a high-cost, high-volume 
business.  This model requires any company wishing to establish 
a national presence to have retail offices in at least 1100 
cities.  If IRDA would allow agents to cross-sell multiple 
policies, this would bring costs down for the industry and 
increase coverage. 
 
LIC's Government Guarantee Still Provides Advantage 
--------------------------------------------- ---------------- 
 
¶11.  (U)  With over 86 percent of the market, LIC is still the 
biggest player in the Indian insurance market.  Despite the 
opening of the sector, the company still enjoys some advantages 
over private companies.  Sharma and Bennett each noted that LIC 
can claim  a government guarantee, and does not have to retain 
the same capital adequacy ratios as the private companies to 
account for risk.  N. Mohan Raj, Executive Director of 
Investment Operations at LIC confirmed this.  (Note: The Draft 
Report of the Planning Commission's Committee on Financial 
Sector Reforms recommends that the explicit government guaranty 
of LIC liabilities-written into the LIC Act-be revoked.  End 
note.) 
 
 
Comment 
-------------- 
 
¶12.  (U)  The failure to pass the insurance bill before the next 
elections will probably not do irreparable harm to the insurance 
industry.  Life insurance premiums are growing healthily, even 
without the hike in the equity cap to 49 percent.   First-year 
premiums collected in May 2008 were 23% greater than premiums 
collected in May 2007, according to the latest data available 
from the IRDA Journal.  While this is much slower than the 
growth rates of prior years, the industry may benefit from the 
slowdown because it will give them time to focus on the quality 
of their contracts, rather than the volume, and to battle 
whatever misselling might be occurring.  Allowing increased 
foreign participation in the insurance market is a must from a 
long-term perspective, and most observers Congenoffs spoke with 
agreed that the FDI cap would be raised eventually, be it in a 
BJP- or Congress-led government. 
 
SIGNATURE