General Insurance: A roadmap for India

The Indian insurance market is required to grow Indian insurance and reinsurance businesses beyond today’s confines into new frontiers of tomorrow, benchmarking against the best of global standards, Arun Agarwal elaborates

August 22, 2012 12:04 IST | India Infoline News Service

The 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.

This paper is attempting a suggestive framework, albeit not in full, but in some key areas for stakeholders to debate and take it to its logical operational phase.

Risk based capital requirement & Solvency II

In contrast to the current regulatory Solvency Capital (which is 150% of the required capital margin), the Economic Capital calculation recognises 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 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 insurer needs to ensure that its realistic balance sheet stays solvent over a certain time period with a pre-specified probability. For example, 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 12 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 future financial condition of insurers, based on technical notes on asset liability management and the economic capital modeling. In its estimation of the Economic Capital for general insurance companies in India, it has drawn heavily on the standard formulae/methodology used under Solvency II framework.

Solvency II introduces a new harmonised EU-wide regulatory regime. The key features of Solvency II include economic risk-based solvency requirements where 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 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.

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, role of the chief risk officer, etc. A few other areas of focus could be:

Concentration of business: HIH, the Australian insurance group that ultimately collapsed in 2000, provided a good example of a group’s failure being detrimental to the local insurance market. HIH was the dominant provider of the indemnity coverage to the building industry, and its demise starkly demonstrated the impact that a concentration of business underwritten in a particular market or segment can have on the local economic system. The dominance of HIH’s professional indemnity business was allowed unchecked, amassing a disproportionate market share. The analysis whether such sudden withdrawal of cover could give rise to any wider economic impact on the local market had not been fully appreciated.

Company culture & ethics: Typically, a firm’s culture has not been the remit of regulation, but it is hard to argue that behavioral issues were not deeply rooted in many causes of the crisis. Excessive executive compensation has fuelled society’s general belief that the financial sector is not as ethically sound as it could be.

Solvency II further ensures harnessing market discipline to support regulatory objectives. It aims to ensure consistent supervisory reporting and disclosure across the EU (European Union). 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 (Financial Services Authority), 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 implementation of Solvency II attempt is to approach the expected change in implementation date to January 2014 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 1 April 2015 would be a good timeframe to move in the direction of Solvency II.

An international reinsurance hub—Why India needs it?

A look at the Singapore Insurance market will probably help  

  • It is now more than 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 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.
  • During this time, international insurance companies have increasingly opted to base their regional headquarters in Singapore and as of July 2010, following recent additions such as Allied World and the return of Aviva to the non-life market, there were 155 registered insurers and authorised reinsures in Singapore.
  • These developments have been led by the growth of OIF (Offshore Insurance Fund) reinsurance business, with risks from all around the region now being placed into the Singapore reinsurance market. China is now the largest single source of Singapore’s OIF business.
  • 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% from a decade ago. This in turn has prompted the establishment of numerous captive managers to service this sector of the industry.
  • The local market is now attracting a significant amount of business from around Asia, which was previously placed directly into the London and Bermuda markets.
  • The growth in the industry has also led to a flood of ancillary providers, such as specialized (re) insurance 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 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 center 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 Association has a self-regulatory function that is enforced through market agreements.

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 18 syndicates trading on the Platform through 15 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 & tax laws, regulations & requirements of the jurisdiction in which they trade.

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.

A growth centre for arbitration

Related to this, there is another development worthy of note. In parallel with and complementary to, the evolution of 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 liberalise 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 (re)insurance industry as it enables international law firms with globally recognised (re)insurance pedigrees to act 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.

The Singapore Interaction Arbitration Centre (SIAC) which is widely regarded as a leading international arbitral institution issued the fourth edition of its rules in mid-2010, to further refine its arbitral framework. SIAC administrated arbitration is becoming increasingly popular.

Singapore’s emergence as a global arbitration centre provides insurers with the option to include arbitration clauses providing for dispute resolution in a neutral and fair jurisdiction with an arbitral appointing body which should ensure the appointment of an independent sole arbitrator or umpire. This need not involve the adoption of SIAC’s rules. The parties can opt for ad hoc arbitration, for example with its seat in Singapore and English law to apply, but with the reassurance of an independent party such as the chairman of SIAC as the default arbitral appointing body.


Due to an upsurge in globalisation in the last two decades leading to an increasingly interdependent and interconnected world, the very nature of the business environment has changed dramatically.

Despite the fact that globalisation has brought immense benefits, it has also brought new systemic risks—one that rapidly moves across countries and organisations—for the business, and the world has also seen financial meltdown on an unprecedented scale leading to firewalls being built.

However, protectionist tendencies are unlikely to reverse the overall trend towards the globalisation. The Indian insurance market is therefore required to grow Indian insurance and reinsurance businesses beyond today’s confines into new frontiers of tomorrow, benchmarking against the best of global standards. 


  1. Best’s 2011 Special Report—India non-life and life market review
  2. The Lion’s share: Singapore consolidates its position as Asia’s regional (Re) insurance center
  3. Barlow Lyde & Gilbert: Asia Insurance Briefing–Oct 2010 
  4. The Actuary–January/February 2012–James Orr from FSA
  5. The Actuary May 2012–Rob Curtis on “Global lockdown?”
  6. IRDA (Insurance Regulatory and Development Authority) notifications

The author is a consultant at Lloyds.

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