Market analysis and knowledgebase: A study on indian non- life insurance and automobile business.2008

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MARKET ANALYSIS AND KNOWLEDGBASE
(This report is research into the Indian Non- Life Insurance and Automobile market and opportunities arising
from the Indian market. Some data herein is dated 2005-07, to show trends and some because of
unavailability of new data).This is the basis of the Project ASO – Automobile Services Outsourcing.
GENERAL BACKGROUND
Market 1
Non –Life Insurance
Despite political uncertainties, India’s economy is thriving. Assisted by this growth, significant
progress has been made in the non-life insurance market since liberalization, and the pace of
change has stepped up in 2007 as a result of detariffication.
1 ECONOMIC GROWTH DESPITE POLITICAL UNCERTAINTY
Whilst India prides itself on being the world‘s largest democracy, the country is beset by political uncertainty.
On the domestic front, India‘s United Progressive Alliance coalition is considered to be inherently unstable.
From an international perspective, relations with Pakistan are viewed as a risk, due to ongoing tensions in
Kashmir. Following the implementation of reforms, India‘s economy has been outperforming other economic
blocks with the notable exceptions of China and Russia, and strong growth is predicted to continue over the
medium term.
Factors that have enabled this strong performance include India‘s demographics, human capital, global
integration, macroeconomic and fiscal stability, and its diversifying industries. However, inefficiencies such as
infrastructure bottlenecks, the evolving regulatory environment and the overburdened legal system hinder
India‘s economy in performing as well as those of China and Russia.
2 SUBSTANTIAL REFORM PROGRESSES IN NON-LIFE
Reform of the Indian non-life insurance market has progressed substantially since market liberalization began
in 2001. Whilst de-tariffication occurred in early 2007, the market remains heavily regulated, and its growth is
hindered by the 26% cap on foreign ownership of insurers. Private insurers are relatively new entrants into
the Indian market, but they already share over one-third of the market and are expected to increase their
market share further as liberalization continues.

3 GROWTH PROJECTIONS POINT TOWARDS HIGH GROWTH
The extent of the insurance market liberalization process is the subject of ongoing debate. Detariffication is
likely to be associated with a period of adjustment and predatory pricing. Already a sharp decrease in rates
has been seen as a result of the January 2007 detariffication process. While it is difficult to project the
behavior of market players and responses of the IRDA, in the medium to long term, these reforms are
expected to lead to more dynamic growth.
THE INSURANCE ENVIRONMENT IN 2008-09
The Indian insurance market cannot be understood except in the context of its history of nationalization and
liberalization. Reform of the Indian non- life insurance market, which was nationalized in 1972, has progressed
substantially since the turn of the century, and received an additional boost in 2008 with the detariffication of
key classes of business.
NON-LIFE PREMIUM INCOME INCREASED BY 106% BETWEEN 2000 AND 2005
Non-life premium income has increased by 106% since initial liberalization in 2000, consistently outstripping
global growth, as summarized by the indexed premium chart below. However, growth in India‘s non-life
market appears to have slowed to 13% in 2006 – down from 18% in 2005.
Despite the welcome reforms between 2000 and 2006, the Indian non-life market remains heavily regulated.
Nonetheless, 2007 has so far been one of the most exciting years for the Indian insurance industry, with
significant reforms taking place. Some key characteristics of the market are listed overleaf.
• Tariffs: Up until the end of 2006, tariffs remained in place across 70% of the market.
Rates for property and motor were detariffed at the beginning of 2007. However, insurers will not be allowed
to change the terms and conditions for existing products for up to 15 months post- detariffication in an effort
to avoid confusion during the initial stages.
• Public Sector Undertakings (PSUs): PSUs remain dominant with an estimated market share of over
60%. However, this share is reducing as a result of private sector competition.
• 26% FDI cap: Foreign entities must partner with an Indian entity in order to form an insurer and are
limited to a maximum 26% stake in the joint venture. While the current government has suggested increasing
the FDI cap to 49%, the timing of this change remains unclear as it is likely to trigger further policy
discussions within the centre-left government coalition.
• Agents: Around 80% of premiums are still distributed through the traditional medium of the direct sales (or
‗marketing‘) agent. Brokers have failed to gain a significant market share largely due to regulations that have
put them in a disadvantaged situation.
• Compulsory Sessions: There is only one local reinsurer, the 100% government-owned GIC. In April 2007,
the proportion of compulsory session to the GIC was reduced from 20% to 15%.
DESPITE LIBERALISATION IN 2000, THE INDIAN MARKET REMAINS HEAVY REGULATED
Looking forward to the market in 2010
The Indian insurance market is likely to change significantly over the next three years largely due to
regulatory changes. In addition, premium growth is being driven by other factors such as the growing
consumer class, increased foreign direct investment, infrastructure development, and an increased awareness
of catastrophe exposure. Despite significant positive changes, the insurance market must still face the
challenge of poor customer perceptions and the danger that the pace of reform will slow.

THE EXTENT OF FUTURE LIBERALISATION IS THE SUBJECT OF AN ONGOING DEBATE
Several significant structural changes are expected in the market as a result of the drivers discussed above:
• Price competition has already begun to increase and is likely to continue to do so for the next 18 to 24
months.
• The practice of cross-subsidization is likely to be phased out as risk- based pricing is used increasingly for all
products.
• As Indian insurers build a profitable portfolio, they are likely to have increased access to the international
reinsurance markets.
• Finally, rising demand for insurance is likely to be met by increased capacity as foreign insurers look to
access this growing market.
One conclusion is certain – the Indian non-life market is set to grow dramatically over the next
few years. The simplest forecasts suggest that premium income could double in five years to reach
USD 11.6bn in 2010. When the structural changes above are taken into consideration, this growth
becomes exponential, with relatively slow growth in 2008-9 rising to rapid growth by 2010.
INTRODUCTION
Purpose
This report, which serves as a market intelligence piece, provides a detailed background on the Indian non-life
insurance sector. In addition to analyzing the key components driving today‘s market conditions, the report
takes account of changes likely to occur within the regulatory environment in the next three years.
Methodology
The information upon which this report is based has been derived from a wide range of both primary and
secondary sources. Most of the facts and figures originate from extensive desk research of an array of publicly
available information. This research is mainly quantitative in nature and forms the backbone of this report.
Structure
This report is structured into three interdependent sections:
1 BUSINESS ENVIRONMENT
The opening section provides an overview of the dynamic growth currently being experienced in India. In
particular, it highlights the most important political and economic factors that are likely to influence the
country‘s economic progress between 2007 and 2010.
2 THE INDIAN NON-LIFE MARKET 2008
This section provides information and analysis on the key components of the Indian non-life market today.
These components include: premium income, products, competitors, reinsurance and regulation.
3 THE INDIAN NON-LIFE MARKET 2010
Premium growth projections are particularly challenging to compile due to the large number of unknowns –
such as company strategy and policy response. As such, this paper aims to simplify such growth projections
by offering two scenarios. Scenario I give‘s a simple constant growth projection based on recent growth
experience and Scenario II takes into account the impact of detariffication.

BUSINESS ENVIRONMENT
Politics
India prides itself on being the world's largest democracy modeled on the British parliamentary model. India is
a large country, not only with regard to its size but also in terms of culture, languages, religions and
contrasting convictions. Much of the complexity of India‘s politics and regulatory environment is dictated by
the difficulties of these competing interests.
THE EFFICIENCY OF INDIA’S REGULATORY ENVIRONMENT IS QUESTIONABLE
Regulatory environment
Despite its reputation, India performs well in terms of control of corruption, rule of law, and voice and
accountability, when compared to the regional average. However, this does not disguise the fact that the
country is often beset by political volatility, manifest by comparatively low levels of political stability.
COMPARED TO REGIONAL PEERS, INDIA SCORES HIGH IN TERMS OF RULE OF LAW AND
ACCOUNTABILITY
Notwithstanding the country‘s heterogeneous society, there is an established and bind institutional framework,
which includes a legal system, capital market regulators a banking supervisors. However, the efficiency and
efficacy of these institutions is questionable, and there are significant gaps within the Indian regulatory
environment such as the lack of data protection legislation. In addition to relatively high levels of corruption
there is a labyrinth of regulation caused by relations between the central and state governments, which must
be simplified if initiatives such as reform of the power sector the development of special economic zones are
to succeed. A major effect of these challenges is to hinder the speed of legislative change, resulting in very
slow legislature.
"We have to make our economic systems as transparent and as open as possible. We must focus
on vital issues like corporate citizenship, market opportunities and intellectual property rights."
Narayana Murthy, Infosys Technologies, India, WEF Summit, (2004)
Economy
For decades, India‘s economy underperformed relative to its potential. Socialist policies and a powerful
bureaucratic apparatus led to red tape that stifled entrepreneur-led development.
With the collapse of the Soviet Union, a major reorientation of trade was needed. This, in combination with
additional external factors, led to a balance-of-payments crisis at the start of the 1990s, which provided
further stimulus for a wave of economic reforms.
FOR DECADES, INDIA'S ECONOMY UNDERPERFORMED RELATIVE TO ITS POTENTIAL.
Following the implementation of these reforms, for which today‘s Prime Minister Manmohan Singh is widely
regarded as the ‗architect‘, growth surged through to the mid-1990s and the beginning of this decade – with
India outperforming other large economic blocks, with the notable exceptions of China, throughout the whole
decade and Russia in 2005.
FOLLOWING REFORMS, GROWTH SURGED AND MADE A STEP CHANGE UPWARDS IN 2002

In addition to the change in its economic development policies, India‘s business environment and the country‘s
growth prospects are influenced by a number of characteristics. These characteristics demonstrate that whilst
the economy is growing and developing, it is still held back by inefficiencies and bureaucracy. These
challenges will need to be tackled if India‘s economy is to continue to perform well in the future.
TABLE 1: Factors affecting India‟s growth prospects
Favourable factors Unfavourable factors
• Favourable demographics
• Improving human capital
• Globally integrating economy
• Challenging but improving
macroeconomic and fiscal stability
• A mix of sheltered manufacturing and
some competitive services sectors
• Infrastructure bottlenecks
• Evolving regulatory environment
• Transparent but overburdened
legal system
Demographics
INDIA’S WORKING POPULATION IS PROJECTED TO GROW SIGNIFICANTLY
Economic growth depends on, amongst other factors, having large pools of high-quality labour supply. India
has a young population of approximately 1.1 billion, the second-largest in the world after China, increasing at
roughly 1.5% per year. Latest figures from the UN
Population Division reveal that India‘s working population is projected to grow significantly over the next 15
years as highlighted by the chart below. This signifies that there will be a significant growth in labor supply
over the next 15 years.
The Indian Non-life Market 2007-08
The Indian non-life market is ranked 27th
largest in the world
INR 9752 crore worth of premiums were written in the Indian non-life insurance market in 2007-8, making
India the 27th largest market in the world in terms of non-life premium.
India contributed .004 % of the world non-life Insurance direct premium collection while in terms
of GDP (Gross domestic Product) ranking, India stands 4th
worldwide, behind USA, China and
Japan.
Though India's insurance sector accounted for 4.1 per cent of GDP in 2006-07 and the insurance companies
recorded a 19.9 per cent growth in premium as compared to the world market growth rate of 2.9 per cent; on
world averages India ranks 78th in terms of insurance density and 54th in terms of insurance penetration.
India is one of the world‘s fastest growing economies, with real GDP rising to 9.4 per cent in 2006-07 as
against 9.0 per cent in 2005-06. India‘s share in world GDP thus has increased to 6.3 per cent in 2006
measured in terms of purchasing power parity. Growth in per capita income also accelerated to 8.4 per cent in
2006-07 from 7.4 per cent in 2005-06.

Economic fundamentals strongly suggest that there is a tremendous potential for the insurance sector to
attain a high growth level. The insurance penetration in a country depends on its level of economic activity,
risk awareness among the people and the deepening of the financial system.
With a large population and an untapped market, insurance industry has a huge growth potential in India. The
improved performance in the domestic economy has an impact on the insurance industry, in particular. Higher
per capita income, domestic savings and availability of more instruments for parking surplus funds facilitates
growth in the activities of financial services, particularly insurance. At the time of opening up of the sector in
1999, insurance was viewed primarily as a tax saving device. However, policyholders‘ perspective began
gradually changing towards an insurance cover irrespective of the tax incentives.
Most of the private insurance companies are joint ventures with recognized foreign players across the globe.
Consumer awareness has improved. Competition has brought more products and improved the customer
service. It has had a positive impact on the economy in terms of income generation and employment
opportunities in this sector.
The Indian non-life market currently lags behind that of its main economic rival, China, predominantly as a
result of the Chinese economy‘s greater urbanization, number of automobiles and emphasis on manufacturing.
China also began its insurance liberalization process earlier. Nonetheless, India‘s growth performance is very
strong relative to that of the world as a whole.
India is growing at roughly twice the rate of the total global insurance market
Worldwide non-life premiums have grown significantly over the past few years; a key contributory factor to
this was the 9/11 attack on the World Trade Center. However, the growth of non-life premiums in India has
outstripped average global rates every year for the past decade and has demonstrated a surge since market
liberalization in 2000.
Liberalization has led to a marked increase in India’s premium levels
Despite outgrowing the global non-life market over the past decade, non-life penetration levels in India remain
extremely low at just 0.6%.Whilst low penetration in a developing economy is to be expected, the Indian
position falls well below that expected by Sigma‘s ‗S-Curve‘, which links non-life penetration to income per
capita.
High regulation may be a major reason for the low level of insurance penetration
A significant contributing factor in the disparity between India‘s actual penetration / GDP per capita and that
expected by Sigma‘s research (‗The S-Curve Gap‘) is the highly protectionist regulatory position adopted by
the government until reforms were adopted in 2000.
Non-life penetration levels are lower in India than would be expected
Current insurance market reforms and continued high economic growth would appear to provide a strong
platform from which to drive premium development in the Indian market and, thereby, to close the country‘s
S-Curve Gap in the short to medium term.
Analyzing the market today
The current state of the Indian insurance market is so heavily influenced by the history of nationalization and
liberalization, that it cannot be understood outside of that context.
The remainder of this section will initially consider the historical development of the market and then analyze
the process of liberalization in four main categories: products, market players, distribution and reinsurance.
Finally, the impact of these liberalization dynamics will be analyzed on a class-by-class basis. This will set the
scene for looking forward to 2010 in the following section.

Historical context
Colonial era
The first insurer in the Indian market was established in 1850
India‘s first general insurance company, Triton, was established in 1850 and was owned and operated by the
British. In 1938, the Insurance Act was passed. This was the first legislation specifically dealing with the
supervision of insurance companies. Prior to this, general insurance firms had fallen under the broad auspices
of the Companies Act (1866).
Nationalization
Following independence in 1947, the Indian government implemented an economic model based on the Soviet
system of national planning. Insurance was not seen as strategically important and so was not initially
nationalized. In 1950, the Insurance Act of 1938 was amended to set up a Tariff Committee, which fell under
the control of the General Insurance Council of the Insurance Association of India – the Tariff Committee was
so influential that it soon became known as the ―Rate Maker‖.
The non-life industry was not initially nationalized following independence
The Tariff Advisory Committee (TAC) replaced the Tariff Committee by statute in 1968. The new body was
designed to be independent and scientifically driven in its rating approach.
However, post nationalization in 1972, the independence of the TAC came into question – observers described
the TAC as the ―handmaiden of the nationalized companies‖ (senior management of these companies took the
most senior positions on the TAC) – as rates did not necessarily reflect ―market price‖.
The non-life market was eventually nationalized in 1972 following many years of tariff-setting
By 1972, general insurance in India was fully nationalized. Each of the 107 general insurance companies in
India was assigned to one of the four subsidiaries of the General Insurance Corporation of India (GIC):
National; Oriental; United India; and New India.
Liberalization
In 1991, economic liberalization began under Dr. Manmohan Singh. Three years later, the Malhotra Committee
Report on the state of the Indian insurance industry was released. It recommended sweeping changes that
would reactivate competition in Indian insurance.
The market was reopened to competition in 2000 following an influential report
These recommendations were put into practice via the Insurance Regulatory and Development Authority Act
(IRDA 1999). In particular, the monopoly previously enjoyed by the GIC was removed. The act effectively
reinstated the 1938 legislation. The following year, the first license was granted to private companies.
Detariffication began in 2005 with marine insurance, with rates for property and motor being detariffed in
January 2007. Rates for property and motor were scheduled to be detariffed at the beginning of the year.
However, insurers are not allowed to change the terms and conditions for existing products until 2008 in an
effort to avoid confusion during the initial stages. The GIC reduced its compulsory session from 20% to 15%
in April 2007.

Products
The subsequent section aims to give a brief overview of product dynamics, recent growth experience,
detariffication and potential future growth areas.
Detariffication will change the dynamics of the market
The progress towards full detariffication of the non-life sector began in 1994 when insurance tariffs on
personal accident and bankers‘ indemnity were dismantled. Between 1994 and 2006, some progress was
made towards detariffication in marine insurance. Nevertheless, motor, fire, workmen‘s compensation and
engineering risks remained tariffed – accounting for around two-thirds of premium. As of January 2007, all
classes of business except for motor third-party liability are no longer under price tariffs.
Motor third-party liability has not yet been detariffed as it was thought that the poor pricing could be
addressed separately. It is suggested that this final tariffed product will be liberalized in 2008, although that
has not yet been confirmed.
CHART 2: Detariffication roadmap (1994 – 2008)
□ Tariffed□ Detariffed
Aviation Aviation Aviation Aviation
Liability‡ Liability‡ Liability‡ Liability‡
PA & Health PA & Health PA & Health PA & Health
Marine Cargo Marine Cargo Marine Cargo Marine Cargo
Marine Hull Marine Hull Marine Hull Marine Hull
Fire♣ Fire♣ Fire♣ Fire♣
Engineering Engineering Engineering Engineering
Motor OD Motor OD Motor OD Motor OD
Motor TP Motor TP Motor TP Motor TP
Motor TP
All classes of business, except for motor third-party liability, are no longer under price tariffs
With the exception of insurance for large properties, the newly detariffed classes of business are still subject
to some product restrictions, and the terms and conditions of existing products may not be altered. The
regulator has argued that this is to prevent confusion in the market and has indicated that all product
restrictions will be removed by April 2008. It is thought that insurers may be able to customize insurance
products as early as October 2007, although these would still be subject to IRDA approval.
♣ Large properties with a total insured value of > USD 500m are freely priced, but must still go
through a qualifying process before placement can be made outside India;
‡ Workmen‘s compensation and Public Liability (Act) was detariffed in January 2007
* Some observers anticipated that some product controls, including price controls for Motor TP,
would remain in place but it was eventually withdrawn in January 2009

In addition to product restrictions, insurers are not permitted to drop the price of a product by more than 49%
in the case of fire risks and 20% in the case of motor own damage without the approval of the regulator. While
this may not prevent a rise in price competition, it will certainly create an administrative barrier to rapidly
falling prices
Legacies of a tariffed product market
The latest round of detariffication is more significant than it may appear at first. Although the Indian insurance
regulator (the IRDA) has been pursuing a policy of detariffication since 1994, around two-thirds of all non-life
premiums in the Indian non-life market remained tariffed until the beginning of 2007.
Around two-thirds of the Indian market remained tariffed up until the end of 2006
Until the end of 2006, only specialist commercial classes such as marine, aviation and professional liability had
been fully detariffed – leaving the large mainstream classes such as motor, fire and engineering tariffed. As
the tariffs covered most of the market until very recently, their effects dominated the market, influencing the
pricing of even non-tariffed products.
Sophisticated insurance buyers are aware that insurers profit from hitherto tariffed lines such as fire and place
demands on insurers to cut their rates in other ways.
Cross-subsidization and product bundling were used to cope with the tariffed market
One method used by insurers to attract fire premiums has been the use of ‗product bundling‘. This activity
sees insurers bundling together tariffed products with non-tariffed products, with the insurer offering
customers exceptional rates for their non-tariffed cover (e.g. marine cargo cover for USD 1) in the hope that
this loss-making line is cross-subsidized by the tariff business and that they make a profit over the account as
a whole.
Considerable growth despite tariffed market
A strategy of bundling and cross-subsidization has enabled the Indian insurance market to grow significantly
in both tariffed (13%) and non-tariffed (15%) business when comparing half year figures for 2005 vs. 2006.
INDIA’S NON-TARIFFED MARKET IN THE 1H 2006 EXPANDED BY USD 144M (15%) WHEN
COMPARED TO 1H 2005
It is significant that the non-tariffed products grew at a faster rate than tariffed products between 2005 and
2006. In particular, the non-tariffed classes of PA & healthcare, marine hull and liability experienced high
growth rates as summarized by the chart below.

Market players
Competition was reintroduced in 2000 with the licensing of the first private companies. Foreign investment
was also allowed at the same time, but limited to 26% ownership.
There were several reasons that prompted the Indian government to bring reform and competition to the
insurance sector.
1. Firstly, while the public sector insurance companies made an enormous contribution in the spread of
awareness about insurance and expanded the market, it was recognized that their reach was still limited, the
range of products restricted and the service to the consumer inadequate.
Competition is seen as a vital component in the success of the Indian non-life market
2. Secondly, it was felt that the rapid economic growth witnessed in the 1990s could not be sustained
without a thriving insurance sector.
3. Thirdly, it was recognized that the vast potential of India could only be achieved if sufficient
competition was generated and the Indian insurance sector was exposed to global economic developments.
The insurance sector was therefore opened to private sector participation with provision for limited foreign
equity participation in 2000.
The Indian general insurance market can be divided into three types of organization: PSUs private companies
and special institutions. There are four PSUs, eight new private sector companies, most of which are joint
ventures with foreign insurers and two special institutions (one of which, the Export Credit Guarantee
Corporation of India Ltd, is solely concerned with export guarantee products while the other is Chennai-based
Star Health, which is a standalone health insurance company.)
Since liberalization, private companies have gained a 34.6% market share
The PSUs remain dominant in the general insurance sector, with a combined market share of 62.9%, while
private companies had a combined market share of 34.6% in 1H 2006.
The special institutions segment only accounts for 2.5% of total market share and, as result, will be
disregarded in the analysis below. The subsequent section is aimed at giving a high-level overview of both
PSUs and private companies, with a focus on comparative strengths and weaknesses.

Public sector undertakings (PSUs)
The four public sector insurers are located in the major cities
National Insurance Company Limited www.nationalinsuranceindia.com
New India Assurance Company Limited www.niacl.com
Oriental Insurance Company Limited www.orientalinsurance.nic.in
United India Insurance Company Limited www.uiic.co.in
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PSU PRIVATE COMPANIES

The four major PSUs currently operating in the Indian general insurance market: National (Calcutta); Oriental
(Delhi); United India (Madras); New India (Bombay). In practice, the PSUs tend to focus their efforts on
maintaining a strong status and market position within their local region rather than competing with one
another. Although New India is generally regarded as the most successful of the PSUs, the PSUs have the
following common challenges:
• Sales focus (rather than underwriting): The tariff system, which has existed for a generation, has
resulted in the lack of a need for insurance companies to underwrite.
Additionally, PSUs have their own in-house sales agents for whom sales targets rather than underwriting are
at the forefront of their activities. This position is now no longer sustainable, due to the phasing out of the
tariff system during 2007.
• Poor systems: The lack of competition in the Indian market, and the backing that the PSUs receive from
government, has meant that these insurers had hitherto faced lower incentives to improve their levels of
efficiency. Accordingly, sophisticated IT systems are currently lacking in this environment – most PSUs
continue to operate at a paper-based level. This is indicative of the inefficiency inherent within the Indian
insurance market and provides a reason for generally poor customer satisfaction.
• Poor claims-paying record: There is a general perception within the Indian market that the PSUs either
fail to pay claims or take far too long to do so. This reinforces the general public‘s perception of insurance as a
tax rather than being of any economic value.
Poor systems and the loss of staff to private insurers are key reasons for the decline of PSUs
• Staff leakage: The gradual loss of market share and competitiveness that the PSUs are currently
experiencing, in conjunction with the higher monetary rewards on offer from private sector players, is leading
to significant levels of high-quality staff leaving the PSU companies to join private competitors.
• Exposure to motor business: A further issue for the PSUs to consider is their substantial exposure to the
poorly performing motor third-party liability sector.
The public companies’ high exposure to motor risks is A Cause for Concern

Private companies
The fourteen new private companies are growing fast. They are generally run by experienced Indian managers
and are strongly supported by foreign expertise. They are steadily building their customer base and, over
time, they are expected to acquire an ever larger share of the market – their share currently stands at 34.6%.
Interviews in both London and India revealed that the new private insurers collectively exhibited a number of
strengths, these included:
THE FOURTEEN PRIVATE COMPANIES HAVE BEEN ESTABLISHED SINCE 2000
• Small and flexible: The private firms have smaller and less disparate workforces than the PSUs and are
therefore able to respond quickly to changes in market conditions.
Private companies have been able to choose the highest-calibre staff from the PSUs
• Good staff, systems, processes and data: Due mainly to their ability to pay higher salaries, the private
companies have been able to choose the highest-calibre staff from the government-owned PSUs. The foreign
partners involved in the new privately owned Indian insurance ventures have ensured that high-quality
systems and processes have been implemented from the very beginning of their enterprise. This ensures that
the companies are run using international industry best practice standards to provide a higher quality of data.
• Greater focus on underwriting: Although the sales function of the private companies is still extremely
important to them, more emphasis is placed on maintaining sound underwriting procedures and high-quality
back office processes than is seen in the PSUs.
The business models, Customer service and staff are stronger in private companies
• Strong claims-paying reputation: As a result of their greater efficiency and information capture, the
privately owned insurers operating in the Indian market have developed a far better reputation than the PSUs
for paying claims quickly and efficiently.
• Product focus: Aside from outperforming PSUs in terms of overall business growth, private companies
have been able to build up a more favorable business mix. This is due to the fact that PSUs are not allowed to
decline certain unprofitable business such as motor third-party.
Motor OD appears to have been chosen as an avenue for gaining market share for private
companies

Following are the list of General Insurers in India.
1) Bajaj Allianz General Insurance Co. Limited www.bajajallianz.co.in
2) ICICI Lombard General Insurance Co. Ltd www.icicilombard.com
3) IFFCO-Tokio General Insurance Co. Ltd www.itgi.co.in
4) Reliance General Insurance Co. Limited www.ril.com
5) Royal Sundaram Alliance Insurance Co. Ltd www.royalsun.com
6) TATA AIG General Insurance Co. Limited www.tata-aig.com
7) Cholamandalam General Insurance Co. Ltd. www.cholainsurance.com
8) Export Credit Guarantee Corporation www.ecgcindia.com
9) HDFC Chubb General Insurance Co. Ltd. http://www.hdfcchubbindia.com/
10) Future Generali Insurance Co. Ltd. http://www.futuregenerali.in
11) Apollo DKV Insurance Company Ltd. http://www.apollodkv.co.in/
12) HDFC Ergo General Insurance Co. Ltd. http://www.hdfcergo.com/
13) Bharti AXA General Insurance Co‘ Ltd. http://www.bharti-axagi.co.in/
14) Universal Sompo General Insurance Co. Ltd. http://www.universalsompo.com/
Foreign players
The ability of foreign insurers to participate in the Indian non-life insurance market is currently restricted to a
26% stake in a joint-venture vehicle with an Indian company. Even with this relatively low level of foreign
participation, many of the world‘s largest insurers (such as AIG, Allianz and RSA) have already entered the
market. Despite their disadvantaged position, foreign capital providers have been able to influence strategy,
product focus and speed of growth. As a result of this influence, there are growing differences between private
companies.
Tata AIG is a joint venture (JV) between the multinational Indian conglomerate Tata and American insurance
giant AIG. The Mumbai-based Tata AIG intends to develop its retail book but has stated that it is looking for
quality of business rather than quantity – it is not prepared to compete on extremely low deductible business.
It is estimated that Tata AIG has employed 1,500 direct sales agents specifically to target this business.
Additionally, Tata AIG has embraced alternative channels that include bancassurance, corporate agency,
brokers and direct marketing, which contribute significantly to premium growth. Tata is said to be a virtually
silent partner in its venture with AIG.
ICICI-Lombard and IFFCO-Tokio are aggressively targeting personal lines business

ICICI, on the other hand, is the main driver in its operation with Lombard. ICICI-Lombard and IFFCO-Tokio
are aggressively targeting personal lines business, the intention being to grow market share quickly.
Conversely, HDFC-Chubb announced that it intended to scale back its personal lines business and focus
instead on commercial business and liability lines, particularly D&O. Since then, Chubb has exited from its
Indian joint venture with HDFC.
Bajaj Allianz has formed a strategic alliance with Karnataka Bank to launch two co-branded over-the-counter
insurance products covering the health and home insurance sectors exclusively for the bank‘s customers. Bajaj
Allianz‘s success is due to its extensive branch network of more than 550 branches and more than 110,000
agents, which are estimated to contribute around 70% of total premiums.
Cholamandalam-Mitsui is based in Madras and continues to focus on the mid-market small and medium-
sized enterprise (SME) business from Southern India.
Royal Sundaram is also based out of Madras and is said to maintain a stable book of business as well as
strong brand recognition in financial lines.
Future Generali is a joint venture between the India-based Future Group and the Italy-based Generali
Group. Future Generali is present in India in both the Life and Non-Life businesses as Future Generali India
Life Insurance Co. Ltd. and Future Generali India Insurance Co. Ltd.
Apollo DKV is a joint venture between DVK and Apollo Group, Hyderabad. Apollo Hospitals group is a pioneer
and leader in corporate healthcare in India and currently owns and manages 42 large tertiary care hospitals,
60 primary care clinics, and the largest retail pharmacy chain of over 600. DKV is the European market leader
and one of the world‘s top five private health insurers. DKV‘s headquarters are based in Cologne, Germany.
The company is a member of the ERGO Insurance Group and thus part of the Munich Re Group, one of the
world‘s largest reinsurers.
HDFC ERGO is a joint venture between HDFC Limited, India‘s premier Housing Finance Institution & ERGO
International AG, the primary insurance entity of Munich Re Group.
Bharti AXA is a joint venture between Bharti, one of India‘s leading business groups with interests in
Telecom, Agri Business and Retail; and AXA, world leader in Financial Protection and Wealth Management. The
company was incorporated on July 2007. Headquartered in Bangalore, the company currently has 30 branches
across India.
Universal Sompo (Universal Sompo) - a joint venture (JV) between Allahabad Bank, Sompo Japan Insurance
Inc., Indian Overseas Bank, Karnataka Bank and Dabur Investments - Universal Sompo is a uniquely symbolic
example of fruitful Public-Private sector
Significant premium growth for private companies
When total figures are aggregated, the picture emerging is that IFFCO-Tokio, in particular, recorded
spectacular growth figures of USD 148m (79%) during 1H 2006 vis-à-vis 1H 2005.
Furthermore, the jump in premium growth for Reliance General of USD 66m almost quadrupled its premium
underwritten when comparing the same periods. This was largely due to the fact that the company is now
driving its retail business – having previously mainly concentrated on commercial lines. Conversely, HDFC
Chubb‘s premium declined over the same time period as summarized by the chart below.
Recent premium growth has shown significant variations
Absolute premium growth has been lead by ICICI Lombard

Private companies are emerging as serious competitors
Despite the continued overall dominance of PSUs, private companies such as IFFCO Tokio, are emerging as
serious competition not only in quality of products and services but also in terms of relative market size, which
is illustrated best in the chart below.
Overall, private companies have therefore been building a book with significant focus on the more profitable
fire, engineering and, lately, PA & health business.
PRIVATE COMPANIES ARE FOCUSING ON THE MORE PROFITABLE LINES SUCH AS FIRE, MOTOR OD
AND PA & HEALTH

Class-by-class analysis
The remainder of this section will consider each of the major classes in the light of the liberalization dynamics
discussed above. This will be used as the basis of the forecasting in the following section.
INCURRED CLAIMS RATIO – MOTOR -2007 -2008
PARTICULARS EARNED PREMIUM (Rs. Lakhs) NET CLAIMS INCURRED (NET)
(Rs. Lakhs)
INCURRED CLAIMS RATIO
(Per cent)
PUBLIC 2007-08 2006-07 2007-08 2006-07 2007-08 2006-07
NEW INDIA 194078 198559 209996 180653 108.20 90.98
ORIENTAL 137012 132846 136423 130377 99.57 98.14
NATIONAL 167841 153428 170449 133293 101.55 86.88
UNITED 106080 94441 116943 90049 110.24 95.35
SUB-TOTAL 605011 579274 633811 534372 104.76 92.25
PARTICULARS EARNED PREMIUM (Rs. Lakhs) NET CLAIMS INCURRED (NET)
(Rs. Lakhs)
INCURRED CLAIMS RATIO
(Per cent)
PRIVATE 2007-08 2006-07 2007-08 2006-07 2007-08 2006-07
ROYAL
SUNDARAM
29749 20673 22856 15280 76.83 73.91
BAJAJ ALLIANZ 92566 49254 61817 33010 66.78 67.02
TATA AIG 24809 22888 15305 13695 61.96 59.83
RELIANCE 71660 14918 53013 9149 73.98 61.33
IFFCO TOKIO 37945 34613 28976 22395 76.36 64.70
ICICI LOMBARD 87333 55105 66505 33463 76.15 60.73
CHOLAMANDALA
M
14073 5195 9353 3883 66.46 74.75
HDFC CHUBB 12017 11830 8491 6995 70.66 59.13
FUTURE
GENERALI
2
SUB-TOTAL 370154 214476 266316 137870 71.95 64.28
GRAND TOTAL 975165 793750 900127 541367 92.31 68.20
Motor
Sales of automobiles tend to have a significant influence on the level of non-life insurance premiums in a
developing country. The main reason for this situation is that motor insurance is generally a compulsory
product in most countries. The relationship between automobile growth and non-life premium income is
illustrated by the Chinese market. Between 1998 and 2002, automobile registrations in China grew by 141%;
during the same time period, non-life premiums increased by 68%. India is just entering a period in which car
sales are likely to grow exponentially; market leader Maruti Udyog reported a 22% increase in domestic sales
at 56,606 vehicles during September 2006 compared with 46,393 vehicles in the same period the previous
year.

The premium breakdown shows that the compulsory motor class plays a less significant role in the Indian
market than in other developing territories. By comparison, the Chinese market consists of 61% motor
premium.
The difference in contribution is reflected in the number of new car registrations in each of the countries. In
2005, China recorded 3.8 million new car registrations whereas India recorded 1.3 million in the same year.
The compulsory motor class plays a less significant role in the Indian market
Motor third-party (TP) liability has been a famously loss-making business due to fixed, very low pricing and to
galloping, very high claims payouts. During 2003-2004, the motor TP portfolio was estimated to have a claims
ratio of 200% to 250%.
It has been common practice for this segment to be cross-subsidized by the motor own damage (OD)
premiums (which business is estimated to have a better claims ratio of about 80%). In particular, ICICI
Lombard has been making significant progress in gaining market share in motor OD business, growing by USD
60m between 1H 2005 and 1H 2006.
On the other hand, Baja Allianz is a significant player in the much less desirable motor TP business. Yet even
in this segment, ICICI Lombard has grown its business more in absolute terms as summarized by the charts
below.

PA & Health
INCURRED CLAIMS RATIO – HEALTH -2007 -2008
PARTICULARS EARNED PREMIUM (Rs.
Lakhs)
NET CLAIMS INCURRED
(NET) (Rs. Lakhs)
INCURRED CLAIMS RATIO (Per cent)
PUBLIC 2007-08 2006-07 2007-08 2006-07 2007-08 2006-07
NEW INDIA 82012 30612 73801 65146 89.88 212.81
ORIENTAL 40605 32371 50256 42895 123.77 132.51
NATIONAL 46806 35756 55238 47010 118.01 131.47
UNITED 48146 32981 65170 52787 135.36 160.05
SUB-TOTAL 217569 131720 244465 207838 112.36 157.79
PARTICULARS EARNED PREMIUM (Rs.
Lakhs)
NET CLAIMS INCURRED
(NET) (Rs. Lakhs)
INCURRED CLAIMS RATIO (Per cent)
2007-08 2006-07 2007-08 2006-07 2007-08 2006-07
ROYAL SUNDARAM 8305 5487 3719 2578 44.78 46.99
BAJAJ ALLIANZ 17808 10693 15171 8367 85.19 78.64
TATA AIG 3708 2974 2778 1835 74.93 61.69
RELIANCE 13617 3017 15269 3410 112.14 113.01
IFFCO TOKIO 7223 4656 8750 7119 121.14 152.89
ICICI LOMBARD 40662 30593 40170 36313 98.79 118.70
CHOLAMANDALAM 2967 884 2761 703 93.03 79.51
HDFC CHUBB 1692 500 2411 436 142.46 87.10
FUTURE GENERALI 25
SUB-TOTAL 96007 58804 91029 60761 94.81 103.42
GRAND TOTAL 313576 190524 335494 268599 106.99 140.97

While corporate business until recently was largely about the manufacturing sector, the economy is now
shifting from manufacturing sector to services sector. This means that group health and liability insurance are
becoming increasingly important for insurance companies.
Group health and liability insurance are becoming increasingly important for the Indian economy
The fundamental causes of upward pressure on health care costs include the rapid progress of medical
technology and the fact that patients are becoming more demanding about health care services and ‗wants‘
are expanding in relation to ‗needs‘.
Rising health costs lie behind considerable growth in health insurance premiums While it is difficult to measure
the extent of rising medical costs, observers suggest that health care costs are typically increasing at three to
five times the rate of general price inflation.
Even though health insurance is seen as becoming increasingly unprofitable for PSUs, due to escalating
healthcare costs, adverse selection, moral hazard and a low premium structure, ICICI Lombard has clearly
targeted this segment of the market as summarized by current market share and growth figures above.

The Indian Non-life Market 2010
Over the next three years, the Indian insurance market is likely to see its development accelerate
The Indian non-life market has experienced significant changes that are likely to influence the country‘s
development of its insurance market in the medium to long term.
So far, the entry of a large number of Indian and foreign private companies has led to greater choice in terms
of products and services for Indian consumers. A growing realization of the benefits and importance of
sophisticated insurance and reinsurance tools has
broadened the pool of potential buyers of insurance.
Given this backdrop, the Indian insurance market has experienced considerable growth since its liberalization
in 2000. Over the next three years, the Indian insurance market is likely to see its process of maturation
accelerate.
Regulatory drivers
Regulatory changes in the four areas discussed in the previous section – products, market players, distribution
and reinsurance – will drive change in the Indian insurance market in the medium term. In some areas, such
as detariffication, the majority of reform has already taken place, although the consequences are yet to be
seen. In other areas, while the reform is promised, it is difficult to anticipate when it will occur. As a result,
there is a lot of uncertainty in the Indian insurance market. The four main areas of change are now considered
in turn.
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Detariffication
The process of detariffication, first begun in 1994, has gradually moved the Indian market to a position where
the overwhelming majority of insurance is transacted without a tariff. As of 1 January 2008, tariff rates have
been withdrawn from all lines of business inclusive of motor third-party (TP) liability. While hitherto, insurance
professionals had limited exposure to sophisticated technical pricing based on actuarial data analysis, in a
detariffed market, this is increasingly a necessity for businesses in order for them to remain profitable.
Foreign ownership
As discussed earlier, foreign ownership is currently restricted to 26%, although there are plans to increase this
limit. The typical structure adopted by the Indian government for the phasing in of foreign-owned entities
across other industries (such as construction and pharma) has been as follows:
1. Phase I: Allow foreign entity to have 26% stake in joint venture.
2. Phase II: Increase foreign entity maximum stake from 26% to 49%.
3. Phase III: Increase foreign entity maximum stake from 49% to 74%.
4. Phase IV: Allow 100% foreign-owned entity to operate in market.
In January 2007, the Indian government reiterated its claim to increase the cap from 26% to 49%
In January 2007, the Indian government reiterated that it would introduce legislation to hike the FDI cap in
the insurance sector to 49%. No time limit has been set for taking a decision on it although consultations with
the industry and stakeholders are underway. There is ample opposition from the left, but analysts expect that
this change will be made effective in the next one to two years.
The effect of this change will be twofold. Firstly, it will increase the focus of the existing private insurers
operating within the Indian market. As discussed in the previous section, the private companies are
increasingly diverging on strategy as they are influenced by their foreign partners. It is likely that increased
foreign ownership will lead to differentiated strategy, more niche players and a wider product range.
Secondly, it is expected to increase the supply of capacity in the market as new investors will decide to enter
the market. Indeed, a number of insurers have commented that, as soon as foreign companies are allowed
more than 26% ownership, they would move as quickly as possible to participate in the market.
Broker distribution
The broker channel was recognized in 2002; again, foreign capital providers can take up to a 26% stake in an
Indian brokerage operation.
There is also no indication at the time of writing as to whether the constraints placed on brokers, such as high
set-up costs and activity restrictions will eventually be removed.
What remains clear, however, is the fact that in a detariffed market, the broker has more opportunity to
demonstrate value to both the customer as well as the insurer. Value-added services can be in the form of
consulting regarding risk management responsibilities as well as more traditional insurance-related roles.
Compulsory cessions
In line with detariffication, there has been some progress in reducing the compulsory cession to the GIC from
20% to 15%.
The 20% compulsory cession has been reduced to 10% in 2007

However, a complete abolishment of the remaining 15% compulsory cession to the GIC is unlikely to occur in
the medium term. Although it would seem natural to liberalize this position as the broader non-life market
begins to open up, the Indian government and legislator reiterated their desire to retain insurance premium in
India in the central legislation of 2000, and there is no reason to believe that this position has since changed.
In addition, many local companies are happy with the automatic reinsurance support that they receive from
the GIC.
The PSUs are pleased that they are able to cede 15% of their poorly performing motor book onto their parent
whereas the growing number of private insurers are grateful for the additional capacity that they receive from
the GIC‘s de facto proportional treaty coverage.
While a further reduction to 10% is expected in 2008, abolishing compulsory cessions altogether is not at the
top of the legislator‘s agenda.
Growth drivers
Overall, sales of both commercial and retail products are expected to benefit from India‘s surging economic
output over the medium term. Economists expect India‘s output to grow by around 6% per annum over the
next ten to 15 years, and the political and business environments are expected to stabilize further.
The combination of this economic growth, increased stability and the liberalization of the non-life sector is
expected to provide premium growth in the range of 10% to 15% per annum over the short to medium term.
Personal lines insurance premium growth drivers:
Personal lines products are expected to develop quickly as Indians grow wealthier
Although probably not of immediate interest to Lloyd‘s underwriters, a developing economy‘s initial growth in
insurance penetration is often driven by personal lines products, especially motor cover as this tends to be
compulsory. Indeed, India‘s fast-developing private insurers expect retail products to provide them with their
main source of premium growth over the medium term.
The reason for their focus is as follows:
• Growing consumer class: The Indian consumer class is currently estimated to be around 200 million and
growing. However, even amongst this class of consumers, non-life penetration remains extremely low. The
reasons for the low penetration are twofold. Firstly, most members of the consumer class have gained their
wealth recently and, therefore, have had little time to consolidate and protect their assets. Secondly, lack of
competition in the insurance market has led to mundane products and poor customer service. These limiting
factors are likely to decrease over the medium term.
Commercial insurance premium growth drivers:
Foreign investment and infrastructure development will drive commercial premium
The widely acknowledged dynamism of the Indian economy is currently attracting global attention.
Commercial enterprise is likely to benefit from this, and the success of commercial enterprise is likely to filter
down to the general insurance sector. Reasons for this include:
• FDI: Foreign direct investment in industry is often made with several requirements that generally include
adequate insurance cover. Sectors most likely to benefit from investment in the medium term are IT,
pharmaceuticals and manufacturing. Product demand is likely include product liability (for exporters) and
directors‘ and officers‘ liability (D&O) cover.

• PPP infrastructure development: The quality of India‘s ports, airports and railways leaves much to be
desired, and infrastructure development in the next few years is likely to cost USD 150bn. Given the need for
speedy infrastructure development and the shaky state of its public finances, the Indian government appears
to have embraced the concept of Public Private Partnerships (PPP). Examples of PPP projects underway are the
Western Freeway Sealink project in Mumbai, which will cost around USD 560m;
development of a metro system in the cities of Ahmedabad and Gandhinagar in Gujarat at a cost of USD
711m; and a series of gas-based power plants across Gujurat at a cost of USD 800m per plant. Many more
projects of this type are being scoped across India over the medium term, and the support of specialist
commercial insurers will be required to ensure their success.
• Insurer quality and client education: Market-leading companies will expect market-leading insurance
cover. Household name insurers have already recognized this and have entered the non-life sector with Indian
partners. Direct investment in the non-life sector by foreign entities is expected to drive growth in insurance
premium through increased quality of product, higher-quality customer service and increased customer
awareness of the economic benefits of purchasing sound insurance coverage.
Quality of service and the high exposure to catastrophic loss will maintain demand
• Catastrophe exposure: India is heavily exposed to natural catastrophe loss but is poorly insured against
such risks. For example, in 1999, India accounted for approximately 25% of the world‘s fatalities due to
natural catastrophes; in 2001, this figure stood at 80%.
Events in recent years, such as the 2005 Kashmir earthquake (more than 87,000 dead in India and Pakistan),
the 2005 Mumbai floods (1,000 dead) and the 2004 Boxing Day tsunami (18,045 dead), have proved that
India remains one of the catastrophe centers of the world. However, less than 15% of the damage caused is
thought to have been insured. According to government estimates quoted by the Times of India, economic
damage from the Tsunami has been estimated at RS. 100bn (GBP 1.3bn). To date, the four Indian public
sector insurers have received 13,000 claims worth just RS. 14bn (GBP 178m). In contrast, insured losses in
the US following Hurricane Ivan (2004) totaled 55% and insured losses following Hurricane Katrina (2005) are
estimated to be up to 48% of the total economic damage suffered.
The Mumbai flood has taken insurance companies by surprise, leading to two insurance companies exhausting
their reinsurance protection. In 2006, all insurance companies had purchased more catastrophe reinsurance
cover. With the increased reinsurance cover purchased, Mumbai flood loss would be only 30% of the
reinsurance cover purchased by all the insurance companies put together in 2006-2007; as against 52% of
the reinsurance cover in 2005-2006.
One of the short-comings of the Indian insurance industry is the lack of credible data to simulate potential loss
from a natural catastrophe of a high severity. At best, insurance companies are following an aggregate loss
model whereby they assess the impact of a natural catastrophe by analyzing the severity of a single event
applied to their portfolio.
Risk factors
Insurance analysts are excited about the prospects of the Indian market. However, there are
risks that may adversely affect the levels of growth in the Indian non-life market:
However, lack of reform and negative customer perception may act as a drag on growth
• Slow reform: Much of this growth prediction is based upon the liberalization agenda set out by the
government and the regulator, the IRDA. Due to a number of competing interests, it should be noted that
there is significant potential for delay in this liberalization program.

• Poor customer perception: Due to the poor levels of customer service provided by PSU insurers and their
failure to pay claims promptly, Indian assureds tend to perceive insurance to be a tax (ie with no returns)
rather than a product of genuine economic value.
Structural changes
Combining the regulatory and growth drivers, there are a number of structural changes that are likely to occur
if risk factors such as a slow reforms and poor customer perception are overcome.
PRICE COMPETITION IS SET TO INCREASE
While it is yet too early to verify the impact of the detariffed environment, competition is expected to manifest
itself in prices, products, underwriting criteria, sales methods and creditworthiness. As experience with other
markets has shown, insurance companies are expected to vie with each other to capture market share
through better pricing and client segmentation. Industry observers estimate that there is likely to be a
significant price war, which is expected to last for 18 to 36 months.
A significant price war is expected over the next few years
When marine hull insurance was completely detariffed, the stiff competition that followed led to rates falling
by 40 to 50%. Marine hull insurance premiums are, however, now expected to rise back to the levels
prevailing before detariffication occurred. Moreover, Indian shipping companies are expecting to see strong
demarcation and differentiation between fleets of different ship owners. Factors such as claims history,
maintenance condition and average age of vessel are expected to strongly influence premium rates. General
insurers have predicted that premiums for older ships will increase by as much as 40% at renewal this year,
but that good shipping fleets with a no loss record, of which there are few in India, are likely to get a 10% to
20% reduction in new premiums.
Cross-subsidization is expected to cease
In the initial phase of detariffication, the free pricing regime is expected to result in a decline in growth. Other
markets in which detariffication has occurred on a similar scale, such as Japan, South Korea and Ireland, have
shown that the first few years can witness a decline of 20% in premiums for detariffed classes – leading to
growth resuming only three years after the lifting of pricing restrictions.
The fire class will no longer serve as a source of cross-subsidy for motor business
The issue of fire detariffication is of particular interest to insurers as they have hitherto used the fire portion of
an account to cross-subsidize the losses that they frequently experience in motor and non-tariffed business
classes. To put it differently, in the loss-making areas, the premium rates are expected to increase to meet the
losses, while premium rates are expected to come down in profitable portfolios such as fire and engineering.
As fire premiums are being detariffed, there is most likely going to be a competitive struggle between the
PSUs and the private insurers. It is believed that this is the reason why the IRDA has placed an administrative
burden on insurers wishing to reduce rates by more than 20%. Some commentators believe this will limit
price competition, while others think it will merely cause confusion in the market.
The public sector insurers in India have continued to push for motor detariffication as, for many years, they
have incurred losses in this mandatory insurance sector. State-owned insurers have argued that since they
handle more than 40% of the country‘s motor business, any delays in implementing the detariffication of this
segment would hit the companies‘ profitability.

RISK-BASED PRICING WILL INCREASE
Rationalization of premium structures is expected
Detariffication is expected to result in risk-based pricing of portfolios and therefore a rationalization of
premium structures. While we can expect some level of unpredictability in the market initially, experience from
other countries that have gone through detariffication shows that prices will stabilize to reflect the underlying
risks and cost of capital, whereas insurers‘ underwriting efficiency will increase. For detariffication to be
successful, stronger solvency supervision will also be required as, without fixed tariffs, insurers‘ results will
become more volatile. This will force out badly performing insurers that have hitherto placed little emphasis
on quality underwriting.
Building of profitable portfolios could help access to reinsurance support
Currently, the Indian market has ample capacity for even the largest risks, due to inter-company cessions of
the PSUs, the market surplus treaties and facultative support from the GIC. With detariffication, some
reinsurers have expressed concern over the possible impact of the ensuing ‗price war‘, which could result in
the revenues of primary insurers shrinking. This, in turn, could lead to a deterioration in underwriting losses
and a consequent weakening of domestic retention capacities.
Some international reinsurers looking at the Indian market believe that it could take some time for cedants to
gather experience with the new situation and to find their minimum rates.
This is due to the fact that the primary reflex for reinsurers is to compete via price for new or renewal
business. Insufficient ratings, in turn, take at least a year to have an impact on the companies to better
differentiate products and price risks appropriately.
The comfort of an anchor tariff rate has made the industry more transaction-focused. From
a reinsurer‘s perspective, the transition toward a business-driven and profit-and-loss-driven
approach should be seen as a positive step. Those insurers that are able to demonstrate their commitment to
building profitable portfolios will enjoy positive reinsurance support.
Growing insurance demand will be met by increased capacity
Growth in insurance demand will need to be matched by increased supply of insurance capacity. There is
unlikely to be a shortage of capacity due to the global interest in India from leading insurers. The three
candidates for this capacity provision are as follows:
Growth in demand is expected to be more than met by increased capacity
1. Existing insurers (PSUs or privates) either by receiving additional capital from their parent companies
or via a capital-raising exercise, e.g. a PSU doing an initial public offering (IPO).
2. New insurers that choose to join the market.
3. Heavier reliance on the global reinsurance market.
The most likely scenario is that all three of these groups will be involved in the evolution and growth of the
Indian non-life market to the extent that the government allows them to be.
The growth prospects in India are very real and understandably attractive to Western insurance groups that
are searching for growth outside of saturated, developed markets.
However, increased capital supply may depress prices to unrealistic levels in the short term.

Growth projection: scenario I – “simple extrapolation”
Having looked at the regulatory and growth drivers, we are now in a better position to project premium levels
for the Indian non-life direct market up to 2010.
We can build up a successively more complex scenario by starting with the most basic:
The most basic growth scenario that we can start with is a mere projection based upon the compound annual
growth rate for the period of 2000 to 2006, which stood at 17%.
This is a useful exercise in understanding the recent growth dynamics of the Indian insurance market and its
potential up until 2010. To put it into context, the Indian insurance market in this scenario could expand by
almost 100% to overtake today‘s markets of Ireland or Taiwan.
If premium growth continues according to its historical average, the Indian market is set to nearly
double by 2010
However, the scenario fails to take into consideration the considerable structural changes in the market
following detariffication of virtually all classes of business since January 2007.
Adjusting for detariffication
In order to be prepared for a virtually complete detariffed market, Indian insurers have had to pursue detailed
analyses of risks based on occupation, sum insured and geographic area to prepare for the new regime
starting in January 2007.
DETARIFFICATION IS LIKELY TO BE ASSOCIATED WITH A PERIOD OF ADJUSTMENT
The new regime is helping to eliminate the frictional costs associated with administering the tariff and to allow
market forces to determine individual risk appetite.
However, as in any market, this is likely to be associated with a period of adjustment and predatory pricing,
and it may even include what some have termed a ‗blood bath‘ for some lines of business that have hitherto
been excluded from the competitive pressures of market forces.
Experience of other markets, and the marine cargo detariffing in India, suggests that the initial period of
detariffing will result in a considerable erosion of the premium base as competition for good risks drives down
rates. Having realized the potential for large rate reductions, the IRDA has limited the level of rate changes for
various classes.
Fire and engineering rates may be reduced by up to 49% and motor rates by 20%. If an insurer wishes to
adopt rates lower than these ceilings, they will be required to file their rates and wait the IRDA‘s
consideration.
While this may not prevent the predicted ‗blood bath‘, it does create administrative costs associated with
lowering rates substantially.
However, this is merely an interim dispensation, which stands to be withdrawn with the approval of the rates
filed by the insurers under the ―File and Use‖ system. Once new products that have been filed for approval are
cleared, IRDA limits for discounts are likely to go up, but it remains unclear by how much this is likely to be.
Even with a set limit for discounts, some insurers are circumventing this directive by offering discounts that
allow premiums to drop. For instance, installation of fire extinguishing aids allowed for discounts of anywhere
between 2.5% and 15%.

The section below aims to give a reasonable overview of potential scenarios.
MOTOR
Fundamentally, in a detariffed environment, the motor insurance is priced on the risk factor rating system
(RFRS) model, which is widely used around the world. The premiums are based on factors such as vehicle,
driver, location and extent of use, occupation, accident repair cost, liability, etc. With detariffing, the rating of
the products should be based on the risk profile of the customer. In the motor classes, the private cars
segment is expected to witness a premium reduction, while commercial vehicles are likely to see an increase
in premium.
Motor third-party (TP) is traditionally considered an unprofitable sector and according to the Times of India,
rates would rise anywhere between 34% and 257% if the product was detariffed.
In 2007, the IRDA decided against a full detariffication of motor TP with the hope that premiums for this class
of business could be adequately increased. The IRDA has proposed an initial increase of 150% in TP premium
rates, which were later brought down to 70% once the transporters threatened to go on strike. For our
scenario, we have used the latest 70% rate increase for 2007 but have assumed that rates will rise again by a
further 10% in 2008. This is likely to be the minimum rate increase if the product is detariffed and the
transport sector can no longer exert political pressure. Once markets have adjusted for this 10%, discussions
have revealed that there may still be room for a further 20% in both 2009 and 2010 in order to converge to
the initially proposed increase of 150%.
Motor own damage (OD) in contrast is profitable and being targeted by the private companies. In addition,
the decision to pool all commercial TP premium could further provide an incentive for private companies to
target the more profitable OD sector. It is likely that this will put downwards pressure on motor OD rates and
the Times of India has predicted a 20% to 25% rate reduction in 2007.
For the first quarter of 2007, however, motor OD rates remained stable, although commentators have
suggested that they will be continually reviewed. As a result for our scenario, we have used a relatively small
rate reduction of 20% in 2007, followed by a further smaller reduction in 2008. Rates are expected to rise
again in 2009 and 2010.
HEALTH
Health insurance should shoot up 100% if insurers try to cover the current losses with the same coverage,
according to an article published by the National Insurance Academy.
However, the regulatory situation may allow only a moderate rise, and competition is likely to push down
prices in an effort to gain market share in one of the fastest-growing business classes. Accordingly, our
conservative estimate is that premiums may rise by a mere 5% in 2007 and a further 5% in 2008.
FORECASTING GROWTH BY CLASS
Using the assumptions detailed above, class-by-class growth has been forecast for 2007 to 2010.
In the first chart below, the 2006 growth rate per class has been used to extrapolate to 2010 premium levels.
In the second chart, the same growth rate has been applied, but thereafter adjusted for expected premium
rate changes as summarized in the previous section.
While this forecast is fairly crude, a few clear conclusions can be drawn from a comparison between the two
charts shown above. These conclusions are supported by the soft intelligence discussed earlier in this report.

1. Slower growth in 2007
Firstly, premium growth in 2007 is much more modest when rate decreases are taken into consideration. This
reflects the general opinion that price wars in 2007 will eat into insurers‘ premium bases.
2. Exponential growth from 2009 onwards
Secondly, the rate decreases early in the period clear the way for much more substantial growth later on. As
the insurance market adjusts to an open pricing structure, the model predicts strong growth in 2009 and 2010
(between 24% and 30% respectively) under the adjustable rate model.
WHILE PREMIUMS WILL SLOW DOWN INITIALLY, THERE WILL BE INCREASED GROWTH TOWARDS
2010…
…WITH THE INDIAN MARKET EXPANDING BY THE SIZE OF THE NORWEGIAN MARKET BETWEEN
2007-2010
The total premium ends lower under the adjustable rate model (USD 12.6bn) than under the constant growth
model (USD 14.2bn), but higher than under the original premium extrapolation (USD 11.2bn), making the
Indian market expand by a premium volume equivalent to that of the total Norwegian market in 2005.
This reflects our understanding of the dynamics of liberalization:
Detariffication will bring real benefits to both Indian consumers and the insurance industry over the
medium term.
While short-term price adjustments will lead to lower growth during the first one to two years,
premium growth is expected to gain momentum towards the end of this decade.
3. Changing product mix
Thirdly, the product mix changes significant when the expected rate changes are taken into consideration.
Most noticeably in this model, motor third-party increases substantially, taking into consideration the
increasing rates. In the past, motor TP has been considered unattractive due to low rates and high loss ratios.
Provided the rates are allowed to rise to a competitive level, this sector should become more attractive.
The chart below compares the current class breakdown with the forecast class breakdown.
BY 2010, INDIA’S PRODUCT MIX IS SET TO RESEMBLE THOSE OF OTHER MAJOR EMERGING
MARKETS
With regards to motor premium, in particular, the forecast more accurately reflects the kind of breakdown we
would expect to see in a developing insurance market such as India. Motor business in total accounts for just
less than 50% of total premium. Motor TP, which typically drives the development of motor business in a
developing economy, accounts for a much more significant share.
In contrast to motor TP, the growth of the property classes, fire and engineering, has been stunted by the
price wars and by significantly higher growth in other classes. Even though they have grown in absolute
terms, their combined share is forecast to fall to 12% by 2010.
Apart from a significant adjustment for fire in 2007 of 35%, this model does not take into consideration the
expanding client base that may be attracted by lower premiums.

MOTOR AND HEALTH ARE FORECAST TO SEE THE MOST SIGNIFICANT GROWTH
Finally, the other big winner is personal accident and health, which by 2010 will have become the largest class
after motor. Again this reflects current speculation that there is considerable potential for growth here.
Conclusion
1. Continued strength in the broader economy and gradual reform in the non-
life sector are expected to combine to produce strong premium growth in the
Indian market over the next few years.
2. Whilst India currently remains a medium-sized non-life market, the growth
predicted over the medium to long term is attracting increasing levels of
foreign investment and competition. Many of the world‟s largest insurers
such as AIG, Lombard and Allianz are present in the market. The new private
insurers are growing fast and have already developed a combined market
share in excess of 30%.
3. Leading international reinsurers such as Munich Re and Swiss Re are
aggressively targeting proportional treaty business. As the market is
gradually liberalized and becomes more mature, these private firms are
considered well placed to capture an even greater share of a fast-growing
market. The main risk to private insurers is the high likelihood of sustained
price competition as tariffs are removed from classes of business such as fire
and engineering, the impact of which have been modeled and explained

Market 2 Automotive Industry
Automotive Market in India
Domestic Market Share – 2008-09
Passenger Vehicles 15.96%
Commercial Vehicles 3.95%
Three Wheelers 3.6%
Two Wheelers 76.49%
Current Scenario
India represents one of the largest two-wheeler markets in the world, with an estimated size of 5.4
million units a year.
India is the two-wheeler capital of Asia with an average of 27 two-wheelers per thousand people, compared
to China's 8 two-wheelers per thousand people.
India became the fastest growing car market in the world in 2004, growth rate of 20%.
Overview
India is being recognized as potential emerging auto market. Foreign players are adding to their investments
in Indian auto industry. Passenger vehicles sales crossed the mark of 1 million in 2004-05.
2/3rd of auto component production is consumed directly by OEMs.
Trends in Automobile sector

Cars by Price Range
Under Rs.
3 Lakhs
TATA V2 XETA, NANO
Maruti 800, OMNI, ALTO
Rs. 3-5
Lakhs
Maruti ZEN ESTILO, WAGON-R, A-STAR, VERSA, SWIFT, D-ZIRE, SANTRO XING
CHEVROLET SPARK,AVEO-UVA
FIAT FIAT PALIO STILE
FORD IKON
HYUNDAI SANTRO XING,HYUNDAI i-10,GETZ PRIME
MAHINDRA-RENOULT LOGAN
REVA MAINI REVA i
SKODA SKODA FABIA
TATA VISTA,V2 XETA,CS,INDIGO,MARINA
Rs. 5-10
Lakhs
MARUTI-SUZUKI GYPSY,SX4
CHEVROLET AVEO-UVA,TAVERA,OPTRA CRV,MAGNUM
FIAT FIAT LINEA
FORD FUSION,FIESTA
HONDA HONDA CITY 2008
HYUNDAI HYUNDAI i-20,HYUNDAI ACCENT,HYUNDAI VERNA
ICML ICML RHINO RX
MAHINDRA MAHINDRA BOLERO,MAHINDRA XYLO,MAHINDRA SCORPIO
MITSUBISHI MITSUBISHI LANCER
SAN STORM SAN STORM
TATA SUMO,INDIGO XL,GRANDE,SAFARI,XENON XT
TOYOTA TOYOTA INNOVA
Rs. 10-15
Lakhs
MARUTI-SUZUKI GRAND VITARA
HONDA HONDA CIVIC
HYUNDAI HYUNDAI SONATA TRANSFORM
MITSUBISHI MITSUBISHI CEDIA
SKODA SKODA OCTAVIA, SKODA LAURA
TOYOTA TOYOTA COROLLA ALTIS
VOLKSWAGEN VOLKSWAGEN JETTA

Rs. 15-30
Lakh
AUDI AUDI-A4
BMW BMW-3 SERIES
CHEVROLET CAPTIVA
FIAT FIAT 500
FORD ENDEAVOUR
HONDA HONDA ACCORD,HONDA CRV,HONDA HYBRID
HYUNDAI HYUNDAI TUCSON
MERCEDES-BENZ MERC-C CLASS
MITSUBISHI MITSUBISHI PAJERO,MITSUBISHI OUTLANDER
NISSAN NISSAN X-TRAIL,NISSAN TEANA
SKODA SKODA SUPERB 2009
TOYOTA TOYOTA CAMRY
VOLKSWAGEN VOLKSWAGEN PASSAT
Rs. 30-90
Lakhs
AUDI AUDI-A6,AUDI-TT,AUDI-Q7,AUDI-A8
BMW 5 SERIES,X3,X5,X6,7 SERIES,M3,6 SERIES
MERCEDES-BENZ MERC-SLK CLASS,MERC-M CLASS,MERC-S CLASS,MERC-E CLASS
MITSUBISHI MITSUBISHI MONTERO 2009
PORCHE PRCHE BOXTER,PORCHE CAYMAN,PORCHE 911
TOYOTA TOYOTA LANDCRUISER PRADO
VOLKSWAGEN VOLKSWAGEN TOUAREG
VOLVO VOLVO S80,VOLVO XC90
Above Rs.
1 Crore
BENTLEY BENTLEYCONTINENTAL G7,BENTLEYCONTINENTAL G7 FLYING SPUR,BENTLEY
CONTINENTAL GTC,BENTLEY CONTINENTAL ARNAGE,
BMW M5
ICML LAMBORGHINI GALLARDO,LAMBORGHINI MURCIELAGO
MAYBACH MAYBACH 62
ROLLS ROYCE ROLLS ROYCE PHANTOM,ROLLS ROYCE DROPHEAD CAUPE
The segregation is made on Ex-Showroom price of base models.

MOTORCYCLE MANUFACTURERS AND MODELS
LML INDIA ROYAL ENFIELD TVS MOTOR
› LML ADRENO FX › BULLET 350 › SUZUKI HAYABUSA 1300
› LML BEAMER › THUNDERBIRD TWINSPARK › SUZUKI INTRUDER M1800R
› LML ENERGY FX › BULLET ELECTRA › SUZUKI GS 150R
› LML FREEDOM › BULLET MACHISMO › TVS APACHE RTR FI
› LML GRAPTOR › BULLET MACHISMO 500 › TVS FLAME
› TVS STAR CITY
› TVS TAURUS FIERO F3*
HMSIL SUZUKI MOTOR YAMAHA MOTOR
› HONDA SHINE › SUZUKI ACCESS 125 › YAMAHA FZS
› HONDA UNICORN
GRAND PRIX EDITION
› SUZUKI HEAT › YAMAHA FZ 150CC
› HONDA STUNNER CBF › SUZUKI ZEUS › YAMAHA GLADIATOR
- › SUZUKI HAYABUSA 1300 › YAMAHA LIBERO G5
- › SUZUKI INTRUDER M1800R › YAMAHA GLADIATOR TYPE JA
- › SUZUKI GS 150R › YAMAHA ALBA 106
› YAMAHA YZF R1
› YAMAHA MT 01
› YAMAHA YZF-R15
› YAMAHA CRUX

Industry Growth
According to the press release issued by Society of Indian Automobile Manufactures, the cumulative
production data for April 2008 – March 2009 shows a growth of 2.96 per cent over April 2007 – March 2008.
Overall production in March 2009 grew by 5.17 per cent over the same month last year.
In 2008-09, production of passenger vehicles segment and two-wheelers segment recorded single digit growth
with the growth rates being 3.44 per cent and 4.88 per cent respectively. Three-wheelers segment registered
marginal growth in production at 0.07 percent. However, production of commercial vehicles fell drastically at
(-) 24.02 percent. The year 2008-09 saw automobile exports registering a growth of 23.61 per cent with all
segments except commercial vehicles, registering positive growth. Passenger vehicles and two-wheelers
segment grew by 53.73 per cent and 22.50 per cent respectively. Three-wheelers exports grew by 4.85
percent. However, exports of commercial vehicles declined at (-) 27.67 per cent during this period.
Passenger vehicles segment registered growth with 0.13 per cent growth during 2008-09 over 2007-08.
Passenger cars and Multi purpose vehicles grew by 1.31 per cent and 5.69 per cent respectively during this
period. However, sales of utility vehicles fell by (-) 7.94 per cent. The sales in March 2009 for passenger
vehicles declined at (-) 1.15 per cent over March 2008.
The sales of commercial vehicles declined by (-) 21.69 per cent during 2008-09 over same period last year.
Medium& heavy commercial vehicles declined by (-) 33.16 per cent and light commercial vehicles recorded
de-growth at (-) 7.10 percent. In March 2009, commercial vehicles sales fell by 26.22 per cent compared to
March 2008. M&HCV fell by 43.40 per cent and LCV fell by 0.17 percent. Also, buses (M&HCV) grew marginally
at 0.57 per cent and smaller buses declined by 6.72 percent.
Three-wheelers sales registered a decline of (-) 4.13 per cent in 2008-09. While passenger carriers grew by
14.36 per cent during 2008-09, goods carriers declined at (-) 37.52 per cent. In March 2009, three-wheelers
sales grew by 11.40 per cent over same month last year.
Two-wheelers registered marginal growth of 2.60 per cent during 2008-09. Mopeds and scooters grew by 4.22
per cent and 9.11 percent. Motorcycles also grew marginally at 1.16 percent. Electric two-wheelers segment
grew by 49.48 percent. Two-wheelers sales grew at a growth rate of 3.65 per cent in March 2009 over same
month last year.
Two wheelers: Growth across segments
Domestic sales for two wheelers were up 14.5% Y-o-Y in September, with growth seen across segments, as
motorcycle sales grew 15.2%, moped by 13.1%, and scooters by 9.4% Y-o-Y. Within domestic motorcycles,
Hero Honda‘s (HH) sales rose 22.8% and TVS‘ by 28.4%. However, Bajaj Auto (BAL) saw motorcycle sales
decline 2.9% Y-o-Y.
On sequential basis, while HH‟s market share declined 85bps, BAL‟s market share went up
150bps and TVS‟ by 127bps. This was due to HH‟s Y-o-Y growth rate dipping by 575bps (to
22.8%) as compared to previous month when it registered 28.5% Y-o-Y growth.
Motorcycle exports for the month were up 36.9% Y-o-Y, in line with the recent trend. BAL
and TVS reported growth of 48.3% and 45.2% Y-o-Y, respectively.
Two wheelers (domestic)

Volume (Units)
September
'08
September
'07
%Chan
ge
YTD FY09 YTD FY08
%
Change
Motorcycles 632,369 548,816 15.2 3,063,541 2,721,290 12.6
Scooters 104,196 95,266 9.4 568,831 530,430 7.2
Mopeds 38,050 33,644 13.1 217,164 204,769 6.1
Electric two-wheelers 3,809 2,040 86.7 14,521 11,676 24.4
Total two-wheelers 778,424 679,766 14.5 3,864,057 3,468,165 11.4
Two wheelers (exports)
Volume (Units)
September
'08
September
'07
%
Change
YTD FY
'09
YTD FY08
%
Change
Scooters 2,972 1,985 49.7 13,235 13,735 -3.6
Mopeds 810 1,746 -53.6 4,445 12,692 -65
Total two-wheelers 87,816 65,109 34.9 519,762 409,126 27
Passenger vehicles: Domestic sales record modest growth; exports double
Domestic passenger vehicle (PV) sales grew 5.4% Y-o-Y in September compared to the Y-o-Y declines
seen in the preceding two months, as buyers postponed purchases due to high interest rates and in
anticipation of model launches in the near future.
The car segment was up 2.8% Y-o-Y, utility vehicle (UVs) 5.4% Y-o-Y, and multi-purpose vehicles
(MPVs) 41.3% Y-o-Y.
Within the car segment, while the compact category was up 1.5% Y-o-Y, the mid-size category was
up 8% Y-o-Y. However, volumes in the entry category (M800 model) declined substantially by 32.2%
Y-o-Y, as buyers await the launch of TML‘s Nano.
Volume growth in the compact category was led by Hyundai Motors (HML) whose sales grew 26.4%
on good demand for i10. However, its key rivals, Maruti Suzuki India (MSIL) and TML, saw a decline in
sales—by 1.3% and 24.4% Y-o-Y, respectively.
Volume growth in the mid-size category was led by TML whose volumes doubled Y-o-Y, mainly due to
success of Indigo CS, followed by MSIL, which recorded a growth of 51.8%, as demand for Swift DZire
remained high.
In the UV segment, the largest player, Mahindra and Mahindra (M&M), posted an increase of
27.6% Y-o-Y, led by high demand for Bolero. Among its key competitors, while TML registered
modest growth of 2.8% Y-o-Y, Toyota Kirloskar Motors (TKM), and General Motors (GM) saw a decline
in volumes by 22.8% and 20.2% Y-o-Y, respectively.
In MPV segment, while MSIL‘s sales rose by 16.8% Y-o-Y to 7,416 units, TML, which now has its Magic
model under this category, saw a steep jump of 188.8% Y-o-Y to 3,047 units.
Passenger car exports doubled Y-o-Y to 32,059 units. HML registered robust growth in exports, up
151.6% Y-o-Y, to 23,911 units. MSIL also saw a 45.5% jump in exports, which came in at 6,201.
Passenger vehicles (domestic)

Volume (Units) September '08 September '07 %Change YTD FY09 YTD FY08
%
Change
Passenger Cars 108,823 105,822 2.8 600,352 568,121 5.7
Utility vehicles 21,180 20,155 5.1 123,317 109,635 12.5
MPV's 10,463 7,405 41.3 54,862 44,779 22.5
Total PVs 140,466 133,382 5.3 778,531 722,535 7.7
Passenger vehicles (exports)
Volume (Units) 8-Sep 7-Sep %Change YTD FY09 YTD FY08 % Change
Passenger Cars 31,543 15,139 108.4 154,665 98,826 56.5
Utility vehicles 357 602 -40.7 2,263 3,470 -34.8
MPV's 159 89 78.7 562 450 24.9
Total two-wheelers 32,059 15,830 102.5 157,490 102,746 53.3
Domestic Sales
Passenger Vehicles segment registered growth with 0.13 percent growth during 2008-09 over 2007-08.
Passenger Cars and Multi Purpose Vehicles grew by 1.31 percent and 5.69 percent respectively during this
period. However, sales of Utility Vehicles fell by (-) 7.94 percent. The sales in March 2009 for passenger
vehicles declined at (-) 1.15 percent over March 2008.
The sales of Commercial Vehicles declined by (-) 21.69 percent during 2008-09 over same period last year.
Medium & Heavy Commercial Vehicles declined by (-) 33.16 percent and Light Commercial Vehicles recorded
de-growth at (-) 7.10 percent. In March 2009, Commercial vehicles sales fell by 26.22 percent compared to
March 2008. M&HCV fell by 43.40 percent and LCV fell by 0.17 percent. Also, buses (M&HCV) grew marginally
at 0.57 percent and smaller buses declined by 6.72 percent.
Three Wheelers sales registered a decline of (-) 4.13 percent in 2008-09. While Passenger Carriers grew by
14.36 percent during 2008-09, Goods Carriers declined at (-) 37.52 percent. In March 2009, three wheelers
sales grew by 11.40 percent over same month last year.
Two Wheelers registered marginal growth of 2.60 percent during 2008-09. Mopeds and Scooters grew by 4.22
percent and 9.11 percent. Motorcycles also grew marginally at 1.16 percent. Electric two wheelers segment
grew by 49.48 percent. Two Wheelers sales grew at a growth rate of 3.65 percent in March 2009 over same
month last year.
Exports
The year 2008-09 saw automobile exports registering a growth of 23.61 percent with all segments except
Commercial Vehicles, registering positive growth. Passenger Vehicles and Two Wheelers segment grew by
53.73 percent and 22.50 percent respectively. Three Wheelers exports grew by 4.85 percent. However,
exports of Commercial Vehicles declined at (-) 27.67 percent during this period.

Trends in Automobile Industry
Automobile Domestic Sales Trends (Number of Vehicles)
Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Passenger
Vehicles 707,198 902,096 1,061,572 1,143,076 1,379,979 1,549,882 1,551,880
Commercial
Vehicles 190,682 260,114 318,430 351,041 467,765 490,494 384,122
Three
Wheelers 231,529 284,078 307,862 359,920 403,910 364,781 349,719
Two
Wheelers 4,812,126 5,364,249 6,209,765 7,052,391 7,872,334 7,249,278 7,437,670
Grand Total 5,941,535 6,810,537 7,897,629 8,906,428
10,123,98
8 9,654,435 9,723,391
Automobile Exports Trends (Number of Vehicles)
Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Passenger
Vehicles 72,005 129,291 166,402 175,572 198,452 218,401 335739
Commercial
Vehicles 12,255 17,432 29,940 40,600 49,537 58,994 42673
Three
Wheelers 43,366 68,144 66,795 76,881 143,896 141,225 148074
Two
Wheelers 179,682 265,052 366,407 513,169 619,644 819,713 1004174
Grand
Total 307,308 479,919 629,544 806,222 1,011,529 1,238,333 1,530,660

Domestic Market Share for 2008-09
Passenger Vehicles 15.96%
Commercial
Vehicles 3.95%
Three Wheelers 3.60%
Two Wheelers 76.49%
Automobile Production Trends (Number of Vehicles)
Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Passenger
Vehicles 723,330 989,560 1,209,876 1,309,300 1,545,223 1,777,583 1,838,697
Commercial
Vehicles 203,697 275,040 353,703 391,083 519,982 549,006 417,126
Three Wheelers 276,719 356,223 374,445 434,423 556,126 500,660 501,030
Two Wheelers 5,076,221 5,622,741 6,529,829 7,608,697 8,466,666 8,026,681 8,418,626
Grand Total 6,279,967 7,243,564 8,467,853 9,743,503 11,087,997 10,853,930 11,175,479
Sizes, Segments & Trends
Two-wheel Purchase Trend

Growing working population
Increased access to credit and lower interest loans
Increased consumer embrace of financial products
Upward migration of household income levels
Fast paced urbanization to rise from 28% to 40% by 2020
Middle class expanding by 30 - 40 million every year
Demographics of a Potential Two-wheeler Owner
Lower middle class to upper middle class households
45% own a desktop
87% own at least 1 mobile phone
Surf internet more than 8 hours per week
Average household income above Rs.15,000 per month
Single 55% Married 45%
TWO WHEELER SECTOR UPDATE
Riding through tough times…..
Two wheeler sales have been witnessing a tough road ever since October 2006. Although during April-
November 2008 the two wheeler sales volume have reported a growth of 4% on a comparative lower base in
the same period last year. Although the interest rates have come down by 75 bps during last 4 months, there
is no relief from the financing institutions on stringent financing norms adopted by them earlier. We believe
although the interest rates are softening and prices have come down due to cut in excise duty, the road ahead
for two wheelers for rest of FY09E period does not look promising. After registering minor a growth of 4% in
the first 8 months, we believe that the sales volumes will fall in the remaining 4 months thereby reporting a 2-
3% fall for FY09E in the overall two wheeler sales volumes.
Two wheeler sales have been falling since the last 24 months, After touching a peak of 8,18,537 vehicles
during festive season in October 2006 sales volumes of two wheelers have not been able to breach this
benchmark.
Although interest rates have started coming down, two wheeler market is likely to remain weak in
the near term.
Estimate - FY09E two wheeler market to report decline by 2-3%.
Average growth in sales volume for last 32 months has come down to 0.8% as against long term
growth of ~10%
All the three segments Viz. Motorcycle, Scooters and Mopeds have registered positive growth in
the first 2 months of FY09.
April-November 2008 sales review Segment wise
All the three segments Viz. Motorcycle, Scooters and Mopeds have registered positive growth in the first 8
months of FY09. Motorcycle segment which accounts for 80% of the market for two wheelers has reported a

growth of 3% on low base effect. While scooters and Moped have reported growth of 7%and 5% y-o-y
Why sales volumes have been declining?
Interest rates still hovering at high levels
High interest rates are among the major reasons for the slowdown in sales. PLR has moved northwards from
10.25% in May 2006 to 13.75% in November 2006. A year back almost 50% of two wheeler sales were
financed on credit but with soaring interest rates credit financing has dropped and the proportion of cash sales
have increased.
Our analysis and feedback from industry suggest that credit financing has dropped to 30% while cash sales
have moved up to 70%. We cite the main reason for this change is because of the high level of interest rates
offered by financing institutions. The two wheeler market in India is especially vulnerable to interest rate. But
although interest rates have started softening due to cut in CRR and repo rates, we believe it is still hovering
at high levels and needs to come down to push the two wheeler demand.
Lack of Financers also affecting sales
Due to increase in number defaults, financers like Citi and ICICI irked themselves out of the two wheeler
financing business thereby the pie of two wheeler financing has contracted. Initially ICICI which had a major
market share of 40% in two wheeler financing started lending in few locations, but later with the rise in
number of delinquencies it has completely moved out of the two wheeler financing business at the dealer‘s
location.
We believe that financers are not likely to return back in the short term.
Financing norms have become more stringent
With the increase in number of defaults and rising delinquencies, the existing financers have made financing
stricter in order to minimize the number of defaults. Our check with dealers brings us the point that previously
financing was pretty easy, but now with various requirements such as CIBIL check, permanent residence
proof, strict check on number of dependent etc., financing has become more difficult which in turn has lead to
rejection of financing cases which is also impacting the sales volumes in the two wheeler sector.
Price hikes mainly due to raw material cost push
Prices of key raw materials such as steel and aluminum had started moving up since January 2008, which led
to few price hikes by the players in the two wheeler market which in fact deteriorated the situation to worse
level for the struggling two wheeler industry.
Consumers of two wheeler market had started postponing their purchase decision due to rising prices of
vehicles. However, since October 2008 price of steel has softened to a marginal extent and so there is not
much scope of a price cut. Even if there is a price cut, we believe that the price cut will not fuel the growth of
two wheeler sales volumes, as the main problem faced by the two wheeler industry still remains due to lack of
financing.
Key Segments
2009
(INR. M)
2010
(INR. M)
2011
(INR. M)
2012
(INR. M)

Market analysis and knowledgebase: A study on indian non- life insurance and automobile business.2008

Market analysis and knowledgebase: A study on indian non- life insurance and automobile business.2008

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Market analysis and knowledgebase: A study on indian non- life insurance and automobile business.2008