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The Indian Liability Insurance Kaleidoscope – A commentary on the Past, Present and Future.
THE PAST
In India, in the pre-liberalisation days, Liability Insurance remained in the realm of the unknown, un-demanded and unsold. The advent of private companies eager to bring different products into the market changed that – but only a bit. Why “only a bit “ ? Let us examine the statistics of Liability insurance in developed insurance markets to see where we stand . In US, 50% of the Non-life General Insurance premium comes from Liability Line of Business. In Europe, the share of liability insurance in the entire non-life premium could be between 25% to 40%. In India however liability insurance accounts for only 3% of the Non-Life Insurance Premium.
As a keen observer of Liability Insurance in India, some of the reasons which quickly come to my mind are as follows:
The Indian Mindset pertaining to Liability Insurance–
The fatalistic Indian attitude “whatever has to happen will happen anyway!” and the Karmic theory of past sins being responsible for any misfortunes visiting us; prevent us from being a redressal/compensation seeking society. The low legal awareness coupled with low insurance awareness affected the growth and development of this line of business.
Liability Insurance has been mostly bought (but not sold) in the pre-liberalisation
era –
Thus where the customer demanded liability insurance, the demand was met but the insurance industry prior to liberalization did not impart any sales focus to this line.
Lack of indigenous underwriting authority and capacity for large proposals –
Prior to the advent of private insurance companies in India, the Insurance Industry was dependent on foreign underwriting and reinsurance for specific lines of Liability Insurance such as Directors and Officers and Professional Indemnity. Lack of autonomous authority also stunted the growth of this product.
Inappropriate policy wording for locally accepted/ underwritten liability
risks –
Casualty lines of business namely product and public liability had decent local capacity available in the market through the market agreement structure but the wording which catered only to low litigation Indian Market did not find acceptance in the international market. Therefore buyers of insurance found it easier to wriggle out of insurance mandates rather than incept locally admitted covers granting worldwide coverage.
Lack of Liability claims handling infrastructure of the Indian Insurance
Industry –
A resultant effect of lack of focus led to inadequate infrastructure for claims handling. Even to-date it is recognized that Indian Liability Insurance Market is fuelled by global exposures which in turn demand global claims handling.
It is difficult to pinpoint one single predominant reason for the low demand but together they make a compelling case for the retarded growth of Liability insurance in India in the past.
THE PRESENT
Since then Liability Insurance has like the proverbial chrysalis emerged from its cocoon to assume the form of an attractive butterfly. This would not have been possible without its charm being appreciated by all the stakeholders in the insurance business - the broker, the insurance buyer and the insurer.
For the Insurance Buyer:
Liability Insurance keeps pace with his global ambitions. Whether he is contemplating venturing out of domestic boundaries to contemplate exporting his products and services to tough and unknown jurisdictions or even engaging in mergers & acquisitions, Liability Insurance minimises the downside of every transaction.
Liability Insurance is often the only source of financial recourse in the event of litigation. Compare this with an asset loss. When an entrepreneur suffers loss of assets even if his insurance is inadequate, based on other parameters, banks and other financial institutions will bail him out of distress by reconstruction/restructured financial packages and soft loans. But an unfortunate entrepreneur when faced with litigation finds no help for expensive legal fees (and God forbid if damages are awarded against him) from any financial partner other than his liability insurer. It is for this reason alone that insurance buyers faced with global liability exposures must not compromise on either the adequacy or the quality of liability insurance.
Duty to defend Claims handling also make a compulsive case for buying Liability Insurance. Some of the claims provisions in Liability insurance almost make it possible for the insured to effectively outsource adverse litigation management . ( The caveat of course is that this is also subject to adequacy of the sum insured). The concomitant advantages are giving him un-paralleled claims expertise in the jurisdiction where the claim is filed against him, keeping his claims costs down to the minimum (and also his renewal premiums) and letting him go about his own business undisturbed.
For the Brokers:
Intermediation in this line of Business is viewed as unquestionable value addition by Insurance Buyers.
When a market is used to direct relationships with no more than a handful of insurers who provide the same coverage at supposedly the same rates, the bigger challenge for brokers is to be seen providing a definite value addition through their intervention in Risk Management and Insurance Buying. However, liability line of business is one area where coverage, interpretation, premium and getting the best deal depends largely on product knowledge and negotiation skills. Here the inputs of a professional broker have not been questioned in the market by serious buyers of Liability Insurance.
Brokers are most suited to structure Liability programmes with large limits of liability. When negotiating for liability policies which obviously go beyond the insuring capacities of most Insurers in the market, the broker is aptly poised to structure the deals through their primary and excess layers, thus providing a seamless package to the Insurance Buyer.
For the Insurers:
For Insurers in India the low claims experience in this line of business makes it lucrative to develop it further. The claims experience on this for most insurers has been quite favourable encouraging many of them to seek liability insurance from their clients in order to accommodate other non-profitable lines of business. Even on a stand-alone basis liability insurance permits the Insurer to have a higher risk taking appetite at the same time keeping the overall claims ratio within controllable limits. The only caution is to put in adequate reserves to meet an unexpectedly large claim if ever it arises.
Liability Insurance in India is virtually an untapped market yet and with the current growth of the Indian economy with obvious emphasis on globalization from Indian entrepreneur, there is only one way that demand for liability insurance can go – up !
THE FUTURE:
The pioneering pains are behind us, but how does the future augur for this line of business ? Pro-activity to ensure future development for the Liability Line of Business leads me to propound the TEST (Training, Expanding, Self-reliance and Targeting) strategy as follows:
- Training:-
Expertise in this Line of business needs to be felt across the industry and not in some pockets. Insurance players have to appreciate the need for intensive training needs in liability insurance because most classes of liability insurance demand intensive and sophisticated underwriting.
- Expanding the Pie:-
The key word in marketing liability insurance within developing economies is to expand the pie, rather than attack existing liability business in the country and compete on the same with existing players. This can only serve as a starting point; it cannot sustain long term growth. Long term growth is achieved by analyzing the market, seeing the need for liability insurance from the consumer which has not been catered to by existing players and being the first in the country to provide the same.
- Self-reliance:-
It is a must to develop indigenous underwriting capability and expertise – No insurer of substance can over hope to grow his liability book, if he is constantly dependent on foreign markets for underwriting support both technical and in terms of capacity. It is a must therefore, to set up and nurture a liability department, within the company so that strong pillars of future basis of growth, viz. global expertise, local adaptability and quick decision-making are set up. This and only this, can establish the confidence of the ultimate consumer in placing and renewing liability business with the insurer.
- Targeting:-
It makes good sense to align marketing strategies with growth of the industrial sectors and economic trends within the economy. Let me illustrate this further. Five years not so long ago, a survey was conducted on the D&O insurance policies sold within the country – and found that D&O Liability insurance was bought by companies who accessed funds from the stock exchange abroad. Thus Indian Companies who had ADR / GDR issues or were listed on foreign stock exchanges were more likely to incept D&O insurance, in keeping with the litigious trends of that country.
Another example can be derived from the fact that Liability insurance in the country has grown with the growth of the IT sector. As Indian IT service suppliers moved up the value chain from mere body-shopping agencies to executing turnkey IT projects, they had to satisfy mandates of Liability Insurance from their customers located abroad.
From there on it was constantly remembering the most oft repeated mantra; “Find the need and fill it”.
This has been an attempt to lend the past present and future perspectives on Liability insurance and to most practitioners of insurance, I will end with one of my favourite quotes on Liability insurance . For anything human, you have to understand it to be able to love it, but for anything divine you have to love it before you can even begin to understand it and in that respect Liability insurance comes closest to divinity !
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Issue 6 | March 2007