Speeches and Remarks

Remarks by David C. Mulford, U.S. Ambassador to India, at the conference on "Building a Vibrant Insurance Market in India" Taj Mansingh Hotel, New Delhi October 6, 2005                                                                            (VIDEO)

As prepared for delivery

It is a pleasure to be here this morning to open this conference.  First, I would like to thank Chairman Rao of the Insurance Regulatory and Development Authority (IRDA) for organizing this event.  This gathering of international and Indian investors, business leaders and industry specialists draws together the "framers" of this industry.  When we do business together, we create ties between countries and societies that go beyond government agreements and business codes.  I am convinced that private sector growth will nurture the U.S.-India relationship of tomorrow and be the engine behind India's future and its emergence as a global player.
 
India's insurance industry is yet another example of the positive effects of competition and new investors in the marketplace.  As we know, India opened its insurance market to the private sector in 1999 when parliament passed a new law establishing an independent regulatory body to oversee the insurance market.  The law opened the door for participation of private insurance companies and a limited participation of foreign insurance companies through joint ventures with Indian companies.  The law also charged insurance companies to make available insurance products and services to the huge segment of the population that are vulnerable and not necessarily part of the formal economy.

The results of the liberalization are there for everyone to see.  The insurance markets -- both life and non-life -- have grown impressively.  IRDA is working on a regulatory framework that helps level the playing field for all types of insurance companies, irrespective of their ownership.  Since 1999, IRDA has licensed 22 new private Indian insurance companies, an overwhelming number of which have global insurance companies as their partners.  To date, the industry has attracted foreign direct investment of $235 million.
 
In 2004, Indian insurance companies mobilized over $21 billion, nearly three times as much as in 1999 ($8 billion).  In other countries, this kind of capital mobilization provides crucial resources for investment in infrastructure, corporate businesses, long-term bonds, and municipal projects.  Once India does more to free insurance companies to invest in such important sectors, it too can gain benefit from this long-term financial resource.  
Other improvements are occurring as well.  New insurance products such as product liability insurance, professional liability insurance, small/medium size enterprise insurance, weather insurance, and group health insurance for the poor have been launched.  Private insurance companies are also using banks, microfinance institutions and cooperatives to increase their market share and compete with well-entrenched state-owned insurance companies. 

The marketplace is getting competitive, but the market share of private insurance companies remains very low -- in the  10-15 percent range.    The heavy hand of government still dominates the market, with price controls, limits on ownership, and other restraints.  We have seen what happens in India when a market is truly opened up.  We saw it in the IT sector, we saw it in the telecom sector, and we are seeing it in the aviation sector.  Why can't insurance be next?  India's insurance market remains very small compared with some of the major emerging markets.  South Africa and South Korea, with a fraction (one-twentieth) of India's population, do at least twice as much insurance business as Indian companies did in 2004.  This is a major missed opportunity for India's economy.  A vibrant insurance market can support the economy by providing long-term capital -- equity and debt -- to the private sector.  For example, in the U.S. over two-thirds of financial assets of insurance companies are in corporate bonds and equities, municipal securities and commercial mortgages.
 
Insurance also shields households and businesses from irrecoverable loss, such as from major natural disasters, illness and death.  In India, 80 percent of health care is privately provided, yet only 10 percent of the population has access to health insurance.  Therefore, many individual households have to pay the full out-of-pocket costs for health treatment.  

What will expand the insurance industry and help it contribute to the economy?  Major policy and institutional issues have to be addressed and changed.   

Insurance is a capital-intensive industry.  It is also a long-gestation business.  India's insurance industry needs capital, and a major source of capital would be from foreign investors, who are now limited to 26 percent ownership.  India needs to raise the cap on Foreign Direct Investment (FDI) to attract capital for the industry.  For some time there has been an understanding that the FDI cap will be raised to 49 percent, and many companies entered the Indian market with this expectation.  Failure to follow through in raising the cap is increasingly seen by investors as a breach of faith. 

I have come here today to say that this promise needs to be delivered, not 5 years from now, but soon, if India wishes to regain its credibility in the eyes of foreign investors.  Increasing the cap on FDI will both enhance the growth of the insurance industry and improve global confidence in India as a business and investment destination.  
I believe the cap should be raised above 50 percent within a short period so that foreign investors would have management control commensurate with their investment and the flow of FDI to the sector will increase.  Leading foreign companies bring more than capital to the insurance industry.  They also bring generations of successful experience in managing and growing the industry.
 
The benefit of the long-term capital that the insurance industry mobilizes is also being lost as a source of long-term capital.  In India, over 60 percent of the insurance industry's financial assets are locked in government securities.  Investment guidelines for insurance companies prescribed by the regulator must be changed to allow and promote access to insurance funds by the corporate sector and infrastructure projects.
There is also a strong case for raising the FDI cap for reinsurance and auxiliary insurance services, such as brokerage and actuarial services. 

I understand that major lines of non-life insurance business such as fire and car continue to be governed by a pricing regime that is administered and not risk-based.  This distorts the market and makes it inefficient.  It has prevented the emergence of a culture of underwriting in insurance companies.  The IRDA needs to dismantle this regime to make these segments of the market truly competitive.

The IRDA should also seek to create a regulatory regime that promotes the most efficient use of capital, eliminates avoidable micro-management of business practices, allows companies to price their products prudentially, and levels the playing field between private and state-owned insurance companies.   When markets are competitive and responsive to consumer demand and preference, it is the consumer that benefits in terms of lower cost and increased ability to manage risks.

I mentioned health as an area that is underserved by the insurance industry.  India as an economy has high health spending but poor health outcomes.  With no pooled risk sharing from insurance policies and a health care system that is primarily private, the cost to individuals becomes a major economic burden.  For this reason, many microfinance institutions are finding that a primary use of micro loans to the poor is to pay medical bills. 

While I have highlighted some of the progress and the need to raise the cap on FDI in the insurance sector, I would like to note a number of other important impediments India's insurance industry faces.  The current minimum capital requirement of $22 million capital for setting up a health insurance company is a significant barrier to entry, particularly when FDI is restricted to 26 percent.  The lack of data from both health providers and from existing claims makes risk-based pricing of health insurance products difficult.  The absence of an appropriate regulatory framework  that enforces a minimum level of service and hygiene standards is an important reason the health insurance market in India is so underdeveloped.  It is not surprising that not a single health insurance company is among the 22 new private insurance companies licensed since 1999.  Clearly, the IRDA and the Ministry of Health need to work in tandem to solve these problems.
 
Another area where the insurance industry is not doing its job is helping mitigate the risks for personal and business loss from natural catastrophes.  In the past decade, India and China accounted for one-fourth of the global economic losses from natural disasters.  Insurance availability in India for natural catastrophes is almost negligible.  As we have seen with the Indian Ocean tsunami, the absence of a "safety net" for property lost in a disaster has led to substantial personal loss and slowed economic recovery.

I am pleased to see that many of the issues I have raised are part of this conference's agenda.  I encourage you to be open in your thinking and discussions.  The development of the insurance industry during the past five years demonstrates the transforming effect of economic liberalization.  I urge you to consolidate the gains achieved during this period and move boldly forward from there.
 
Thank you.