General COVID Impact on the financial services industry

Indian insurance industry has not been able to insulate itself from the growth pressures faced by Indian economy in general. During the pandemic, the risk management practices that were adopted by the companies have been put to acid test currently.

COVID 19 global pandemic was a double blow for the Indian economy which was already struggling. According to the World Bank, the current pandemic has “magnified pre-existing risks to India’s economic outlook”.

What began as a health crisis, quickly unfolded into a business crisis. There is hardly any business sector that has been left untouched by the novel coronavirus COVID-19. outbreak. Aviation, Tourism, Manufacturing, Transportation, the banking, financial service and insurance (BFSI) and Retail industries top the list.

In March, India imposed a nationwide lockdown with the hope to contain the outbreak. The Indian lockdown which lasted for nearly three months, was supposedly the most stringent lockdowns the world has seen.

To steer the country through these unprecedented times, the Indian central bank – Reserve Bank of India and the Indian government have implemented several measures – fiscal, legislative, and operational. The Government of India began a series of initiatives – all non-essential services in the country were halted (insurance was classified as essential), an aid package of more than USD 260 billion was dispensed to create a self-reliant India and several labour law initiatives were undertaken. The healthcare space also witnessed a drastic shift with the opening-up of the telemedicine sector in India and remote treatments being made accessible.

In April 2020, India also changed in foreign investment policy to curb “‘opportunistic takeovers/acquisitions’ of Indian companies due to the current pandemic”. The revised policy ensures that all foreign investments from countries that share a land border with India will now be under scrutiny of the Indian Ministry of Commerce and Industry.

Challenges faced by the insurance industry

The COVID-19 crisis raised short term and long tail challenges equally for the insurance industry. Insurance companies were facing operational and procedural challenges, revenue dips and depleting reserves as well as the mandate to meet the growing coverage requirements faced by the entire country.

Insurance players had to attend to concerns such as:

  • Business continuity: Risks on an insurance companies own existence was required to be planned for and several stress-test mechanisms were kickstarted.
  • Employee well-being: While the insurance industry is moving towards digitisation, it is and will always be employee centric. With the government classifying insurance as an essential service, employers were required to strike a balance between work-from home procedures and the requirement of face-to-face interactions with customers. This also presented an increased exposure to the virus.
  • Crisis management: Insurance companies are expected and required to monitor the evolving situation of the pandemic and initiate all measures necessary to effectively communicate and manage employees and customers. Moreover, an insurance company is required to maintain effective and frequent communication with regulator, customers, partners, agents, brokers, shareholders, etc. to build confidence and ensure continuity of service.
  • Capital adequacy: Indian insurance companies are required to maintain a prescribed regulatory solvency and ensure financial resilience. While unprecedented exposures are accounted for to an extent, the pandemic had the potential of sending balance sheets into a tailspin.
  • IT infrastructure and cyber security: With the gear increasing on remote access requirements, a tall order of building an appropriate IT infrastructure was asked for in a very short span of time. There was a heightened risk of cyber incidents and insurance companies were inevitably vulnerable and easy targets.
Regulatory challenges and initiatives

The Indian insurance regulator – Insurance Regulatory & Development Authority of India (IRDAI) has continually released several instructions and clarifications that steered the course of insurance responses to the pandemic.

  • Insurers were instructed to accept COVID-19 related claims under active health insurance policies even though underwriting and actuarial procedures did not account for such increased exposures.
  • IRDAI advised insurance companies to extend the grace or delay period by 30 days in case of policy lapse or renewal.
  • Specialised short term COVID health insurance products were launched with fixed benefits
  • A standardised product COVID product was also launched to provide protection to a large number of employees engaged in manufacturing, services, SME, MSME, logistics sector and migrant workers, catering to their medical needs.
  • Several regulatory compliances were relaxed or timelines were extended by IRDAI
COVID Impact on health insurance

The pandemic has driven the realisation of needing protective investments – specially health and life. There has been a promising uptake of 30-40% in health insurance adoption. The tipping scale has moved from health insurance being a ‘push’ product to a ‘pull’ product.

In the wake of the COVID crisis the health insurance industry has seen tectonic shifts and has become the collective priority of businesses, the government, and people. The demand for health insurance has increased but underwriting thresholds have also seen a rise. India has been an under-insured country even though the mass insurance scheme – Ayushman Bharat launched for the poor, seemed to have bridged the gap significantly.

While in the short term, insurers have responded to the call for adequate coverage, concerns are rising on the long term and indirect effects of the pandemic. Experts have analysed that COVID-19 interacts adversely with co-morbidities such as diabetes, renal and other chronic diseases and any impact may prolong conditions resulting in a longer trail of non-COVID-19 claims also.

Further, typical insurance policies and specifically the Ayushman Bharat scheme does not cover the impact of setting up isolation wards which would increase underwriting assumptions and cost calculations significantly.

On the other hand, newer products are developing and insurers may switch to developing specific products rather than standard wordings, while retaining the need for simplified policies.

COVID Impact on different lines of business
  • Life insurance: The crisis is expected to result in customers rushing to increase covers. The market would see a reactive boost in demand in term insurance. Investment-linked products may not see major demand due to a volatile stock market.
  • Motor insurance: The automobile space would see a lack of purchase of new vehicles and fewer vehicles in transit thereby reducing the chances of accidents resulting in a decline in new policies and reduced claims on existing policies. However, a dichotomy exists as social distancing is expected to persist for a long period of time causing a surge in private vehicles – two-wheeler and low cost four wheelers, thereby increasing the need for insurance. A shift anchored by COVID-19 can be seen in new usage-based motor insurance policies that were launched recently which allows owners to insure vehicles for the kilometres they intend to drive.
  • Property insurance: Large impact on property insurance is seen with the trigger of the 30 day no-occupancy exclusions of property damage insurance policies. This clause is likely to bring in a large chunk of disputes.
  • Professional Indemnity: While work is being carried out at home, there seems to be an increase in potential vulnerabilities that organisations face. The management is making decisions in the teeth of daily changing government policy. Actual or alleged breach of duty, negligent act, error, omission, misstatement, misleading statement, breach of warranty or breach of confidentiality, all are actions and/ or inactions that may trigger a claim against an organisation.
  • Business interruption insurance: BI losses has been a major area of discussion during this time of the pandemic. In Indian policies, property damage triggers business interruption losses and advanced loss of profits, hence triggering disputes and debates over BI losses caused even without physical damage to property. In India, the market is not tested as the judicial functions were largely suspended.
  • Directors and Officers liability insurance: In the wake of crisis, the Directors and officers may face a litigation from the employees as employees may contract COVID 19 while travelling to work or while working in the office premises. Further, there may be an increase in security class action suits where typically allegations would include, (a) failure to disclose or adequately disclose risks that company faced – or failure of the company to update prior disclosures as circumstances evolved; (b) inadequate steps to mitigate risks; (c) failure to observe recommended or required protocols; or (d) failure to develop adequate contingency plans. Also, though many existing D&O policies may not be written with cyber and technology related risks in mind, the failure to protect against and insure for privacy or cyber liabilities could potentially lead to D&O liability.
  • Cyber insurance: A major boost is seen and is further expected in cyber insurance due to a reliance on remote access and increasing risks and vulnerabilities.

The insurance industry has witnessed a massive shift towards digitalisation. The global financial crisis in 2008 propelled the redesigning of payment systems and processes and now COVID-19 has forced the insurance industry to adopt remote and digital ways of working and it is undoubtedly set to drive a wider acceleration of technology adoption across the industry. This is a trend, of course, that has already been with us for some years: but the current situation will significantly expedite it

Insurers have undergone digital transformation at the product level or specific elements in the supply chain but now will be urged to reprioritise technology spend into insurtech, digital distribution and technological infrastructure.

What we at Khaitan Legal Associates think?

Government and IRDAI did some quick thinking and responded to COVID 19. Even the insurance industry rose to the challenge and aligned itself with the larger objective of the Government and IRDAI in alleviating the impact of the pandemic and its fallout on the policyholders.  Unlike several other jurisdictions, where the insurance/financials services regulator became eager to intervene in existing insurance covers, especially in the area of business interruption, the IRDAI thankfully exercised restraint in India. However, now when the worst seems to be behind us, the Government and IRDAI should get back to rebuilding the insurance story. The India growth story will be incomplete without a robust insurance sector, so the focus should be back on reinvigorating the insurance sector. Some work has commenced but a lot more needs to be done.

Footnote :

Circular Ref. No.IRDAI/HLT/REG/CIR/054/03/2020 IRDAI press release dated 23-03-2020


Growth of the Indian insurance industry till the USD 100 billion threshold

While numbers certainly reveal something, they may not relay the complete story. India has crossed a significant milestone by reaching USD 100 billion threshold, however there is immense potential for the market to grow.

The Insurance industry has been at the forefront of economic development in India and has driven the growth of our gross domestic product (GDP) in the last decade. The gross premium in the Indian insurance industry has reached approximately USD 100 billion with approx. USD 71.1 billion from life insurance and USD 23.38 billion from non-life insurance, pushing the country’s sector into the league of larger insurance economies globally. In life insurance business, India is ranked 10th among the 88 countries, for which data is published by Swiss Re and 15th in global non-life insurance markets.

Post liberalisation and privatisation, the regulatory changes enabling growth in the domestic insurance industry started from the Insurance Law (Amendment) Act in 2015 which increased the foreign direct investment (FDI) limit in the insurance sector from 26% to 49% to help attract foreign investments in the sector. Since then, insurers have been allowed to raise hybrid capital such as subordinated debt and/or preference shares from both onshore and offshore investors, divest equity through initial public offerings.

The insurance regulator IRDAI with support from the Government of India has taken a multifaceted approach towards developing the local insurance market.

Creation of reinsurance hub

The Indian reinsurance sector has a good number of players (both domestic and cross border reinsurers) to promote a healthy and competitive market for reinsurance, and it is expected that the capacity will increase which will result in to the establishment of a reinsurance hub in India in near future. A number of factors including the recent regulatory changes, India’s geographic advantage of being located in the heartland of South Asia with conducive relationships with the Chinese and Middle Eastern markets, the emerging economy and the exposure to increasing natural catastrophes allows India to become a regional reinsurance hub and expand aggressively and inclusively.

The development and benefits of IFSC GIFT City in Gujarat (infrastructure, exchange control relaxations and tax benefits) has garnered interest of many insurers, reinsurers and intermediaries which demonstrates the potential of GIFT City to match up to global financial centres in Singapore, London, Tokyo and Dubai and further facilitate the creation of a regional reinsurance hub in India.

Risk based capital regime

The regulator is currently weighing the option of shifting calculation of capital of insurance companies to a risk based regimes from a solvency denominated regime. This will ensure light touch supervision for entities that manage their risk well and will allow them to maintain minimum capital to support its overall business operations in consideration of its size and risk profile. While there are serious fatalities that are predicted, in the coming years some form of price discipline may be implemented to create a balance and democratise the process of calculating capital requirements.

Innovation Sandbox

Indian insurance development has always been conventional and conservative in its approach, however, the rise of digital technologies are ushering in a more precise, data-driven era, creating huge opportunities for insurers to demonstrate their value and to reap the financial rewards of doing so. Parallely, today’s customers have greater access to integrated information and their behaviour towards seeking and purchasing insurance products has immensely changed. The lack of brand loyalty and the need for exemplary customer satisfaction compounds the competition between insurance providers and the requirement to innovate and create seamless products further intensifies.

Insurance companies are now embracing InsurTech disruptors instead of combating them and are developing enterprise innovation models. IRDAI is granting access to start-ups and aggregators and is also enabling the innovation sandbox experiment. IRDAI has recently released the ‘Report of the Committee on Regulatory Sandbox’ which recommends that a regulatory test environment is needed to foster growth in the insurance value chain and increase the pace of the most innovative companies, in a way that provides InsurTech in particular and the Fintech sector as a whole with flexibility in dealing with regulatory requirements and at the same time focussing on policyholder protection and managing risks in a controlled environment.

Government Schemes

The Government of India has launched various social insurance schemes under various insurance segments that have instrumentally created more insurance penetration and sectoral growth. In April, 2016, the Government of India had launched Pradhan Mantri Fasal Bima Yojana (PMFBY), the flagship scheme of the government for agricultural/ crop insurance in India. Enrolments under the Pradhan Mantri Suraksha Bima Yojana (PMSBY) reached 130.41 million in 2017-18.

Industry experts have predicted that the government’s ambitious national health protection scheme- Ayushman Bharat scheme covering 100 million poor and vulnerable families with a cover of Rs. 5 lakh (US$ 7,723) per family of tertiary care and hospitalisation will be transformative for the insurance industry as it would have a major multiplier effect on a host of allied sectors like pharmaceutical, medical devices, data management, insurance hospitality and human resource management.

While the insurance sector regulator is rapidly taking the insurance market into the next phase of growth, other financial services regulators and law makers of the country are looking to holistically incentivise insurance market players. For e.g., some insurance products are covered under the EEE method of taxation, which translates to an effective tax benefit of approximately 30% on select investments and exchange control regulator has opened the market for offshore borrowings etc.

Having crossed a major milestone, the Indian insurance industry is expected to grow significantly by 2019-20, aided by the Centre’s Ayushman Bharat health insurance scheme.


India’s journey towards meeting the global IFSC benchmark

The year 2019 is beginning to show immense promise for the growth of India’s first International Financial Services Centre – GIFT City, Gujarat. GIFT City is a ‘smart’ city with high-quality physical infrastructure, an IFSC structured as special economic zone and global financial hub.

The International Financial Services Centres Authority Bill, 2019 was recently passed by the country’s cabinet to establish a unified regulator to oversee the dynamic financial services undertaken in GIFT City and ease inter-regulatory coordination.

The need for a coherent regulatory framework for India’s first IFSC was recognized in the Union Budget 2018, when the Finance Minister of India proposed the idea of a unified regulator to play the key role of a catalyst and provide an integrated and undivided approach to the ease of doing business with a single window clearance. It was also advocated that one of the most important roles of a unified regulator would be to act as an enabler by creating a conducive regulatory framework that is benchmarked globally. It would not be helmed around domestic rules and regulations, and instead would try to create a level playing field for the IFSC to compete globally.

This development forms part of a series of steps that the government has taken recently to promote GIFT City. Over the last three years, the Regulators in India namely Reserve Bank of India (banking and exchange control), Securities & Exchange Board of India (capital markets), Insurance Regulatory & Development Authority of India (insurance, reinsurance and insurance intermediaries) have created the issued regulatory framework allowing Indian and foreign financial institutions to open their offices in GIFT City.

The framework for allowing foreign insurers and reinsurers to set up shop in GIFT City was already provided by insurance regulator IRDAI. GIFT City presents itself as an opportunity to insurers and reinsurers globally to penetrate the Indian markets providing immense growth potential as an industry.  GIFT City caters to customers outside the jurisdiction of the domestic economy and allows financial interactions between service providers and customers across borders.

Late last year, IRDAI notified the revised norms under the order of preference which places insurers and reinsurers set up in GIFT City above global cross border reinsurers.

With the advent of the regulatory framework for setting up insurers and reinsurers in the realm of IFSC, the enabling of insurance intermediaries to set up in IFSC was much awaited. Recently in January, the framework to facilitate the entry and operations of domestic intermediaries in GIFT City was unveiled by IRDAI. Incentives in direct and indirect tax coupled with regulatory ease for setting up and operations have made the prospects of new business and growth brighter for insurance intermediaries.

The recent Vibrant Gujarat Summit 2019 brought about major optimism in global investors and the available opportunities in GIFT City.

Mr. Subhash Chandra Khuntia, Chairman of IRDAI said that GIFT City has the potential to emerge as a hub for the reinsurance sector for inbound and outbound financial transactions. Mr. Uday Kotak, vice chairman and MD of Kotak Mahindra Bank highlighted four sectors where GIFT City offers immense opportunities for business. These are stock markets, offshore asset management, offshore banking and Reinsurance. “India has the best minds in asset management, but we find that they move to other financial services centre as there were not similar centres in India. With GIFT City, we can present this brain drain,” said Kotak

Global Financial Centres Index, the world’s most authoritative comparison of the competitiveness of the world’s leading financial centres has recently featured GIFT City as one of the significant emerging IFSCs in the latest edition of ‘Global Financial Centres Index 24 (GFCI)’, released in London in September 2018. GIFT is ranked third in the list of the GFCI report, which has highlighted 15 centres that are likely to become more significant in the next few years.

“It is a great achievement for GIFT IFSC to join the GFCI so early in its development as a financial centre and is very encouraging that so many respondents see GIFT as becoming more significant in the future,” said Mark Yeandle, Director of Z/Yen Partners and the author of the Global Financial Centres Index series. The rank takes into consideration five major factors namely business environment, human capital, reputation, infrastructure & financial sector development. This is a significant achievement for a centre entering for the first time in the main index, GIFT City noted.

“The recognition of GIFT IFSC in list of most significant emerging financial centres and entry into main index of global financial centres by GFCI is the testimony of the contribution GIFT IFSC is making in the international financial services business,” said Ajay Pandey, MD & Group CEO, GIFT City.

The GIFT City profile in the latest GFCI report also states that GIFT City is a gateway for inbound and outbound business from India. GIFT City is fast emerging as a preferred destination for undertaking International Financial Services. GIFT City covers Banking, Insurance, Capital Market and allied services covering law firms, accounting firms and professional services firms. It provides very competitive cost of operation with competitive tax regime, single window clearance, relaxed Company Law provisions, International Arbitration Centre with overall facilitation of doing business.