Sun Life Financial and

Indian Economic Surge

Case Analysis – International Business

The entry of Sun Life Financials, a leading international

financial services organization into the Indian insurance
market is analyzed here and also the attractiveness of
Insurance markets in India and China is discussed, followed
by recommendations to the respective governments on
how to attract more FDI.
Q1) How is the insurance market in India changing? Why is India an attractive
market for investment?

Indian insurance is a flourishing industry, with several national and international players competing to
excel. With several reforms and policy regulations, the Indian insurance sector has witnessed tremendous
growth in the recent past.

Insurance is a federal subject in India. There are two legislations that govern the sector- The Insurance
Act- 1938 and the IRDA Act- 1999. The insurance sector in India has come a full circle from being an
open competitive market to nationalization and back to a liberalized market again. Tracing the
developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost
two centuries.

Present Scenario

The Government of India liberalized the insurance sector in March 2000 with the passage of the
Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private
players and allowing foreign players to enter the market with some limits on direct foreign ownership.
Under the current guidelines, there is a 26 percent equity cap for foreign partners in an insurance
company. There is a proposal to increase this limit to 49 percent.

The opening up of the sector is likely to lead to greater spread and deepening of insurance in India and
this may also include restructuring and revitalizing of the public sector companies. In the private sector 12
life insurance and 8 general insurance companies have been registered. A host of private Insurance
companies operating in both life and non-life segments have started selling their insurance policies since
2001.

Non-Life Insurance Market

In December 2000, the GIC subsidiaries were restructured as independent insurance companies. At the
same time, GIC was converted into a national re-insurer. In July 2002, Parliamant passed a bill, delinking
the four subsidiaries from GIC.

Presently there are 12 general insurance companies with 4 public sector companies and 8 private insurers.
Although the public sector companies still dominate the general insurance business, the private players
are slowly gaining a foothold

Re-insurance business

Insurance companies retain only a part of the risk (less than 10 per cent) assumed by them, which can be
safely borne from their own funds. The balance risk is re-insured with other insurers. In effect, therefore,
re-insurance is insurer's insurance. It forms the backbone of the insurance business. It helps to provide a
better spread of risk in the international market, allows primary insurers to accept risks beyond their
capacity, settle accumulated losses arising from catastrophic events and still maintain their financial
stability.

While GIC's subsidiaries look after general insurance, GIC itself has been the major reinsurer. Currently,
all insurance companies have to give 20 per cent of their reinsurance business to GIC. The aim is to
ensure that GIC's role as the national reinsurer remains unhindered. However, GIC reinsures the amount
further with international companies such as Swissre (Switzerland), Munichre (Germany), and Royale
(UK). Reinsurance premiums have seen an exorbitant increase in recent years, following the rise in threat
perceptions globally.

Life Insurance Market

The Life Insurance market in India is an underdeveloped market that was only tapped by the state owned
LIC till the entry of private insurers. The penetration of life insurance products was 19 percent of the total
400 million of the insurable population. The state owned LIC sold insurance as a tax instrument, not as a
product giving protection. Most customers were under- insured with no flexibility or transparency in the
products. With the entry of the private insurers the rules of the game have changed.

The 12 private insurers in the life insurance market have already grabbed nearly 9 percent of the market
in terms of premium income. The new business premiums of the 12 private players has tripled to Rs 1000
crore in 2002- 03 over last year. Meanwhile, state owned LIC's new premium business has fallen.

There are very few opportunities in the world that are as large as the India opportunity: with a population
of almost 1.2 billion, the market is enormous; the number of skilled, English-speaking people in the
workforce is impressive; and the government has proven to be very stable. Most economists agree that
India will have solid, stable growth for the next 20 to 30 years. Investing at the ground floor of the growth
phase of the Indian economy is a once-in-a-lifetime opportunity. There are very few investment
opportunities that can compare to the Indian market in the long term.

Q2) Why did Sun Life Financials enter the Indian Market?
With a huge population base and large untapped market, insurance industry is a big opportunity area in
India for national as well as foreign investors. India is the fifth largest life insurance market in the
emerging insurance economies globally and is growing rapidly. This impressive growth in the market has
been driven by liberalization, with new players significantly enhancing product awareness and promoting
consumer education and information. The strong growth potential of the country has also made
international players to look at the Indian insurance market. Moreover, saturation of insurance markets in
many developed economies has made the Indian market more attractive for international insurance
players,

Research Findings

 Total life insurance premium in India is projected to grow Rs 1,230,000 Crore by 2010-11.

 Total non-life insurance premium is expected to increase at a CAGR of 25% for the period
spanning from 2008-09 to 2010-11.

 With the entry of several low-cost airlines, along with fleet expansion by existing ones and
increasing corporate aircraft ownership, the Indian aviation insurance market is all set to boom in
a big way in coming years.

 Home insurance segment is set to achieve a 100% growth as financial institutions have made
home insurance obligatory for housing loan approvals.
  Health insurance is poised to become the second largest business for non-life insurers after motor
insurance in next three years.

 A booming life insurance market has propelled the Indian life insurance agents into the ‘top 10
country list’ in terms of membership to the Million Dollar Round Table (MDRT) — an exclusive
club for the highest performing life insurance agents.

Nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-
life insurance continues to be below international standards. And this part of the population is also subject
to weak social security and pension systems with hardly any old age income security. This itself is an
indicator that growth potential for the insurance sector is immense.

A well-developed and evolved insurance sector is needed for economic development as it provides long
term funds for infrastructure development and at the same time strengthens the risk taking ability. It is
estimated that over the next ten years India would require investments of the order of one trillion US
dollar.

All these factors combined have lured international players like Sun Life Financials to enter the Indian
market

Q3) What was the entry mode in India for Sun Financials and Why?
Sun Financials made a Foreign Direct Investment in India by forming a Joint Venture with Aditya Birla
Group. Sun Life acquired 50% of the equity in Birla Capital International AMC Limited and Birla
Capital International Trustee Company Limited.

Sun Life and Aditya Birla Group also established a new sales and distribution company to market a broad
range of financial products and services across India. Sun Life was looking forward to working with the
Aditya Birla Group, a well known and respected name in India. By combining Aditya Birla Group’s
reputation and proven track record in financial services with their international expertise in asset
management and life insurance, Sunlife could maintain a competitive advantage to provide excellent
customer value to clients

Reasons for forming Joint Venture:

 To enter into a foreign country

 Sharing risks as well as costs involved in setting up the business.
 Good brand name and relations of the Local company can be capitalized.
 Suppliers, distributors and established channel partners of local company can be utilized.
 Cultural bridge can be minimized
 Unable to get 100% FDI due to government restrictions. The IRDA act of 1999 had put a 26
percent equity cap for foreign partners in an insurance company.
 Joint ventures are a necessity by government
  Profit sharing/market sharing

Q4) Compare India & China’s attractiveness from the perspective of an

Insurance & Financial Service Company
Life markets in China and India are developing quickly in parallel.
POPULATION & GDP GROWTH - Combined, China and India account for almost 40% of the world's
population, and they have expanded their economies at a rapid pace over the last five years, with GDP
growth averaging 10.6% in China and 8.7% in India. Hundreds of millions of people have been lifted out
of poverty, and a large middle class is emerging. Continued high growth is expected.
THE MARKET TODAY
 Both the Chinese and Indian markets have similar origins as the sole domain of state-owned
monopolies — People’s Insurance Company of China (PICC) and Life Insurance Corporation of
India (LIC). Both have gradually opened up to domestic and foreign competition.
 In China, the monopoly ceased officially in 1988 when Ping An Insurance Company was
established. In the following two decades, a significant number of new life insurance companies
entered the market and, by the end of 2007, there were 42 companies selling new business in
China, approximately half of them domestic and the rest foreign or joint-venture companies. AIA
is 100% foreign owned, and some of the first few foreign entrants managed to secure 51%
holdings. The rest of the foreign partners are limited to a 50% stake
 In India, the insurance monopoly was abolished in 1999, with the first private insurers opening
for business in 2001. By early 2008, there were 17 private-sector life companies. All but two of
these are joint ventures with foreign partners, with a maximum of 26% foreign direct investment .
None are currently listed, although there is increasing market talk about this happening soon.
PREMIUM INCOME
Both China and India have seen strong growth in life insurance premium income In China, the total for
the industry was Y494 billion (US$68 billion) in 2007, a five-year compound annual growth rate (CAGR)
of 17% per year. The Indian industry's premium income was Rs1.56 trillion (US$34 billion) for the
2006/07 financial year, a five-year CAGR of 26% per year. The Indian private sector has thrived, with
market share reaching 18% in 2006-2007, or 26% of new life insurance premiums.
LOCATION
Despite strong premium growth in general, the pace across different regions within each country is far
from even. In China, growth has initially been concentrated in coastal, wealthier areas, with the western
interior less developed, although this is changing fast.
For India, while there are no requirements as to where companies locate operations, the majority of new
players have chosen to be headquartered in Mumbai, with the rest scattered among the other key cities
across the country.
REGULATIONS
The first Chinese insurance law was introduced in 1995, and the China Insurance Regulatory Commission
(CIRC) was formally established as the industry regulator in 1998.
The Insurance and Regulatory Development Authority (IRDA), formed by legislation in 1999, supervises
the Indian insurance industry.
Both China and India have restrictions on foreign direct investment in life insurance companies.
Currently, the Chinese regulator sets a limit of 50% for joint venture insurance companies, or 25% if the
foreign investment is in a domestic insurance company as a strategic investor (with a cap of 20% for any
single investor). The limit is 26% in India, although the Indian industry has been petitioning for an
increase to 49% for some time. While recent signals from the Indian government have seemed positive,
no decision has been forthcoming.
A number of foreign investors were waiting for a higher limit before entering the Indian market although,
given the lengthy delay, some have rethought whether they should wait. In addition, Indian regulations
require that the shareholding of any single Indian investor must be reduced to a maximum of 26% after
the company has been in operation for 10 years. This regulation and the potential increase in the foreign
investment limit are the subject of much debate in India. It's possible that large holdings may need to be
sold over the next few years, generating a dramatic shift in the mix of domestic and foreign ownership.
DISTRIBUTION
The geographic vastness of both China and India requires large distribution networks if companies want
to have significant coverage across the country. Currently, the major channels for the distribution of life
insurance products in China are individual tied agency forces, group sales representatives (selling group
products to state-owned and private enterprises), and bank and post office branches
In India, the distribution of life insurance is similar, dominated by tied agents who brought in 89% of the
new business in the 2006-2007 financial year
Since the early part of this decade, bancassurance has also emerged in China as a key distribution channel
for insurance policies, selling primarily simpler savings-type, oftentimes single premium, products. Sales
relationships between insurance companies and banks are often at the local branch level, meaning that the
same bank could be selling products from a range of life insurance companies, while each life insurance
company sells products through a number of banks. The regulators are now encouraging a more
consolidated approach, allowing insurance companies and banks to have strategic cross-shareholdings.
Similarly, bancassurance is growing in importance as a sales channel in India, following new regulations
allowing bank sales. Many of the Indian private life insurance companies have made alliances with
regional and national banks in an attempt to take advantage of the geographic spread of the banks' branch
networks, and just over 16% of sales in the private sector were made from this channel in 2006-2007.
More recently, in both China and India, direct marketing by telephone and broker distribution (although
embryonic) are expanding sales channels for individual life products.
PRODUCTS
Savings-oriented products tend to dominate the life insurance industry in both China and India. Both
markets offer a wide range of traditional nonlinked (both participating and nonparticipating) and linked
savings products. There has been strong demand for investment-linked (or unit-linked) products in both
countries, supported by strongly performing equity markets (at least until late 2007). In India, fairly
simple maturity investment guarantees are offered with these products, and restrictions on the use of
derivative instruments for managing market risks have hampered innovation, although more sophisticated
guarantees are likely to emerge. Investment guarantees are not yet generally offered with these products
in China.
Pure risk products (such as term life or critical illness) tend to be a small proportion of sales in China.
People don't yet seem to see their value because there are no payments or "returns" to policyholders
except in the event of death or some other type of insured event. Similarly, protection products are not yet
typically seen as really attractive by Indian consumers, and take-up of term insurance has been
disappointing. A range of critical illness, accidental death and disability benefits have been introduced by
insurers to target the protection needs of Indian consumers. The protection industry is seen as a
potentially significant market in both countries, though increased customer education and awareness is
required to help develop this market.
More complex products (such as variable annuity-type products offering various types and levels of
guarantees) are likely to be offered in both markets in the medium to longer term as more sophisticated
capital market instruments become available for risk management and hedging purposes. These types of
products are likely to be popular in both markets because they offer some guarantees (which should have
increased appeal given the recent market turmoil) while offering various potential upside benefits. 
LOOKING FORWARD
Up to now, the life insurance markets in China and India have had similar experiences in many respects
— very large population, transition from monopoly to private companies, similar development time
frames (although China undertook regulatory reforms earlier than India), similar distribution channels and
product types. Given the outlook for continued strong economic growth, tremendous opportunities still
abound in both countries.

The following graphs illustrate the facts mentioned above.

r
Q5) What would be your recommendations to the governments of China &
India to attract more FDI in Financials & Insurance Service Companies

Both India and China have their own set of problems which need to be addressed to improve their
attractiveness

Recommendations for India

 Increasing the cap on the amount of foreign investment in this sector from existing 26% to
49%. This will result in a more competitive market as the best practices of the foreign
companies will be implemented here when they enter the market on their own. There will be
more control over operations and processes will be standardized.
 The price structures will have to be in sync with the risk profiles attached. Obsolete
regulations on insurance pricing will have to be done away with
 Distribution channels need to be more developed to help penetrate a larger share of the
market
 Insurance and Reinsurance will have to be delinked as the same rules cannot be applied to
both.
 Facilitate the penetration of insurance into rural markets by developing infrastructure and
ensuring that the insurers design products catering to the need of this largely underserved
market.

Recommendations for China

 Transparency regarding policies and the functioning of various departments of the

government needs to be increased. Entry and exit procedures should also be made more
straightforward and efficient
 The insurance sector is restructuring but the market is still consolidated by a few large
players. The government should work towards increasing the competition to help develop a
competitive market
 Reduce the cost of entering the insurance market by reducing the amount of capital
investment required
 Should work towards building more grass root economy by facilitating SMEs (not related to
the government) as a supplement to national champions
 Enhance quality information disclosure; Impose prompt and severe punishment for any
infringement of any requirement, even during market downturns