I think we should really talk about liability as a risk and the risk certainly exists; lots of people take it on their balance sheet. When we look it as a risk which ought to have been transferred to insurance companies and hasn’t been, one wonders, why? The fact is that liability premium was not even reported independently. It was reported as a part of ‘miscellaneous’, which is why, historically, insurance companies in India have been reporting their financials across the following lines of business—motor, fire, and marine. The rest have been clubbed under miscellaneous. Only now is liability being mentioned. Actually, the first official figures that I have come across are in the August 2004 journal of IRDA which are unaudited and state that liability premium has been from $35 billion to $71 billion. This is an increase of over 100 per cent. The market is much bigger than the $71 billion reported in the journal. I think the market is already $125 billion to $150 billion. However this comprises only 3-4 per cent of the gross return premium in India. I think a gap exists because lots of companies still tend to report several products under miscellaneous which ought to have been reported under class liability insurance. Anything which does not fall under the category of traditional products such as property, fire and motor is put into a class called special contingency and that can be reported under miscellaneous. Liability is a sub-segment of miscellaneous. Liability premium accounts for over 70 per cent of gross return premium in the US and over 50 per cent in the UK. When compared with these markets one is tempted to think that the Indian market has not done much to sell liability products. Of late, a concerted effort has been made and the results have been positive. While the rest of the market has just grown at an average of 12-13 per cent, liability in the last one year has grown by over 100 per cent. The penetration is low and this offers a huge opportunity. To tap into this market, I would draw the attention of corporates and individuals towards risk and highlight circumstances (or pressures) that are forcing a rethink. Regulatory: This relates to concerns on corporate governance. After the amendment to Clause 49 of the listing agreement, executive and non-executive directors, particularly the latter, will realise that the responsibility as a director in a company is not just cosmetic. The focus on accountability and greater transparency will be one of the key drivers of liability insurance in India. Companies will now be compelled to think in terms of transferring risks such as the D&O, and E&O (professional indemnity) from their balance sheet to insurers. Another regulatory pressure is Sebi’s insistence that mutual funds take an E&O cover. Similarly IRDA regulates that insurance broking firms take professional indemnity cover. The day is not far when this movement will catch on. We already see an increasing trend where doctors are coming under pressure to professional indemnity cover, known in the US as medical malpractice cover. Chartered accountants might find that the Institute of Chartered Accountants might, some day, consider it a must for chartered accountants to take professional indemnity cover. Judicial reform: Judicial reform is another area which is going to drive the need to adopt these covers and we have already come across examples of judicial activism in play. Social pressure: The third area is social pressure. An example is the Sexual Harassment Bill against women which has been introduced as a draft by the HRD ministry. This would drive companies to think whether they should take this risk [(Employment Practises Liability Insurance (EPLI)] on their balance sheet or transfer it to an insurance company. This can either be taken on a standalone basis or as an adjunct or as an extension of D&O liability. Commercial pressure: Commercial pressure is a direct result of globalisation. I think globalisation is a two way process with Indian and foreign companies expanding their operations outside their national borders. Some of the Indian pharmaceutical companies, for example, are present in as many as 25-30 countries. So, they export liability risk in exactly the same manner as American or European-based companies would. Any Indian company which is raising capital directly or indirectly outside India is also subjected to risk, especially if the company is listed on the US-based exchanges. Indian IT services is an example of a sector that faces this risk.

What is the potential of liability insurance in India?

I think it is the right time for liability insurance in India to take root. Compared with March 2003, in March 2004, premium has increased by over 100 per cent. I will not be surprised if the market zooms to the $300 billion to $400 billion range five year from now.

Which are the liability products that suit the Indian market?

I would like to classify the liability products currently available in the Indian market in two categories: one is financial and the second casualty. As far as financial lines are concerned, the stable products are D&O, E&O (also called professional indemnity), and foreign commercial crime and cyber liabilities. On the casualty side we have commercial general liability, public liability and product liability. These are the standard products which are available in India today. The appetite in terms of capacity as well as expertise available in India is very low as far as these products are concerned. Therefore we rely on reinsurance support. Expertise comes from a couple of global players who are now operating in India. There is a market for D&O, E&O, product recall policies and doctor’s malpractice. Though there are more than 200 D&O policies in the market, it is not enough.

Is competition bringing down liability pricing and is it reinsurance driven?

Pricing, unlike tariff products, is dictated by trends in the global market for these lines. We saw that they were at an all time high. The pricing was rigid till early 2004 and it has softened in the latter part of the year. For D&O liabilities the premiums are down by 15-20 per cent. Howden’s cover for D&O is among the most comprehensive and is a result of the feedback and needs of our customers. One such product is called the Howden 98. In a hard market, we were finding it difficult to convince underwriters to accept Howden 98 because they are much wider and not as restrictive as the policies of several major players in the insurance industry. We are working on products that take care of our customers’ needs and are not encumbered by Howden 98. Increasing competition is partly bringing down the liability prices. But I think the major cause, especially in the insurance market is technical. It’s a question of supply and demand. The entire liability scenario is reinsurance driven. Typically a private insurer in India will not take any liability which is more than $1 million on their balance sheet and that is the maximum. The four state-owned public sector companies together with GIC (the five of them) take maximum risk of $2 million. Whereas a number companies in India are taking risks that are insured between $30 to $100 million.