MANAGEMENT DISCUSSION AND ANALYSIS REPORT:

ECONOMIC ENVIRONMENT

India registered 6.7% financial growth in 2011-12. This is positively disconcerting when compared to the 8.4 per cent growth achieved in 2010-11.

Agriculture and service sectors performed well during the year under review and the slowdown can be attributed almost entirely to weakening industrial growth.

The services sector continues to be a star performer as its share in GDP has climbed from 58% in 2010-11 to 59% in 2011-12 with a growth rate of 9.4%. Agriculture and allied sectors too achieved a growth rate of 2.5% in 2011-12. The industrial sector has performed poorly, retreating to a 27% share of the GDP.

But, despite the low growth figure of 6.7%, India still remains one of the fastest growing economies. A majority of other major economies including some of the emerging economies saw a significant slowdown. The already fragile global economic environment turned sharply adverse midstream owing to the turmoil in the euro-zone countries and sharp ratings downgrades of sovereign debt in most major advanced countries.

Slowing down of the Indian economy can be attributed to a large extent to global factors, but domestic factors also played role. Tightening of monetary policy owing to high and persistent inflation and slowing investment and industrial activity are two major factors that affected the Indian economy in 2011-12. However, for the Indian economy, the outlook for growth and price stability at this juncture looks more promising.

Problems of inflation, revenue growth and much more have daunted the growth path but the country is still able to maintain momentum. There are signs from some high frequency indicators that the weakness in economic activity has bottomed out and a gradual upswing is imminent. It is brdicted that the Indian Economy would grow by 7.6% in 2012-13 and 8.6% in 2013-14.

Another important area of concern to India is that of sustainable development and climate change. These are global concerns too. India too is seized of the gravity of the situation and is engaged constructively in global negotiations. Climate change challenges ahead are large and India is doing more than its fair share in reducing its energy-intensity of growth. 

India is now much more closely integrated with the world economy as its share of trade to GDP of goods and services has tripled during the decade 2000-2010. At the same time, the extent of financial integration, measured by flows of capital as a share of GDP, has also increased dramatically and the role of India in the world economy has commensurately expanded, along with the other major members of emerging markets.

INDIAN INSURANCE SECTOR DEVELOPMENTS

The Indian general insurance market registered a growth of over 23 per cent in the year 2011-12. Market brmium for non-life segment increased to Rs. 58,344.16 crore from Rs. 47,372.78 crore in the brvious year.

Public sector companies booked a brmium of Rs. 34,113.79 crore as compared to Rs. 27,990.10 crore in the brvious year, registering y-o-y growth of 21.9%. Private companies have by comparison grown y-o-y at a rate of 25.0% from Rs. 19,382.68 crore to Rs. 24,230.36 crore. Market share of public sector stood at 58.5% (brvious year 59.1%) and that of private sector at 41.5% (brvious year 40.9%).

About 52% of the market brmium growth has been contributed by the motor class with health contributing another 19%. Motor and health together form 64% of the industry brmium.

Motor grew 31%, Liability 22%, Personal Accident 22%, Health 19% and Marine Cargo growing at 20%, (all year on year).

Significant growth in motor brmium can be attributed to third party insurance brmium rate increases across private and commercial vehicles from April 2011.

On the life side, the first year market brmium for 2011-12 shrunk from Rs. 125,826 crore to Rs. 114,233 crore in the brvious year registering a de-growth of over 9%.

This was on account of shrinkage in brmium for individual segment while group segment saw healthy growth of over 15%. Market share of Life Insurance Corporation grew from 68.7% to 71.4% during the year.  

GIC Re's BUSINESS PERFORMANCE

During 2011-12 the Corporation registered a growth rate of 16.6%. The brmium growth in the domestic market was lukewarm at 9.4%. The Corporation's gross brmium income during the year 2011-12 was Rs. 13618 crores and the income, during the year from investments was registered at Rs. 2255 crores. Underwriting results show an overall loss of Rs. 4971 crores in 2011-12 compared to an underwriting loss of Rs. 1104 crores in the brvious year. The ratio of total business expenses to the earned Premium, i.e., Combined Ratio stood at 143.90%. The Solvency margin of the Corporation as on 31st March 2012 was 1.59.

CLASSWISE PERFORMANCE

FIRE

Fire Business recorded a growth of 15.34%. The earned brmium for the year was Rs. 3,157 crores as compared to Rs. 2,737 crores in the brvious year. GIC Re's domestic brmium grew by 30% 980 crores from Rs. 753 crores). As was done in the brvious year, the commissions under the obligatory cession for domestic business were finalised based on performance. The commission as a percentage to earned brmium for the fire portfolio stands reduced to 15.4% as against 22.4% in the expiring year.

GIC Re's foreign inward business grew by 9.7% (Rs. 2,178 crores from Rs. 1,985 crores). The growth was due to the contribution made by HO and the three foreign branches giving GIC Re property book a global sbrad. The retro business continues to contribute to the brmium growth.

Incurred claims stood at Rs. 5230 crores. The major single loss during the year from the domestic market affecting the books of GIC Re on net basis was Gujarat Narmada Valley Fertilizers (GNFC). There was no major CAT Loss in the domestic market but for a claim on Teesta Urja from an earthquake in North Eastern India on 18 Sep. 2011. Also a few claims have been reported from Thailand floods under interest abroad.

The world witnessed a series of major CAT events in the year 2010-11. Earthquake in Japan and New Zealand, floods in Australia in 2011-12, floods in Thailand and tornadoes in USA. These events jolted major reinsurers across the globe and GIC Re was no exception. GIC Re's books were affected by development of claims which were reported towards the end of last financial year and primarily from Thailand floods which occurred during the current year. Overall incurred losses from the Thailand floods have been provided at a very prudent estimate of Rs. 1,956 crores.

MARINE HULL

The Marine Hull business recorded a healthy growth of 16.8% in gross brmium over the brvious year. Despite the growth, this class of business suffered losses in tune with other classes of business and in line with the global marine hull portfolio. The earned brmium for the year was Rs. 515.37 crores as compared to Rs. 455.40 crores in the brvious year. The net brmium for the year ending 2011-12 showed an upward trend of 23.60%. The increase in net brmium can be attributed to the selective and quality underwriting as also to the cost & expense control measures adopted by the department. This growth is also on account of increasing participation in foreign & domestic treaties and facultative accounts worldwide.

The increase in brmium volume was made possible despite the increased capacity of domestic players, competitive pricing, moderate economic recession and a soft reinsurance market last year. Looking at the ever decreasing rate of brmium and deductibles in the domestic market, certain corrective measures have been taken to improve the rates and deductibles and the same were implemented during this year's fleet renewals. Further corrective measures included imposing loss corridor/loss participation clause in loss making treaties.

Two major losses were reported in 2011-12. Formosa Product loss of 2009 was reported in 2011-12. Another loss reported pertained to a vessel of the Mercator Lines fleet. The losses largely came from obligatory cessions and proportional treaty arrangements as also from losses contributed by our foreign branches.

GIC of India continues to administer the Govt. of India Hull War risk scheme for Indian Flag Vessels as also the Marine Hull pool. It is observed that generally the ship owners brfer the Institute of London War Risk Scheme which, though restrictive in coverage, is cheaper than the GOI War Risk Scheme. The recent increased incidence of piracy & abduction in the Arabian Sea and Gulf of Aden and subsequent declaration of the entire Indian Ocean and Arabian Sea as excluded areas by the Joint Hull Committee in its latest report has generated the interest of the Indian clients and Insurers in the GOI War Risk Scheme.

MARINE CARGO

Domestic business accounts for 65% of GIC Re's cargo portfolio. Reflecting the domestic market growth in cargo brmium of 20%, GIC Re's cargo brmium has gone up by about 23% for 2011-12 over the brvious year.

This reflects the pick-up in international trade mainly for commodities. However, project cargo shipments is seeing a slowdown in line with the overall slowdown in infrastructure activity. The growth is also as a result of price stability on major accounts.

Cargo Gross Premiums for 2011-12 is Rs. 522 crores as compared to Rs. 421 crores as in the brvious year. The earned brmium for the year was Rs. 382.81crores as compared to Rs. 313.16 crores in the brvious year.

Incurred claims stood at Rs. 392 crores 327 crores for brvious year). Whilst no significant individual losses have been reported during the year, attritional losses have increased through the treaty writings. The process of improving the treaty performance is ongoing and the outlook for 2012-13 appears positive.  

OIL AND ENERGY

GIC Re's off-shore oil & energy business continues to show a steady growth with profitability. The aim is to develop the portfolio adopting a cautious underwriting approach.

55% of brmium comes from foreign business which reflects GIC Re's position as a recognised energy reinsurance provider.

Offshore energy brmium accounted for in 2011-12 is USD 40 million as compared to USD 42 million in 2010-11. The lower brmium is on account of bringing down GIC Re's writings from countries under various international sanctions.

There have been a few mid-sized losses in 2011-12 such as the Cairn Energy (India): Rs. 13 crores, KS Endeavour (Nigeria): Rs. 30 crores.

The business has a good growth potential both in the domestic market and overseas and remains a prime area of focus for GIC Re as a dominant Energy Reinsurer in the market.

OTHER MISCELLANEOUS

GIC Re's Other Miscellaneous business, including Agriculture and PA but excluding Motor Portfolio, continues to show a healthy growth year on year both in domestic and international business.

Other Miscellaneous portfolio has been showing constant growth in terms of Earned Premium both in domestic as well as foreign business with an improved growth of 22.35% for 2011-12 over 2010-11.

The Earned Premium for 2011-12 is Rs. 1268.62 crores whereas for 2010-11 it was Rs. 1036.82 crores. Gross written brmium for 2011-12 is Rs. 1435.20 crores as  against Rs. 1245.14 crores for 2010-11.

Incurred claims stood at Rs. 1336.05 crores for 2011-12. No significant losses have been reported during the year.

The Corporation constantly endeavours to provide sufficient capacity through both treaty and facultative reinsurance to domestic market in order to maximize retention within the country.

AVIATION

Airline market remained benign during the year 2011 in terms of loss activity and fatalities. Market capacity remained broadly unchanged. Softening trends were observed in the ratings. The overall recovery in the world economy was reflected in the growth of exposures. The market brmium for airlines at lead terms showed significant softening and following markets reacted by seeking to bridge the gap between lead terms and their verticalised (lower than the leader's) terms.

Gross Premium at Rs. 620.63 crore as against Rs. 754.01 crores registered a de-growth of 17.7% over the brvious year. Net Premium for the year was Rs. 550.73 crores as compared to Rs. 548.32 crores and remained stable. Earned Premium for the year was Rs. 550.85 crores as compared to Rs. 507.66 crores for 2010-11 registering a growth of 8.5%.

The total incurred claims for 2011-12 is Rs. 522.43 crores. Some of the GIC Re's major losses during the year were Caribbean Airlines, Asiana Airlines, Egypt Air, Thai Airways, Tame Lineas, Buddha Air, Air KBZ, Georgian Airways and Spicejet Airlines (Domestic). Put together, these large losses summed up to Rs. 150 crores approximately.

There was no recovery arising out of the major losses except in case of Asiana, since the GIC Re's incurred loss in each of the cases was below the deductible.

LIABILITY

Globally, prices in Liability lines remained stable, with renewals remaining flat or experiencing slight decreases in rates as capacity remained in abundance.

Rates for Directors and Officers insurance for companies with US exposure experienced significant increases. Withdrawal of capacity by some major reinsurers resulted in shortage of capacity for Product Liability covers for pharmaceutical companies having global exposure.

The Indian Liability insurance market continues to witness growth of around 20% year on year rebrsenting around 2.4% of the total Gross Domestic Non-Life Premium. Increased treaty capacities with local insurers coupled with an increase in the number of players added to aggressive pricing.

Liability business registered an overall flat growth of 0.3% over the brvious year. Gross Premium for the year is Rs. 183.30 crores as against Rs. 182.67 crores.

The only major loss for Domestic Business pertains to Errors and Omission cover of Oracle Financial Services Limited, which has reported 100% incurred loss amount of Rs. 56.80 crores.

Overall the market continued to be soft on almost all lines other than for high hazard risks such as pharmaceuticals, chemicals and such critical risks. The brmiums have continued to drop by about 0-15% for small to mid-size accounts. The drop is comparatively low on mid to large accounts. The penetration levels increased on products like Directors & Officers covers. Amongst all other products D&O cover continues to be the fastest growing product.

GIC Re continued to play an important role in providing need based capacity to the Indian market.

LIFE REINSURANCE

GIC Re and Hannover Re have a cooperation agreement for development of Life Reinsurance business in India since 2008. Extensive marketing efforts are being made jointly since then with emphasis on product development and this has resulted in growth of GIC Re's Indian life reinsurance business. This year 5 private Life Insurance companies have entered into new treaty agreements with HLR/GIC Re, in addition to our existing book of Indian business.

New life insurance business of Indian life insurance companies has shown negative growth of 9.21%. However, the market shows overall growth of around 9% to 10% in 2011-12. Net Written Premium of the Corporation has increased to Rs. 47.07 crores from Rs. 34.35 crores in the brvious year, a growth of 37.03%. Earned Premium has increased this year to Rs. 40.71 crores from Rs. 24.19 crores in the last year. Operating profit has increased to Rs. 22.94 crores from Rs. 4.01 crores.

AGRICULTURE REINSURANCE

GIC Re continued its Agriculture Reinsurance portfolio during the year by providing reinsurance support for agriculture and index based weather insurance schemes.

GIC Re's international Agriculture portfolio is well diversified and consists of business from various countries brdominantly in Asia & Africa.

The total Reinsurance brmium increased from Rs. 338.04 crores in 2010-11 to Rs. 445.24 crores in 2011-12 showing a growth rate of 31.71%. Out of total brmium in 2011-12, Indian market contributes for Rs. 360.2 crores while Rs. 84.9 crores is written from rest of the world.

HEALTH

The Gross Direct brmium of Health business in India was Rs. 13,325 crores in 2011-12 against Rs. 9,944.03 crores in 2010-11, at a growth rate of 34% p.a.

GIC Re's Health portfolio comprises obligatory cessions, some selective domestic treaties besides the Health Business written by the foreign branches.

GIC Re's Gross Written Premium and Earned Premium during the Financial Year 2011-12 are Rs. 1760.36 crores and Rs. 1688.42 crores, at a growth rate of 6.9% and 26.24% respectively over 2010-11.

Incurred claims for 2011-12 is Rs. 1842.45 crores whereas for 2010-11, it was Rs. 1357.93 crores. This is due to increase in incurred losses of gross direct health portfolio.

This year has also seen an addition to the Standalone Health Companies in domestic market namely Max Bupa Health Insurance Co. 

MOTOR 

The Motor Premium of Rs. 2,971.33 crores for the year ending 2011-12 showed a growth rate of 30%, in comparison to brmium figures of Rs. 2,285.69 crores of 2010-11. Domestic business accounts for 81.62% of GIC Re's Motor portfolio.

Incurred claim has increased from Rs. 2,801 crores to Rs. 3,114 crores as compared to last year, mainly due to obligatory losses and the fact that GIC Re continues paying the Third Party Liability claims made by the 4 PSUs pertaining to the years prior to 2007.

With the winding up of the Indian Motor Third Party Liability Pool with effect from 1.4.2012 and formation of the Declined Pool, the Third Party Liability of commercial vehicles would now be protected under the respective companies Motor Non-Proportional programme protecting their net retention.

The winding of the Motor TP Pool resulted in GIC Re absorbing an additional provision of Rs. 811 crores which also impacted the overall incurred loss of Motor portfolio. Though, IRDA allowed staggering of this provisioning over a three year period, GIC Re decided to absorb the entire provisioning in 2011-12 itself.

TERRORISM RISK INSURANCE POOL

The Indian Market Terrorism Risk Insurance Pool was formed as an initiative by all the non-life insurance companies in India in April 2002, after terrorism cover was withdrawn by international reinsurers post-9/11. The Pool has thus completed a decade of successful operations. All Indian non-life insurance companies and GIC Re are members of the Pool. The Pool is applicable to insurance of terrorism risk covered under property insurance policies. The Pool offered limit of indemnity of Rs. 7,500 million per location for terrorism risk cover till 31.3.2012. From 1st April, 2012, the limit has been increased to Rs. 10,000 million per location. Premium rates for terrorism cover, which were last revised upwards from 1.4.2009 after the losses reported from 26/11 Mumbai terrorist attack event, have been reduced w.e.f. 1.4.2012.

GIC Re continues to successfully administer the Pool. Apart from its role as Pool Manager, GIC Re also contributes capacity to the Pool and participates as a reinsurer on the Pool's excess of loss reinsurance protection. 

The Pool's brmium income has grown from Rs. 388.7 crores in 2010-11 to Rs. 457.7 crores in 2011-12, an increase of 17.75%. The claim paid by the Pool during 2011-12 is Rs. 41.5 crores, which includes balance payment of losses arising out of the 26/11 Mumbai terrorist attack. The Pool has settled all losses arising out of the 26/11 event for a total amount of Rs. 377 crores. No major losses were reported to the Pool during 2011-12. 

CREDIT RATING

International rating agency AM Best has maintained the Corporation's rating at 'A' - (Excellent). The rating reflects excellent risk adjusted capitalisation and leading business position in Indian market with the offsetting factor being reliance on investment income from portfolio highly concentrated in Indian equity market.

Indian credit rating agency Credit Analysis & Research Limited (CARE) has reaffirmed AAA (In) Claims Paying Ability rating. Insurers with this rating have the highest financial strength to meet policyholders' obligations and impact of any adverse business & economic factors on the claims paying ability is minimal.

INVESTMENT

After two successive years of fairly robust growth of 8.4%, GDP is estimated to decelerate sharply to 6.7% during 2011-12 with a marked slowdown in agriculture, manufacturing, construction, etc. The slowdown in Industry reflected a number of factors including domestic policy uncertainties, cumulative impact of monetary tightening and slackening of demand. Corporate pipeline investment shrunk and new investments continues to remain tepid. Higher interest rates and rising input prices, among other factors, are likely to have adversely affected the investment sentiments.

The fiscal correction, as indicated in the Union Budget, along with other policy measures is expected to address supply side bottlenecks in agriculture, energy and transport sectors. This is such expected to create conditions for revival of investment in the economy.

During the year 2011-12, against the backdrop of a large and persistent liquidity deficit, RBI continued to inject durable primary liquidity into the system with a view to brserve stable credit conditions. The secondary impact of durable liquidity injections by way of CRR cuts and OMO purchases also considerably eased the liquidity conditions.

A major concern on the inflation front continued to be high fuel prices driven by the increase in international oil prices. Headline inflation has declined since December 2011 largely on account of transitory factors including a favourable base effect and seasonal decline in vegetable prices which was in line with RBI indicative trajectory.

Despite slowdown in domestic growth and oil price increase, equity market stayed vibrant in Q4 2011-12 conditioned by revival in global markets, the surge in FN inflows and decline in domestic inflation.

The gross market borrowing programme of the Central Government through dated Securities was to the tune of Rs. 5,110 billion, a 16.7% hike over the brvious year. Following the Union Budget announcement of a higher than anticipated market borrowing programme and subsequent issuance of auction calendar for dated securities, the 10-year yield rose steadily to 8.63% as on March 30, 2012.

Based on IRDA guidelines, the Corporation invests 45% in Directed Sector comprising Central/State Government Securities, Government Guaranteed Bonds, Housing and Infrastructure Sector. Balance 55% is invested in Market Sector and these investments are subject to prudential and exposure norms.

The investment portfolio of the Corporation stood at Rs. 22,165.74 crores as against Rs. 19,777.80 crores showing an increase of Rs. 2,387.94 crores rebrsenting a growth of 12.07% over the brvious year. Income from investments stood at Rs. 2,175.41 crores with a mean yield on funds at 10.37%. The net non-performing assets percentage was at 0.17%.

GIC RE'S REINSURANCE PROGRAMME

The Corporation has arranged both Risk and Catastrophe Excess of Loss Reinsurance, in respect of various classes of business, for protecting its net retained Portfolios under domestic business. On large sized risks, wherever found necessary the Corporation arranges for facultative retro. CAT protection has also been arranged for select business and territories in respect of Foreign Inward Business.

The Corporation has continued the ART contract and cessions under both domestic and foreign business are made there under. Placements have been made with securities meeting the stipulations laid down by the Regulator.

FUTURE OUTLOOK

Indian Insurance Industry has the potential for exponential growth in the year ahead. The factors that have catalysed the sectoral growth in the last decade still persist and should continue to spur growth of the sector for several years ahead. During 2011-12, the General Insurance Sector achieved a growth of over 23 per cent. In 2012-13 too it is expected to register an excellent rate of growth. Motor & Health, despite the economic slow down, are once again expected to lead the rally like in the brvious years.

The general Indian macro-economic environment impacts the Indian Insurance Sector too. Factors like interest rates, inflation, bearish sentiment in the capital markets, and brssure on the Indian rupee have impacted the insurance industry too.

The Indian Insurance Sector is facing a talent crunch. Insurance companies are finding it difficult to attract talent. Insurance is a long term business and takes time for the manpower to get into the nuances of the business. As such, in the absence of talented manpower, the industry is likely to suffer in the long run. To sum up, the Indian Insurance Industry is still a virgin and emerging landscape, with immense possibilities and tremendous potential.