With consistent growth performance and an abundant highly skilled labor force, India provides substantial opportunities for investments. The government has made development of infrastructure in highways, ports, railways, airports, power, and telecom a high priority. In order to meet the demand, the government is actively seeking domestic and foreign private investment. Overall, India provides a liberal, attractive, and investor friendly investment climate.
General Information About India
The Republic of India is the largest democracy and tenth largest economy in the world. In terms of purchasing power parity, India is the fourth largest economy in the world. Hindi is the official language; however, the constitution recognizes 14 regional languages. English is the language of commerce and politics.
India has a federal system of Government with clear demarcation of powers between the Central Government and the State Governments. The legal system recognizes both negligence and strict liability. Punitive damages are not a feature of the Indian legal system. The Limitation Act 1908 prescribes a limit of two years for tort and three years for contractual cases.
Indian Insurance Marketplace
The insurance sector in India has expanded dramatically since deregulation in 1999 and potential for further growth remains high. Investors continue to be confident about the sector, even though there is a foreign investment limit of 26% in insurance companies. By 2006-07 private companies held a 35% share of the non-life insurance market. Foreign multinational insurers operate via joint ventures with Indian interests; however, because their investment participation is limited the degree of control they can impose on local underwriting is restricted.
Mutual companies and branches of foreign insurers are not permitted to operate in the Indian market. All insurance premiums in India must be paid in full before the insurer will bind coverage. Recent regulation allows for premium payments through credit cards, the internet, e-transfer, direct debit and bankers draft.
Insurance placed outside the regulatory system of India is not permitted. The law provides that insurance must be purchased from local authorized insurers with some exceptions affecting private medical insurance. A law passed in 1999 opened the door to private insurers and broke the monopoly of government-owned insurance companies, which continue to operate.
Topics of Discussion
This document highlights the most common operational scenarios that expose portfolio companies and private equity firms to loss in India, and how they should be addressed from an insurance and risk management standpoint. The scenarios are as follows:
- Your product is manufactured in India at a facility that is owned and/or managed by your company
- A India based contract manufacturer is responsible for all aspects of the manufacturing process of your product, but they can’t or won’t prove that they purchase valid insurance
- Your employees travel to India for business reasons
- You have full-time employees based in India that require health insurance and/or Workers’ Compensation coverage
- An acquisition is based in India
- Directors and/or officers permanently reside in India
- Your product is manufactured in the U.S. and sold in India
- Your product is manufactured, sold, and intended for use in the U.S., but somehow ends up involved in a lawsuit in a
Indian court
Your Product is Manufactured in India at a Facility That is Owned and/or Managed by Your Company
India prohibits the insuring of property or operations located in India with insurance companies not licensed in the country.
To ensure that coverage is in place to respond to claims or suits in any jurisdiction permitted by U.S. law, based upon an occurrence in India, it is necessary to coordinate local Indian insurance with coverage issued in the U.S. The coverage should mirror the objectives and risk tolerance of the overall organization, so it is important for the U.S. based decision maker to control the coverage placed in India. Potentially disastrous inconsistencies in coverage can occur if the decision is left solely to local management. There are potential cost savings associated with coordinating the coverages appropriately.
The policies available in India respond to the statutory, political, and cultural norms of the country. Therefore, a U.S. based insurance buyer should not expect an Indian insurance policy to respond in the same manner as one issued in the U.S. U.S. style policy wordings are available, however, they are by no means universal. Indian insurance policies generally carry a jurisdictional limitation only recognizing claims brought in India. At additional cost, General Liability and Products Liability coverages may be endorsed to include worldwide jurisdiction.
An Indian Based Contract Manufacturer is Responsible for All Aspects of the Manufacturing Process of Your Product, but They Can’t or Won’t Prove That They Purchase Valid Insurance
Regardless of whether the contract manufacturer procures insurance coverage, this arrangement creates a challenge. Business owners in India do not view insurance coverage with the same importance that we do in the U.S. Although a contract manufacturer may provide evidence of insurance, the level of sophistication of coverage in emerging markets is mediocre at best. It is also difficult to confirm that coverage is maintained once evidence is provided.
It is crucial to keep in mind that it is your company’s brand at risk when a claim occurs. If the contract manufacturer carries insurance coverage that responds to a claim, that carrier will focus on making the contractor whole rather than your company. There are insurance products available that can extend your insurance program to provide coverage for your international contract manufacturers. The benefits of this approach are as follows: allow you to control program design, negotiate the premium, and control the claims process. Although it will result in additional premium, the expense that you incur under your deductibles/self-insured retentions when a claim occurs can be passed through to the contract manufacturer. It is common to opt for this approach when your business model has a heavy reliance on an Indian based contract manufacturer.
Your Employees Travel to India for Business Reasons
Between 2004-2006, some 714 kidnap-for-ransom gangs, with nearly 4,300 members, operated in India. More than 12,000 children were abducted in the country during the same period. India has steadily moved up the list of the world's top 10 countries for incidents of kidnapping.
The upward trend in kidnapping cases, not only involving children, has raised concerns among executives of multinational corporations and other organizations operating in the country over the safety of their employees, their families and themselves. Although the majority of kidnappings have occurred in underdeveloped areas of the country, it is likely that profit-motivated kidnapping gangs increasingly may target multinationals.
There is also the possibility that a non-Indian employee could require medical care while visiting India. If possible, we recommend that the employee return to their home country as soon as possible in order to receive the required medical attention. If that is unrealistic, we recommend that your company purchase a Global Medical insurance policy that will address these expenses on a primary basis.
Without a policy all medical expenses will be treated as an out-of-network benefit by U.S. based health insurers (thus increasing the employee’s out-of-pocket expense), or worse yet, not be covered at all. There are also services included in the policy that can improve the employee’s quality of care while being treated in India. Typically, referral to pre-screened western-style practioners and facilities are included.
You Have Full-time Employees Based in
India that Require Health Insurance and/or Workers’ Compensation Coverage
The Ministry of Health & Family Welfare administers the public healthcare system. There is no legislation relating specifically to healthcare. Private medical insurance has seen high levels of growth as products become more accessible and customer-orientated, and new specialist health insurers continue to enter the market.
Economic prosperity has seen an increase in the middle classes with sufficient disposable income to fund private health cover for the first time, especially in urban areas. The most popular medical expenses policy for both individuals and groups is "Mediclaim,” which covers hospital expenses up to a selected limit. Cover for prescription drugs are not included, so the policyholder or scheme member must pay for these out of pocket. Mediclaim is complementary to the public system and provides a better level of treatment and care. It allows for treatment to be carried out much sooner than under the public system, where waiting lists are long and demand for beds is 120% of capacity.
Similar to U.S. standards, Indian legislation regarding Workers' Compensation aims to provide workers and their dependants with a measure of relief in case of accidents and, to some extent, occupational diseases. Unlike the U.S., employers are not required to purchase Workers’ Compensation insurance to cover any benefits for which they may become liable under the provisions of Indian Workers' Compensation laws. Therefore, many people are excluded from the protection afforded by Workers' Compensation.
Fortunately, most citizens receive coverage through other occupational accident legislation. Limited sickness cover is provided under the Employees' State Insurance Act 1948 (ESI Act), but this does not cover all employees and those that fall outside the scope of the act either go without or buy private healthcare insurance.
Expatriates are usually employed in senior posts and are unlikely to fall within the definitions of a "worker" in the provisions of the Workers' Compensation law. Expatriates are also unlikely to qualify for other "social security" benefits. Therefore, it is very important for an Expatriate’s employer to purchase a Global Medical Insurance policy as summarized in the previous section.
An Acquisition is Based in India
An acquisition of an Indian company presents insurance and risk management challenges.
In addition to premium projections and a plan to integrate their exposures into the U.S. program (where legal), your broker should focus on the following coverages and services:
- Earthquake: Most of India is a low to medium risk area although the boundary between the Gangetic Plains and the Himalayan ranges is a zone of continually violent earth movement. Earthquakes are common from the western borderlands of Pakistan, through Nepal to Assam. Bhuj is regarded as a high-risk zone. Basic earthquake insurance, provided as an extension to the fire and special perils policy, covers damage following earthquake and shock.
- Windstorm: Cyclones hit the southern states and coastline bordering the Bay of Bengal each year, causing various degrees of damage often of disastrous proportions. Recently, however, there have been no major incidents. Windstorm insurance is available in the market.
- Flood: Flooding often comes in the wake of cyclones. Therefore, regions contiguous to the Bay of Bengal are particularly susceptible to inundation. One of the most notorious floods of recent years occurred in May 1990 when cyclonic mud hit the state of Andhra Pradesh. Tidal waves caused flooding up to 11 miles inland. Some 1,000 people perished and severe damage was caused to crops. Flood is covered within the standard fire and special perils policy.
- Other: Bushfire exposure is limited to remote areas. Subsidence can be a problem for infrastructure projects in rough terrain.
- Travel Risk Assessment: Your people will no doubt visit a facility one or more times prior to closing the deal. Your Equity Risk Partners professional can alert you to weather patterns that will affect your trip, and the probability of violence in the region due to situations like elections or labor strikes and/or just general problems in the area.
It might be necessary to focus on other areas depending on the target’s specific operations and location.
Directors and/or Officers That Permanently Reside in
India
A local Director’s and Officer’s Liability policy must be placed if you have a director or officer residing in India. Failure to do so will leave that individual(s) exposed to an uninsured claim. There is no other legal or suitable way to insure an India based director or officer, even if your U.S. based D&O policy is issued on a worldwide basis.
Your Product is Manufactured in the U.S. and Sold in
India
Product Liability coverage is affordable and easy to obtain for a U.S. based company that manufactures a product in the U.S. and sells it in India. This exposure can be addressed for as little as $2,500 annually.
Certain international courts are not required to notify defendants of pending suits. Therefore, a product liability suit involving your product could be underway somewhere around the world without you knowing about it. Most insurance policies purchased in the U.S. provide coverage on a worldwide basis; however, most insurers will only tender a defense if the suit is brought in the U.S. Thus, without a Foreign Liability policy your company could be uninsured for suits brought to courts outside of the U.S. and for federal enforcement orders that are recognized by a U.S. court.
Your Product is Manufactured, Sold, and Intended for Use in the U.S., but Somehow Ends Up in a Lawsuit in a
Indian Court
Coverage to address this exposure is easy to obtain and relatively affordable. However, it is a difficult claim scenario to foresee and the expense is equally difficult to justify. Coverage for this exposure can be secured for as little as $2,500 annually. It will provide coverage as illustrated in the prior section.
Addressing the aforementioned exposures requires the coordination of brokers and underwriters in both India and the U.S. At Equity Risk Partners, we have Indian partner brokers that we work with on a regular basis. We also have contact with underwriters in both countries. Our partner broker in India is Guatam Boda of J. B. Boda & Co. You may learn more about them at
www.jbboda.net.
Please let your Equity Risk Partners professional know when you are travelling to India (for business or pleasure), considering selling your product/service, and/or operating a facility in India. It would be our pleasure to assist you in assessing the risks associated with doing so.
Our White Papers on Mexico and India complete the first two parts of our four part series. Our series on emerging markets will continue with a similar analysis of China and Brazil.
