FDI hike will boost insurance sector
PROPOSAL LIKELY TO HELP LOCAL PRIVATE INSURERS GROW FAST AND EXPAND PRESENCE IN INDIA
MUMBAI: The government’s proposal to increase the foreign direct investment limit in insurance from 49% to 74% is likely to accelerate growth and spur competition in the sector raising hopes of a flux of foreign capital into private Indian insurers.
Greater capital infusion by foreign insurers in Indian joint ventures could eventually lead to transfer of control to the cash-rich foreign partners. This can cause a fresh challenge for state-run Life Insurance Corp. of India or LIC, which has a commanding 70% share of India’s insurance market.
The proposal, announced by finance minister Nirmala Sitharaman in Union budget 2021, is likely to help local private insurers grow fast and expand presence in India which has one of the lowest insurance penetration levels globally.
“The non-life insurance sector finally witnessed a longstanding demand being fulfilled in terms of increase in FDI limit to 74%. This should catalyse the long-term development and growth of the industry,” said Bhargav Dasgupta, MD and CEO of ICICI Lombard General Insurance. He said also that other steps announced in the budget such as privatization of state-run firms, increased allocation to healthcare and infrastructure, and vehicle scrapping policy “are positive for the (insurance) sector. What remains to be seen is their timely implementation.”
Insurance penetration in India is currently at 3.7% of gross domestic product (GDP) compared to the world average of 6.31%. Growth in the life insurance sector has slowed to 11-12% currently from 15-20% until fiscal 2020 as the pandemic pushed customers to save cash instead of spending on stocks or life insurance policies.
The general insurance sector is, however, growing at a robust annual pace of 18%, which is more than the previyears. Growth in this sector has picked up as the pandemic led ous more people to purchase health insurance policies. Average growth rate in standalone health insurance is currently at 35-40%.
As per the insurance law, whenever any capital infusion is proposed in an insurance joint venture, all the partners are mandatorily required to bring in capital exactly in proportion to their shareholding in the company.
If any JV partner is unable to infuse sufficient capital as per the shareholding, the others are restrained from adding more capital. In such a scenario, the insurance company ultimately suffers as it is unable to grow its business or spend enough to sustain.
Most private insurers in India have foreign JV partners who are expected to take advantage of the increased FDI limit to beef up their shareholdings.
“An increase of FDI in insurance to 74% will possibly bring in more capital, and more importantly fresh capital from companies which have been waiting to enter India,” said Joydeep K. Roy, Partner and Leader - Insurance, PWC India.