OPENING THE DOOR WIDER

The FDI hike in insurance could be a win-win for companies and insurance buyers. But foreign partners will want more say in the business

TThe Modi government is not looking to divest stake in Life Insurance Corporation (LIC) purely as a fiscal measure; it has also announced far-reaching reforms in the insurance sector in Budget 2021. Finance minister Nirmala Sitharaman proposed hiking the foreign direct investment (FDI) limit in the domestic insurance sector from the current 49 per cent to 74 per cent, a move that would attract additional capital and help insurers maintain adequate solvency margins and invest in technology and product innovations.

The government also plans to privatise one of the five general insurance companies. The Centre has said that 50 per cent of company boards (under the new FDI norms) will be independent directors, and all key people will be Indians. A specified percentage of the profits of the insurance JV will also be retained as a general reserve. Among the 70-plus insurance and reinsurance firms, 35 already have JVs with foreign companies. Analysts say hiking FDI limits in the underpenetrated Indian insurance industry is an essential step—it should provide customers with better products at lower costs, which will help increase insurance penetration (percentage of premium to GDP), which was 2.82 per cent in 2019. Fitch Ratings says the Centre's moves will boost M&A activity over the medium term. Last year, the government had permitted full foreign ownership (previously

49 per cent) in insurance intermediary companies, including insurance agents, brokers, loss assessors and surveyors.

When FDI was hiked to 49 per cent, several foreign players had increased their stake in Indian insurance ventures. They included Nippon Life (JV partner in Reliance Life Insurance), Tokio Marine (Edelweiss Tokio Life) and Japan’s Daiichi (Star Union Dai-ichi Life). That said, there are still a handful of Indian insurers where foreign partners hold 26 per cent stake or below.

“The focus now is on how soon the government and the insurance regulator announce the revised framework,” says Indranath Bishnu, partner, Cyril Amarchand Mangaldas. “We are anticipating restrictions in relation to nationality and residency of directors and certain KMP (algorithm)related party transactions, and perhaps the repatriation of dividends.”

There could be new players coming in and some shareholders may go for stake changes. Along with 74 per cent stake and management control, many other regulations will have to change, like those for private equity (PE) reinvestment, accounting and capital and risk, for the JV to be able to roll up the financials to their global book with a higher than 50 per cent shareholding, says PwC’s Joydeep Roy. Sakate Khaitan, partner, Khaitan Legal Associates, says the regulator will need to balance Indian control while giving the foreign partner incentive to invest money. It can’t be that they invest money and take the risk but have no say in how the business is run, he adds.

India accounts for merely 2.6 per cent of the world’s total insurance premium, indicating that the potential for growth is immense for the sector. An underpenetrated market and factors such as a young population, growing working age group, rising income levels, increasing awareness about insurance and expected increase in dependency ratio are expected to fuel growth in the sector.

The Indian insurance industry has grown significantly over the past decade, but there is room for further growth. The insurance industry grew at over 12 per cent CAGR between 2009 and 2011. This growth rate in life and non-life insurance is probably the fastest sustained growth in the world for a 20-year period, says Roy.

INDIA ACCOUNTS FOR JUST 2.6% OF THE WORLD’S TOTAL INSURANCE PREMIUMS, SO THE POTENTIAL FOR GROWTH IS IMMENSE

This is also thanks to the government’s consistent efforts at financial inclusion, which have resulted in nearly 400 million Jan Dhan account-holders who enjoy some form of insurance cover. There are over 60 million Pradhan Mantri Jeevan Jyoti Bima Yojana beneficiaries and 160 million Pradhan Mantri Suraksha Bima Yojana beneficiaries (the figures are not necessarily mutually exclusive). This implies a significant percentage of those covered under some form of insurance if one takes the estimate that puts India’s insurable population at around 750 million. The increase in net financial assets of households is an opportunity for life insurance firms (it touched 7.7 per cent of GDP in 2019-20). As of March 2020, around 66 per cent of financial assets and liabilities were allocated to currency and deposits, while 23.2 per cent was given to life insurance funds, according to the RBI bulletin of June 2020. A higher proportion of financial assets in deposits and currency is a challenge as well as an opportunity for insurers. They are eyeing a large portion of this savings in financial assets. Mutual funds, which are always competing with insurance, have seen outflows due to the recent liquidity crisis faced by the sector and general risk aversion due to the Covid-related uncertainties.

Keki Mistry, managing director & vice chairman, HDFC, says he is bullish on the growth potential of the retiral business, given the changing demographics, increase in life expectancy and lack of social security. Also, India’s elderly population, estimated at 78 million in 2015, is expected to double by 2035 and triple by 2050. The current reforms in the insurance market should tap this vast potential, both for jobs and to bolster India’s economy.