Higher F DI to drive insurance penetration

The highlight for the insurance sector in the Budget has been the proposed increase in the FDI limits and allowing foreign ownership of insurance companies, subject to safeguards. These precautions include having key personnel as resident Indians, 50% of the Board being independent and retaining specified percentage of profits as general reserve.

Indian market is expected to be amongst the fastest growing insurance markets globally. This growth would require significant capital outlay and hence deep pockets from the promoters/capital providers to the insurance companies. This proposal would enable Indian partners who lack appetite or the cash to grow the business to bring in overseas funding or cede larger shareholding to the overseas partner to provide the necessary capital for growth. InsureTechs are likely to benefit from the move. This is expected to have a significant impact in deepening the insurance market in India. Further, this increase could also signify consolidation in the sector given that there are a few companies which have struggled to increase penetration and make good acquisition targets.

Even though the government has not mentioned the relevant company, the strategic selloff of a general insurance company as a part of the divestment program and LIC’s delayed initial public offering is expected to shore up the government’s revenues and reduce the government’s capital requirements towards the ailing public sector general insurance companies.

However, a kink has been introduced in the taxation of ULIPs with the government proposing to allow tax exemption for maturity proceeds of only those the ULIP which have an annual premium less than Rs 2.5 lakh. This cap is prospective in nature and would only be applicable for policies purchased beginning February 1, 2021.

The non-exempt ULIPs would be treated on par with mutual funds. This seems to be nudging the ULIP investors towards alternative investment products such as mutual funds rather than combining insurance and investments.

The government has increased the allocation to the Pradhan Mantri Fasal Bima Yojana to Rs 16,000 crores in FY21-22 from the revised Rs 15,306.6 crores in FY20-21. This modest increase of 4.5% barely keeps up with inflation and is much less than the double digit increase witnessed in FY20-21.

Given the government’s borrowing plan, while the hardening of yields could involve some MTM losses, higher yields could signal growing investment income for the companies in the future.

Even though the insurance sector is growing, according to an economic survey, insurance penetration in India increased to 3.76% in 2019 from the 2.71 per cent in 2001, which is still lower than Malaysia, Thailand, and China’s, which reported 4.72, 4.99 and 4.30 per cent, respectively. These moves are expected to increase availability of insurance and drive penetration.

Sanjay Agarwal is Senior Director and Saurabh Bhalerao Associate Director with CARE Ratings