Budget 2020:
Big-bang reform for Indian insurance will be to scrap ownership clause

As many as 70 insurance companies fight for business in India. Foreigners can own up to 49 per cent stake in an Indian insurance company without permission from the government or any other regulator. A much-talked about reform is lifting the cap. Finance minister Nirmala Sitharaman is expected to do that when she presents the Budget in February. Except that insurance reform will have to deal with rules on ownership and control of insurance companies. The law says an Indian insurance company has to be “Indian owned and controlled”. Why would a foreign investor put in money without getting control?

Subrata Panda , Business Standard
28th January

India’s insurance business is waiting for the Union Budget that is expected to increase the cap on foreign direct investment (FDI) in the sector to 74 per cent. One insurer predicts investments worth Rs 30,000 crore if foreign companies are allowed a greater role in a market saturated with 70 companies.

Foreign companies can own up to 49 per cent stake in an Indian insurance company without permission from the government or any other regulator—the so-called direct route. The finance minister, in the last Union Budget, had said the government will examine proposals to increase FDI in insurance after consulting the industry.

The General Insurance Council and the Life Insurance Council—organisations that represent the two sides of the business—have held consultations with the stakeholders, and so has the industry regulator, IRDAI.

Ownership obstacle

According to the Insurance Laws (Amendment) Act, 2015, an Indian insurance company has to be “Indian owned and controlled”. This gives the Indian partner the right to appoint a majority of the directors or control management of a company.

The government will have to reconsider the rule on Indian ownership and control if it raises the foreign investment cap, as without that an investor is unlikely to raise its stake in a company beyond 50 per cent.

"The government should direct the regulator to lift the restrictions regarding management and control because unless that is done, nobody would be interested in putting in money. However, once the issue of ownership and control is relooked at, it would give an impetus to the investors to pump in money. And, as much as Rs 30,000 crore would come into the insurance sector if that is done,” said Nilesh Sathe, a former member (Life Insurance) of Irdai.

India has 70 insurers—eight of them state-owned—and they can be classified three ways. General Insurance Corporation (GIC Re) and New India Assurance are the only two state-owned insurers—both listed.

Then there are top-tier companies, like ICICI Prudential Life Insurance, SBI Life Insurance, or HDFC Life Insurance, in which foreign investors have minority stake and their Indian partners are unlikely to make way. A foreign investor will be unable to increase stake even if the government relaxes the cap on foreign investment.

Lastly, there are insurers whose Indian managers are unable to invest capital and may look at foreign shareholders. These are typically mid-sized companies--Aviva Life Insurance, PNB MetLife and Exide Life, for example.

“If we categorise the Indian insurance sector into large-, mid-sized and smaller companies, the increase in FDI cap is unlikely to have any material impact on the larger industry leaders. But in the mid-sized and smaller players, who still need growth capital, there will be a positive impact but especially in those situations where the Indian shareholder is willing to dilute, the foreign shareholder is willing to step up with the underlying implication that the owned and controlled construct gets revisited”, said Sandeep Ghosh, partner and leader at Financial Services Advisory at EY.

“This would lead to better capitalized companies and increased competition among the players. So, it is does change the competitive change the competitive ability of some of the smaller and mid-sized players where the Indian promoter is short on capital and foreign players has the bandwidth to increase its stake,” he said.

FDI, just good or great?

The industry welcomed the government’s decision in July 2019 to allow 100 per cent FDI in insurance intermediaries-- brokers who sell insurance products—but it wants the next reform to tackle the cap on Indian ownership.

Ashvin Parekh, of Ashvin Parekh Advisory Services, said, “There will be no material impact if the cap is increased to 74 per cent from 49 per cent currently. I think the government missed the bus. They could have offered this particular sop earlier. This is already becoming a saturated market. So, whether or not foreign players will be interested to come in is not clear because the distribution will remain with the partners and distribution is a key thing in insurance.

“It would have been a great reform had it been done 10 years ago. The trouble came in with caveat of Indian ownership and control of management. When government relaxed the cap in 2015 form 26 per cent to 49 per cent, it was introduced with so much conditionality that it came as a surprise to most of the foreign investors,” he said.

Insurance companies, at any point in time, are required to have enough capital to pay off their claim liabilities. Indian solvency norms for insurers are not entirely based on risk. For every Rs 1 of liability, an insurance company must have Rs 1.5 in assets—capital that foreign investors can help with, said R M Vishakha, managing director and chief executive officer of Indiafirst Life Insurance.

“The government's intent to raise the FDI limit to 74 from 49 per cent, will provide an enabling opportunity to the Indian promoters to monetise their assets, in addition to providing an opportunity for increased FDI,” said Vishakha.

Parekh, of Ashvin Parekh Advisory Services, said the Top 7 companies in the industry have “enough to take care of solvency needs” and greater FDI will help those seeking more capital.

Non-life insurance companies collected Rs 1.26 trillion as premium till November in FY20, registering a growth of 6.26 per cent. Life insurance companies collected Rs 1.69 trillion, clocking 37.22 per cent growth in the same period.

Foreign investment will help insurance to reach millions in the country, but for that the caveats on management and ownership must be scrapped.


Insurance’s growth pangs

Surplus income with the middle class and the upper middle class has reduced as the economy slows down, dragging down the life insurance sector

Banks tie up with insurance companies to sell their products, but this mode of distribution has been struggling of late because state-owned lenders are busy with their consolidation

Unit-linked products are a significant portion of life insurers’ business, but their sale has plateaued

General insurers suffered losses because of natural disasters in various parts of India 2019. There were floods in Kerala and Karnataka; a 'severe cyclonic storm' in Odisha and a heatwave in Bihar. Hundreds died or were injured.

General insurers are pulling out of crop insurance as extreme weather events increase claim rates

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