The enhanced 74 per cent foreign direct investment window and nudges by the regulator for listing received a lukewarm response, although there are expectations that the insurance sector could see renewed investment activity on these fronts in the coming months.
This was also recently flagged by the new IRDAI Chairman Debasish Panda, who said the regulator is reviewing investment norms for the sector to bring in more investments and deepen the insurance penetration in the country.
Key measures under this would be listing as well as higher foreign direct investment.
“This can be done by measures such as listing of insurance companies, which would also enable greater transparency and disclosure,” he had said, noting that with the LIC listing, close to 60 per cent of the market would get listed.
“That brings in a lot of transparency, disclosures, and access to the market to raise capital. This will help them grow, and our ultimate target of deepening insurance penetration will happen,” said Panda.
Solvency ratios
Experts point out that most insurers continue to have good solvency ratios despite the Covid-19 pandemic leading to higher claims. However, they would require capital for business expansion.
Higher FDI limits will attract more foreign capital, which will aid in increasing insurance penetration in India, said LIC has said in its DRHP.
Higher FDI limits will also enable more global insurance firms to enter India and bring in their best practices, thereby increasing competition and better pricing of insurance products, per the LIC document.
“There are several other benefits on increasing the cap, which include: (1) because of better availability of more capital than earlier, the insurance companies can increase impetus on business growth and diversification of their portfolio and (2) more options available to consumers with an increase in competition, which also leads to better offers for them,” it further noted.
This is crucial for a country like India, which is under-insured, compared to more developed economies.
While the penetration of life insurance sector went up from 2.15 per cent in 2001-2002 to 3.20 per cent in 2020-2021, non-life insurance penetration went up from 0.56 per cent to 1.00 per cent in the same period.
Insurance density (ratio of premium in US dollar to total population) in India remained same during 2019-20 and 2020-21 at the level of $78, according to IRDAI’s Annual Report. Enhanced FDI cap
However, nearly a year after the government permitted higher foreign direct investment of up to 74 per cent in insurance companies, only a few insurers have used this window to increase stake in their Indian ventures.
This includes Ageas Federal Insurance and the Future Generali insurance joint ventures.
Shailaja Lall, Partner, Insurance, Shardul Amarchand Mangaldas & Co, said the insurance market in India is evolving and maturing rapidly.
“The 74 per cent FDI cap for insurance companies is also seeing its fair share of interest. The good thing is that there are no conditionalities, such as the requirement for Indian ownership and control, which existed earlier.
“Many companies are waiting and watching. Some are also in negotiations to review their own JV contract clauses,” she said, adding that it is also about how many companies want to consolidate their operations in India. To be fair, a number of insurers have used the enhanced FDI cap of 49 per cent. Many insurance intermediaries and brokers such as Willis Towers Watson, Marsh and Gallagher have also used the 100 per cent FDI window for their Indian ventures.
Data with IRDAI indicate that against the 49 per cent FDI cap in insurance sector, the average foreign investment in Indian life insurers was 35.44 per cent as on March 31, 2021. It was 27.68 per cent for private sector non-life insurers and 29.38 per cent for private standalone health insurers in the same period.
Faster approvals
There is expectation of some streamlining of processes and approvals to enable investments in a smoother and faster manner. However, a blanket 100 per cent increase in FDI cap for the sector may not be in the offing.
G Srinivasan, Director, National Insurance Academy, said the higher FDI window of 74 per cent will lead to more capital into the insurance sector, which will enable more expansion and penetration.
“However, it will happen only gradually, and it is a call that has to be taken by each insurer on whether or not to increase FDI,” he said, adding that there may also be need to review the processes for such approvals so that they can go through more quickly.
Lall also said the processes must be streamlined for faster approvals. “For instance, any change in shareholding of more than 1 per cent needs approval from the IRDAI, and can take as long as three months. This can be very time consuming for a PE investor,” she said.
Further, from a regulatory perspective, foreign investors will evaluate whether they want to be in a regime where there can be a lot of unforeseen regulatory changes, which may impact their investment and control, she said. An industry source noted that many companies were looking at the higher FDI window. But they had put their plan on the backburner as the government left the top position vacant for about 10 months after IRDAI chief SC Khuntia completed his term on May 6, 2021.
The IRDAI has been nudging insurers to list on the bourses for some time now. But only a handful of companies have done so. This includes HDFC Life, ICICI Life Insurance and ICICI Lombard General Insurance, SBI Life Insurance, New India Assurance and the latest being Star Health and Allied Insurance.
While state-run life insurance behemoth LIC is set to debut on the bourses sometime this quarter, most other insurers do not have such plans for now.
“Listing is in the interests of all stakeholders and will lead to more governance and transparency. It will also improve the profile of the sector and increase insurance penetration,” said Srinivasan, but added that the decision to list will depend on the promoters and the board of each insurer.
The head of an insurance company also agreed and said the decision on when to list rests with shareholders.
“But as an insurance company, we are very forthcoming with disclosures. The idea behind listing is to bring more transparency and that we are already doing through our regular disclosures,” he said, adding that with the mega initial public offering of LIC coming in, more companies may consider listing on the bourses.
Lall said that with so much PE investments in insurance companies, there could be more instances of listing when they choose to exit.