FDI can keep the insurance sector afloat

The new government brings the promise of economic reform and India Inc keenly awaits some strong action to clear policy logjams. The insurance industry has been very vocal in favour of passing the Insurance Laws (Amendment) Bill that proposes a hike in foreign direct investment (FDI) limit to 49 per cent, from the current 26 per cent. It is hopeful that the Budget will consider increasing the FDI limit for non-life and health insurance, followed by life insurance.

The insurance sector opened up for private players in 2002. In the last 13 years, the 23 life insurance companies that operate in India have explored many new distribution channels, done product innovations and infused more than ₹30,000 crore of capital to boost business.

Yet, India’s 1.2 billion population has among the least covered by insurance. Only about 6 per cent of Indians have insurance cover; of these about 4.4 per cent have life insurance and 5 per cent have a reasonable health cover. Most small businesses (family-owned) too have no or negligible insurance. In these circumstances, the need of the hour is support for the insurance industry through long-term capital infusion by hiking the FDI limit.

Life insurance is a long-term and capital intensive business with a long break-even period, about a decade or so. Most private players have accumulated losses, not due to inefficiency but due to the nature of this business. Over the past few years the Indian life insurance industry has undergone de-growth and market consolidation despite being one of the top 10 insurance markets in the world. If this opportunity to infuse capital is missed, there is every likelihood of global investors rethinking their options. The earlier notion of allowing foreign institutional investors (FIIs) to invest 23 per cent would not only have compromised the interests of foreign investors, it would have been detrimental to India’s own insurance needs.

India, given its demography, has always been an attractive market for global insurers who have always been keen to expand their business in the country. The FDI limit for insurance in India is among the lowest globally. China, Indonesia and Malaysia have an FDI limit of 50, 80 and 51 per cent respectively. Japan, South Korea, Vietnam, Hong Kong and Taiwan allow 100 per cent FDI.

Even in India, sectors such as banking, mutual funds and NBFCs have no restrictions. Hence, this is the right time for allowing global investors to bring in the much required foreign capital, which otherwise will find its way to competing markets.

Life insurance is a capital intensive business. Insurers need capital to maintain a healthy base, offer a wider bouquet of products, and protect consumer interests against insolvency. Increased capital inflow will enable insurers to offer products that are capital-guzzling but work in the customer’s interest without taking a toll on their bottomlines. It will also give domestic players access to state of the art technology to upgrade their distribution systems and generate long-term funds that are critical for infrastructure development.

This will also facilitate the Government’s agenda on financial inclusion.

An increase in FDI limit can help promote pension penetration. It will also incentivise insurance intermediaries such as brokers and web aggregators through higher commissions. The increased capital inflow is also likely to give a fillip to relatively new private life insurance companies that have seen a decline in new business premium over last two years. If the FDI limit is hiked, Indian promoters of life insurance companies will gain the most, as several of the relatively younger companies have not raised fresh capital in the last three years. This indicates that a change in stake will be through sale of shares by promoters rather than issue of fresh shares. Additionally, given that insurance is a very tightly regulated business, it will in no way be exposed to systemic risks.

The insurance industry not only protects human life but is also a key resource for raising funds for the country’s infrastructure. According to the 12th Plan, India needs to spend about $1.2 trillion on infrastructure build-up and expansion, and there’s almost a $300 billion gap in funding. Increasing FDI in insurance is one way of meeting this requirement.

In the past few years, decline in GDP coupled with high interest rates and policy paralysis has led to the deterioration in corporate asset value. Part of the money the Government raises through disinvestment of local insurance partners could be used to bolster the capital base of public sector banks. According to RBI estimates, banks will require extra capital of ₹5 trillion, including around ₹1.75 trillion of equity capital by 2019 to meet the requirements under Basel III. The capital from both disinvestment and entry of new players could be used to facilitate this.

The insurance sector in India not only provides solutions for long-term savings but also, purely due to size, provides stability to the financial markets and acts as a buffer against external shocks.

According to J Hari Narayan, former chairman of the Insurance Regulatory and Development Authority, if the Government increases the FDI limit, the insurance sector could receive ₹5,000-6,000 crore of foreign investment. The Life Insurance Council has estimated a potential foreign exchange inflow of $10 billion. In addition to fuelling the growth of the insurance industry, this capital will also help India overcome the adverse forex situation, as FDI would be long-term sticky money, much better than the fickle FII money that’s pouring in currently.

Finally, even as the Government is expected to consider a hike in the FDI limit, it will exercise the utmost caution and not pass on the reins of India’s insurance business to foreign players. There are talks about raising the FDI limit along with conditions of health riders and tax concessions for insurers.

One of the challenges is the Government’s proposal to increase FDI limit but not give voting rights to the foreign partner. This runs the risk of not cutting ice with the foreign partners as even with 49 per cent investment in the venture, control will remain with the Indian promoter. Still, there is hope that the outcomes will be positive.

The hike in FDI limit will not only be a welcome signal for the entry of new technologies, but also lead India towards deeper product expertise and better underwriting skills.

The writer is the MD and CEO of Aviva Life Insurance