The Government’s decision to hike the foreign direct investment (FDI) cap in insurance from existing 26 per cent to 49 per cent looks like eliciting only a cautious response from investors.
First things first. There is no denial that the proposal — whose materialisation is, however, subject to legislative amendments requiring voting in Parliament — is necessary for driving future growth in the domestic insurance industry.
For a country with over one billion population, the size of life insurance business, a vital component of social security, is abysmally low. The share of the Indian life insurance business amounted to just 2.69 per cent of the global market in 2010, as per the data from by the Insurance Regulatory and Development Authority (IRDA).
The overall penetration of life insurance, even with 24 players today in the business, stood only at only 4.40 per cent of the country’s GDP in terms of total premiums underwritten. It only shows the immense opportunity for growth, which cannot, however, come without more capital flows into this sector. And that precisely also justifies the need for increase in the FDI limit. The other reason has to do with solvency margins. Right now, there may be headroom for expansion even without higher capital flows. Also, the first-year premiums of life insurers have shown growth from the quarter ended June this year. But this may motivate insurers to ramp up operations to a level higher than what their existing solvency margins might permit.
The increase in FDI, therefore, becomes relevant at this juncture, as it would facilitate higher capital flows for deployment. There are also challenges being faced by life insurers in the wake of the game-changing reforms in regulation pertaining to Unit-Linked Insurance policies.
A more stable regulatory turf (demarcating the powers of IRDA vis-a-vis other regulators), clarity on bancassurance channels and speedy procedural approvals for product filling would stimulate interest in expansion.
The challenges that emerged in the course of the last decade of growth may have made most promoters wary. The industry buzz, indeed, is that many of the promoters are itching for exit. In that event too, higher FDI is necessary to enable these promoters to exit and their foreign partners to take more interest in the existing ventures.
NON-LIFE
On general insurance front, the proposed increase in FDI would probably yield faster results than in life insurance. Growth per se has not been a real issue for non-life insurers. This segment has been posting a steady 18-20 per cent annual growth. However, high-claims ratio, erosion in premium rates due to excess competition that has led to almost unviable pricing, and, finally, lower solvency margins are key issues.
Some of these can certainly be addressed through higher capitalisation. To that extent, that proposed FID hike, if materialises, would bring some cheer to the non-life sector. For non-life, there are two further key reforms pertaining to motor and health insurance, which could trigger growth. The abolition of an existing motor third party pool from April 2012 and the creation of a declined risk insurance pool (to provide mandatory third party cover for all commercial vehicles) would help even out the losses from the former.
Similarly, the formation of a health insurance council and on-going review of health insurance regulations are positive factors for attracting FDI into the sector.
POLICYHOLDERS’ PROTECTION
The policyholder is also an essential stakeholder in the scenario. What would a higher FDI mean to policyholders? Will it give them more options in terms for product range and reach?
An answer to this is not easy, if the recent past is any guide. The unbridled growth of unit-liked product sales till about 2010, and a corresponding jump in the incidence of mis-selling of policies and consumer grievances, raises major concerns.
There is a priori reason to believe that a higher FDI limit is going to take care of the above irregularities in business practices. The noticeable increase in penalties imposed on insurers by the regulator is a sign of the increased official awareness on protecting the interest of consumers.
There is also an urgent need to spread awareness and education about insurance, along with its implications and intricacies to the common man. Some of the recent measures by the IRDA, the RBI and SEBI to spread financial literacy right from the school stage may be of use if sustained in the long run.
The regulatory reforms brought out by the IRDA in the last three years have also empowered policyholders, though admittedly much more is needed in this direction.
Foreign investors, on their part, may not really jump to invest in the Indian insurance industry at this stage.
They may prefer a cautious approach, in view of the domestic and global economic environment, in general, and current challenges specific to the insurance industry itself.