BL Research Bureau
The Centre’s focus on unlocking long-term funds for infrastructure, has led to expectations of a revision in FDI limit in insurance in the upcoming Budget to 74 per cent from 49 per cent currently. Given that insurance is an important route through which the Centre can raise stable long-term money, opening up the sector can help bring in more capital into the sector.
But raising the FDI limit alone may not draw in foreign investors into the sector. The government had increased the FDI limit in insurance in 2015 to 49 per cent from 26 per cent. But nearly five years after the limit was raised only 8 life insurance players out of 23 private players, and 4 out of the 21 private general insurers, have foreign promoter holdings of 49 per cent. Many insurance players still have foreign holdings of 26 per cent or even lower according to data available for September 2019. Indian promoters still hold 100 per cent stake in companies such as Exide Life, Kotak Mahindra Life and Reliance General.
After the insurance sector opened up in 2000, both life and general insurance went through a series of regulatory changes. Until about 2014-15 only few insurance players were profitable. In a bid to help companies access capital more easily, the Insurance Laws (Amendment) Bill, 2015 was passed to increase the FDI limit in insurance from 26 per cent to 49 per cent.
But five years on, this has not led to huge foreign flows into the sector. Life insurance players such as Bajaj Allianz life, Canara HSBC Oriental Bank of Commerce Life, IDBI Federal Life, and Future Generali India Life, still have just 26 per cent foreign promoter holdings. In the general insurance space, there are fewer players with 49 per cent foreign holdings. Leading players such as Bajaj Allianz, SBI General and Tata AIG still have only 26 per cent foreign holdings.
Traction in the life insurance space appears to have been better with players such as Aditya Birla Sun Life, Aegon Life, Aviva Life, Bharti AXA Life, Edelweiss Tokio Life, Reliance Nippon Life and Tata AIA raising foreign holdings to 49 per cent (as of September 2019) from 22-26 per cent in 2013-14.
There has also been a lot of investor activity in the life insurance space, with top players such as ICICI Prudential Life, HDFC Life and SBI Life hitting the primary market in recent years. In case of HDFC Life, while the foreign promoter holding is 19.7 per cent, foreign portfolio investors (FPI) hold another 15.94 per cent as of September 2019. ICICI Pru Life has 22 percent foreign promoter holding and 12.12 per cent FPI holdings; SBI Life has 5.2 per cent foreign promoter holding and 23.72 per cent FPI holdings. Listing of these insurance companies has helped kindle foreign investor interest.
But given the broader picture across both life and general insurance players, it appears that raising the FDI limit alone may not assure easy access to capital. Both life and general insurance sector have seen series of regulatory changes in recent years, impacting profitability. But there has been significant improvement in performance of many private players over the past two to three years.
Getting past regulatory ups and downs
In 2010, the IRDAI issued introduced regulatory changes to unit-linked insurance products (ULIPs), including a cap on charges, surrender and discontinuance charges, and minimum levels of sum assured. In 2013, IRDAI issued regulations to link commissions to the premium paying term and to discontinue highest net asset value guarantee products, among other tweaks. The 2010 changes impacted the sale of ULIPs while non-linked products took a knock in 2013.
But since then top life insurers have re-structured their product portfolio, focussed on cost efficiencies and persistency to drive profitability. Of the 24 life insurance players (including LIC), 20 companies reported profit in 2018-19.
In case of general insurers, the transition from the tariff regime--when insurance players witnessed high growth-- to de-tariffing of most policies in 2007, led to re-alignment of business models. The dismantling of the motor pool in FY16 and increase in rates on motor third party also helped reduce losses and improve profitability. But more recently, the mandatory long term insurance—five-year third party cover for new two-wheelers and three-years for cars- impacted general insurers’ profitability. Rising losses from crop insurance also hurt few players.
Among the 21 private general insurers, 7 reported loss in 2018-19.
The key concern however is that few private players constitute large part of the market. For instance, top 7 private life insurance players contributed 76 per cent of the market in FY19 (in terms of Individual Weighted Received Premium). In case of private general insurers too, top 7 contribute about 75 per cent of gross direct premium. This concentration of business is a key impediment to draw in capital across the board, for the insurance sector.