The regulatory go-ahead for an increase in foreign direct investment (FDI) cap to 74 percent in insurance companies will see some foreign JV partners increasing their stakes in Indian ventures besides boosting competition in the cash-strapped sector.
Italian insurance group Generali and American insurance group Liberty Mutual are likely to be the first ones to go for increasing stakes in their Indian insurance ventures — Future Generali Life Insurance, Future Generali India Insurance and Liberty General Insurance respectively.
According to sources, the two overseas JV partners are keen to up their stake as they want a bigger slice of India’s underpenetrated insurance market.
“We could see the arrival of new foreign players, who could add value to the industry through their expertise and help increase insurance penetration. Moreover, foreign partners of Future Generali and Liberty could hike their stake in the companies,” industry sources told Moneymonc.
The main business of many Indian promoters, who also have a presence in the insurance sector, is not doing too well right now following economic slowdown compounded by COVID lockdowns and shutdowns. So they don’t have the extra cash available to invest into insurance.
“We have also seen the central bank advising lenders to restrict their investments in insurance companies. So, we believe that there is going to be a shortage of capital as far as this industry is concerned and that is worst that can happen to us at this point of time because to increase penetration, we need to have the capital to be able to expand,” Roopam Asthana, CEO and Whole Time Director at Liberty General Insurance told Moneymonc in an interview last week.
While there is a lot of talk of digital and the possibilities of people buying financial products digitally, it hasn’t really happened in insurance unlike in other industries. Face-to-face interaction is still required in insurance and that calls for more people, physical infrastructure and capital.
“So, to grow, to expand marketing and distribution reach, the industry needs more capital. Therefore, capital requirement is an area of pain for the industry and the 74 per cent increase in FDI is going to help solve some of these problems,” Asthana said.
Alongside, foreign partners are also expected to bring global best practices, innovations and increase competition in the insurance industry. Overall, it will be advantageous to customers.
After the passage of the enabling amendments in the Insurance Act 1938 to hike the FDI in the Indian insurance sector to 74 per cent from 49 per cent, the finance ministry, on April 13 notified the draft rules, Indian Insurance Companies (Foreign Investment) (Amendment) Rules, 2021, to implement the new provision.
“Insurance sector is highly capital intensive. The 74 per cent hike in FDI cap will give a boost to the sector and the risk-taking capacity will also increase accordingly,” says Shiva Kumar, ex-president, Edelweiss group.
ICICI Lombard MD & CEO Bhargava Dasgupta said, “The FDI hike will help the industry to grow further as the sector had been clamouring for the same for a long time. It will also result in a lot of competition because many foreign players, who had been waiting in the wings are likely to come in. Still, we are happy with that. If you are ok with the banking sector then why not for insurance? More competition would benefit the industry.”
India currently is the 11th largest insurance market in the world with an opportunity to break into the top 10 by the end of this year. Since the industry was privatized, it has grown annually at 15 percent. Still, it continues to be one of the least-penetrated markets in the world at mere 4 percent penetration.
This would in-turn lead to significant employment and opportunity for medium-skilled people to become insurance agents and contribute to insurance coverage and growth nationwide. It is also likely to support long-lasting investments in infrastructure projects.
Suresh Agarwal, Chief Distribution Officer, Kotak Mahindra Life Insurance, said, “Increase in FDI cap to 74 percent is a progressive step; it will attract additional capital into the industry. It is a sign of the government’s confidence in the industry, and it will help the deepen penetration in the under-penetrated market. Further, any additional capital could strengthen the balance sheets of insurers.”
As per the draft rules, in an Indian insurance company having foreign investment exceeding 49 percent, at least 50 percent of the net profit for the financial year has to be retained in general reserve if the insurer’s solvency margin is less than 1.2 times the control level of solvency for a financial year for which dividend is paid on equity shares.
Also, a majority of its key management persons, and at least one among the chairperson of its board, its managing director and its chief executive officer, have to be resident Indian citizens, said the draft rules.
Moreover, total foreign investment in an Indian Insurance company will mean the sum total of direct and indirect foreign investment by foreign investors in such company.
(Kumud Das is a Pune-based teacher and freelance journalist, who writes on insurance, banking and human interest stories)