Experts speak on FDI reforms in Insurance

Sometime back in July 2012 we had written about the first positive ripples of investment in the Insurance Sector. We had discussed about the possibility of increasing the FDI investment cap from the erstwhile 26% to 49%. With the recent ongoing parliamentary discussions this possibility might soon be a market changing reality for the Insurance Business. Though we have to wait till November and hope for a smooth approval of this proposed reform, let’s have a look at how the industry is impacted and what the industry experts have to say on this:

Puneet Nanda , executive director ICICI Prudential : “Raising FDI cap will send positive signals to foreign investors and will encourage new players to enter the Indian insurance market. Increased competition will lead to the introduction of newer and lower-priced products and better service from insurance firms.”

Vibha Padalkar, executive director and chief financial officer, HDFC Life: “More companies will enter the sector because India is an underpenetrated country when it comes to life insurance products. Along with lower prices, customers will also see new products hitting the market”

Nathan Parnaby, CEO of Standard Life’s Asia and emerging markets division: “The Indian government and their finance minister are doing the right thing…We would like to look at the opportunity of increasing our stake”

[Standard Life holds 26% stake in HDFC Standard Life Insurance]

Louise Shield, an RSA spokeswoman: “We welcome the move, it’s a step in the right direction”

[RSA holds 26% stake in Royal Sundaram Alliance]

Although RSA has not expressed any interest to increase their stake in Royal Sundaram Alliance, others like Standard Life and Prudential (currently having stake in ICICI Prudential) have expressed interest to take advantage of this reform. As per market experts, Standard Life and Prudential would need around 300 million pounds and 700 million pounds respectively to increase their stakes to 49% in HDFC Life and ICICI respectively. Although a 49% doesn't give any controlling stake to either of them, it induces greater involvement and interest in business strategy, management and implementation.

From every corner of the globe we are getting positive vibes about this proposed reform. Perhaps opening up FDI in Insurance is a great way to explore the full potential of a strong market as India. We certainly hope that this move is not thwarted by unreasonable political aspirations.

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Government plan to increase FDI cap to 49% in the Insurance Sector

The decision which has been pending since May 10^th this year and which had once been rejected by the Standing Committee in December 2011 finally goes in favor of the insurance companies.  In its latest report Government seems optimistic in raising the Foreign Direct Investment (FDI) limit in the insurance sector to 49% from its existing 26%. As per the current regulation a foreign player can have a maximum of 26% stake in the insurance companies. This change of almost doubling the FDI limit is seen as a need to give a push to the reforms laid out by the Government this year.

Over the years post liberalization of the insurance segment, both the domestic companies and their foreign partners had been requesting the need for an increased participation of the latter. However the Standing Committee contended by justifying that an increased presence of the foreign companies would unnecessarily expose the Indian segment to the risk and vulnerabilities of the foreign market.  However, the panel, headed by senior BJP leader Yashwant  Sinha, had agreed on the need to bring in comprehensive changes in the archaic laws governing the insurance sector.

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Indian General Insurance Sector a hidden gem

Standard and Poor's, in  a recent study on the Indian General Insurance sector has highlighted something that we always knew but did not appreciate enough: that India's general insurance sector is a goldmine, poised for excellent growth.

This conclusion stems from the fact that general insurance industry penetration as a percentage of GDP is amongst the lowest in India.  With a combined annual premium of Rs 40,000 crores, the Indian General Insurance sector is about 0.6% of GDP. With rising income levels, galloping growth rates in motor car ownership, increasing awareness of healthcare and healthcare related costs, greater predisposition to travel and home ownership, almost all the sectors within the general insurance industry are poised for impressive growth.

A few dark clouds loom though. The public sector insurance companies continue to bleed with significant underwriting losses ( masked by sale of family jewel investments). Third Party motor continues to be the biggest drain as far as underwriting losses go. Health insurance claims are also threatening to spiral out of control. The public insurance companies will have to get their act together as far as motor and health underwriting is concerned.

It is hoped that the government will relax the FDI norms allowing higher than 26% FDI in the insurance sector in India. This will greatly help in allowing more capital into this industry, leading to a better growth rate. It is also hoped that public policy, especially in the case of health and health insurance, will contribute towards a higher awareness for health insurance products.

At our end, we wouldn't be surprised if the non life insurance industry outperforms its more glamorous brother -Life Insurance- and becomes a 2 lakh crore industry by the turn of the next decade.