India Raises FDI Cap for Insurance Sector to 74%, Ownership Restrictions Eased
India’s insurance sector is a low hanging fruit and the move to raise the FDI cap is expected to boost insurance penetration, which has immense scope for growth vis-à-vis the global average. In the non-life segment, health insurance and crop insurance are viewed as rising upstarts, a fallout of the pandemic and seasonal and climactic disturbances.
India recently passed The Insurance (Amendment) Act of 2021, which increases the foreign direct investment (FDI) cap in the insurance sector from 49 percent to 74 percent. The amendment act also removes contentious foreign ownership restrictions that were introduced in 2015 and had prevented the desired inflow of foreign investments to the sector.
Rationale behind the decision
The post pandemic world has seen a definitive shift in priorities for people across the world due to new uncertainties. It thus becomes timely for a renewed look at facilitating the insurance sector 0 injecting much needed foreign capital to supplement domestic long-term capital, technology, and skills. These cumulatively will enhance insurance penetration, social protection, and job creation in the sector.
With its massive population of over 1.3 billion, the insurance penetration in India remains grossly under-served at 3.76 percent (as of 2019). This is abysmally low as compared to the global average of six percent. However, with the expansion of digitization, India is hoping to bridge this massive demand supply gap through beneficial partnerships between Indian and foreign counterparts.
Presently, the value of gross premiums collected by life insurers is over US$68.32 billion (INR 5 trillion) with both insurance penetration levels as well as the density on an upward trend.
Key trends in India’s insurance sector
The insurance sector can be classified as life and non-life, also known as general insurance. Post liberalization in the early 1990s, India’s insurance industry recorded significant growth with an increase in the number of private players. Subsequently, the insurance sector opened to foreign investment in 2000 – first allowing foreign companies to have up to 26 percent stake in the Indian insurance sector. In 2015, this limit was further relaxed to 49 percent but the government introduced ownership restrictions where a foreign entity could not have the controlling stake in the company. Finally in 2021, the limit has been raised to 74 percent and ownership restrictions eased.
Meanwhile, in 2019, the government liberalized the FDI for insurance intermediaries to 100 percent, with the aim of increasing market penetration and making the sector more competitive through increased technical innovation and know-how.
As of March 2019, there were 70 insurers operating in India. Out of these, 24 were life insurers, 27 were general insurers and seven were standalone health insurers. Additionally, the country also had 12 re-insurers, including foreign reinsurer branches. In the life insurance sector, the Life Insurance Corporation (LIC) is the only public sector company, while the non-life insurance sector has six public sector insurers. Private sector insurers have been recording good growth, particularly in the non-life sector claiming a 48 percent market share in FY 2020. This market share is projected to reach 55.80 percent in FY 2021-22.
In the non-life segment, health insurance and crop insurance have been deemed as rising upstarts along with the traditionally popular motor vehicle insurance. Growing awareness regarding healthcare along with the increased burden of high out-of-pocket-healthcare expenses are drivers propelling the growth of health insurance demand.
Reasons to invest
- Large market and robust demand: Increased digitization and connectivity has increased awareness among people about newer products penetrating the market. Innovative products like Unit Linked Insurance Plans (ULIPs) and Crop Insurance have changed the traditional old insurance New distribution channels, including bancassurance (the selling of life assurance and other insurance products and services by banking institutions), online distribution, and non-banking financial companies (NBFCs) are aiding growth by increasing the outreach of the insurance products.
- Opportunity for growth: As mentioned earlier, India’s market is highly underserved and given its population size, the Indian insurance sector is low hanging fruit for investors. According to industry estimates, India’s insurance sector is expected to revert to its pre- COVID growth trajectory of 14-15 percent annually over the next three to five years.
- Sector-wide open removing ownership restrictions: With the latest announcement of increasing the FDI cap in Insurance sector to 74 percent, there is now a possibility for foreign partner(s) in existing joint ventures to have an increased stake in the entity’s ownership. The previous requirement of an Indian controlled management has been relaxed to make it more investor Foreign players can also expect attractive valuation of exits for existing investors as well as entry of new investors due to removal of ownership restrictions. Increasing institutional interest in the sector along with deepening capital markets will also contribute towards attractive entry and exit valuations.
- Increased technological integration: India is on its way to become a fully digitized ecosystem with augmented capacity for advanced technology absorption. There are more than 140 insurance tech start-ups in Foreign players can meaningfully participate in this technological integration to expand their target group, increase penetration and access, and tap into growth opportunities. This is especially relevant for Tier II and Tier III cities in India, which have been rapidly growing and are untapped growth segments.
- Conducive policy support: The Indian insurance sector is well regulated with the apex regulator, IRDAI (Insurance Regulatory and Development Authority), having complete flexibility to frame regulations for the sector. Lucrative tax incentives are also offered on insurance.
Challenges and sector outlook
India’s insurance sector is a capital intensive one, demanding a solvency ratio of 150 percent. Owing to its long gestation periods, the sector favors players with deep pockets and offers foreign investors with attractive opportunities to establish, expand, and enrich their insurance and re-insurance businesses under diverse insurance categories.
Post the much-awaited decision to increase the FDI cap, stakeholders are now eyeing a detailed policy with relaxed regulatory norms and lenient dividend repatriation norms.
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