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Thursday, February 25, 2021

Insurance sector thrown open: FDI hike to 74% sets stage for its takeoff

Foreign inflows in insurance companies will also enable them to become more effective vehicles for household savings, creating long-term assets in the economy.

Written by Sandeep Singh , Sunny Verma | New Delhi |
Updated: February 2, 2021 7:36:06 am
Insurance sector thrown open: FDI hike to 74% sets stage for its takeoffThe government’s move to raise FDI limit further to 74 per cent, therefore, is a bold one in this political context. (Representational Image)

Finance Minister Nirmala Sitharaman’s Budget announcement of increasing the FDI limit in insurance from 49 per cent to 74 per cent could lead to an unprecedented expansion of the insurance sector, its penetration, its level of competition, and value for customers in terms of better products at lower cost.

Foreign inflows in insurance companies will also enable them to become more effective vehicles for household savings, creating long-term assets in the economy.

“I propose to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49% to 74% in Insurance Companies and allow foreign ownership and control with safeguards,” said Sitharaman.

While this may bring in an initial thrust of foreign capital within the industry, participants in financial services sector say the decision may change the face of the Indian insurance industry in terms of technology, product offerings and resources. Infusion of capital may also lead to faster growth, deeper penetration of the private sector across the country and employment generation in the sector.

Stating that the foreign joint venture insurance companies were reluctant bringing in their global practices into Indian joint ventures until they had the majority stake, Jaspal Bindra, chairman, Centrum Group said, “With 74 per cent ownership, now foreign partners will have every motivation to bring in the full game in terms of range of marketing products, range of resources and full technology platform.”

He added that while the insurance sector, currently has issues like high premiums which affects value customers, “I think this will bring in the right amount of competition and the full range of products.”

Finance Minister Nirmala Sitharaman carrying the first digital budget outside the Parliament on Monday. (Express photo by Praveen Khanna)

There are many who feel that while FDI limit enhancement will lead inflow of capital in the companies, it will also develop the insurance industry as a big channel for generating long-term money for development of the economy and creating long-term assets.

“Equity capital in India is at a shortage so besides leading to deeper penetration and bringing in cost efficiency, the insurance sector will play a big role in the economy as it can channelise household savings into long-term investments. Banks have funds but they are not investment companies. Besides banks, we need insurance and pension for creating long-term assets and now insurance will play that role in a bigger way,” said Rashesh Shah, chairman and CEO, Edelweiss Group.

While insurance penetration as a per cent of GDP currently stands at just 3.71 per cent, India has a big unserved market and experts feel a lowering of cost and simpler and more affordable products may push this up. More so, given the numbers across demographic groups.

Incidentally, raising FDI in insurance has faced political opposition in the past. A bill to raise FDI in the sector to 49 per cent from 26 per cent was introduced by the UPA government in Parliament in 2008. However, it could not be passed due to opposition from Left parties and others till 2015, when the BJP-led NDA government promulgated an Ordinance to give effect to higher FDI in the insurance sector.

Sitharaman and Anurag Thakur addressing the press after the Budget presentation

There has been opposition to higher FDI as it is seen as exposing the sector to short-term volatility, possibility of sudden pullout of funds by foreign companies and putting hard-earned savings of policy holders at risk.

The government’s move to raise FDI limit further to 74 per cent, therefore, is a bold one in this political context.

Enhancing the limit, Sitharaman said that under the new structure, the majority of directors on the Board and key management persons would be resident Indians, with at least 50 per cent of directors being independent directors, and specified percentage of profits being retained as general reserve.

While the onset of Covid has seen a rise in demand for insurance product – life and health, the sector has been on a steady expansion given its low base. In the nine-month period, between April and December 2020, the first-year premium for private sector life insurance companies grew by 6.54 per cent over the corresponding period last year.

While the standalone health insurance companies saw their gross direct premium underwritten (GDPU) rise by 9.5 per cent, the general insurance companies saw their GDPU grow by 1.14 per cent in the nine-month period.

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