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FDI relaxation in insurance: Fresh funds to unlock domestic potential

Govt’s decision to increase the FDI cap in insurance has resulted in foreign capital infusion, with firms raising stakes in their domestic joint ventures.

Written by Sandeep Singh | Updated: December 29, 2015 6:37:46 am
Most people in the organised sector avail of health insurance through the group cover their company offers. (Source: Reuters) The FDI in the sector witnessed a sharp uptick over the last one month. (Source: Reuters)

The government may have failed to clear the Goods and Services Tax Bill 2014 along with several other reforms that are still in the pipeline, but one sector that has seen a rebound in investor interest after the Centre eased the investment cap this year in the insurance sector. So far, 10 companies have witnessed an increase in stake by their foreign partners in joint venture insurance firms. Industry experts feel that this is expected to push insurance penetration and boost economic activity going forward.

The FDI in the sector witnessed a sharp uptick over the last one month. Among the series of FDI announcements, Mitsui Sumitomo Insurance (MSI) and ERGO have been the latest to increase their stakes in their insurance venture. Last week, MSI increased its stake in Cholamandalam MS General Insurance from 26 per cent to 40 per cent for Rs 882.7 crore and on December 17 ERGO Insurance Group announced to increase its stake in HDFC ERGO General Insurance from 25.84 per cent to 48.74 per cent with an additional investment of Rs 1,122 crore. Similarly, Nippon Life, in November, announced an investment of Rs 2,265 crore for an additional 23 per cent stake in Reliance Life Insurance.

There have been six more instances where a foreign partner has announced to raise its stake from 26 per cent to 49 per cent and they are — AIA in Tata AIA Life Insurance Company; Bupa in Max Bupa Health Insurance, Sun Life Financial in Birla Sun Life Insurance at an investment of Rs 1,664 crore, AXA in life and general insurance joint ventures with Bharti Enterprises. Similarly, Aegon also increased its stake in Aegon Religare Life Insurance to 49 per cent. Following Aegon’s decision to raise stake, the company has now been renamed to Aegon Life Insurance. Standard Life had increased its stake in HDFC Life to 35 per cent earlier in August.

The increase in stake by the foreign partners and inflow of money is expected to provide a boost to the growth and development of the insurance sector.

fdoEven though the money may not be going directly into the company and may instead go either to the Indian promoter or into debt repayment, sources within the industry say that it will improve the promoter’s ability to fund the company’s expansion, which in turn may have a notable economic impact in terms of increase in distribution network, job creation and routing individual savings into financial instruments, among others.

“At a larger level, if I need money to go and spend on distribution and if my shareholders are strapped for money, they won’t allow me to do that. The inflow of funds from the foreign partner just eases the promoter’s ability to fund growth. It could potentially go up,” said Ritesh Kumar, managing director and CEO, HDFC Ergo General Insurance. He further added that, “While the money may not come into the company but the second round of funding, after a decade, shows their confidence and commitment. So as and when it is required they will bring in the money and it will find its way into — distribution expansion, product innovation, development, skill development.”

There are others who point that firms which don’t have deep presence here will set up their infrastructure for the same. “With 49 per cent, the capital commitment will be much higher and this will result into deeper reach, bringing in new products, better processes. While newer players will look to enter into smaller cities, we will see the latest products that are being launched globally, also simultaneously getting launched in India,” said Sam Ghosh, CEO, Reliance Capital.

Other players too agree with this. KS Gopalakrishnan, managing director and chief executive officer of Aegon Life Insurance said that the FDI ease up will encourage capital infusion by attracting investments from foreign players and will also lead to employment generation

“It will enhance quality of insurance cover, support in technology upgrade and push firms to provide long-term savings vehicles and especially in meeting the huge infrastructure financing requirements. Capital infusion will play a key role in driving it (penetration) and reaching out to uninsured population. With more funds coming in, the insurance companies will create new employment opportunities,” said Gopalakrishnan.

Where will the money go

While arguing for an increase in FDI, the industry players had earlier said that they need capital to increase their reach, develop new products and improve on quality of service. Now that the government has increased the FDI limit and the funds have started to flow in, it should be a matter of time before these companies start rolling out their expansion plans and offer better products and services.

As of now, while some large private sector insurers have presence across some smaller cities, they are still not present in many others. In fact for smaller players, the number further narrows down as they are present only in larger cities.

So it is likely that there will be investment done by these companies in smaller cities in a bid to set up their distribution network, team of surveyors etc.

Aegon Life, plans to go local in certain areas. “We have identified certain key clusters that we believe can be important contributors to our overall business. Cities such as Ludhiana, Ahmedabad, Baroda, Bhubaneswar, Cuttack and Chennai are amongst the few pockets where we would like to focus and build a strong local connect. Our aim is to be amongst the top five players in the cluster locations that will contribute towards business worth Rs. 30-50 crore over a period of 2-3 years,” said KS Gopalakrishnan, managing director and CEO, Aegon Life Insurance. He further said that the investments would be utilised to build a robust business model including infrastructure.

Product development service enhancement will be another key area. Ghosh said that globally, in the general insurance sector, the new innovations are on savings linked products and that is something that we will see coming into India too.

Technology is another area where these firms may invest. While companies will look to reach out and be physically present in smaller cities, they are looking at the use of technology to reach out to people in the rural areas.

“In a country like ours, the potential in the top 20-30 cities is more but there is a deemed market outside of it as the small towns and villages are mostly untapped. While we would like to be physically present in smaller cities, to tap rural areas I don’t think physical presence will be an economically feasible option and so we would like to use technology to reach,” said Kumar, adding that the Payment banks and small banks will also play a role in taking financial services to rural customers.

Aegon plans to invest over Rs 100 crore in technology and various digital initiatives. “For instance, we have developed a mobile-first website that provides users with an enhanced & simplified buying experience,” said Gopalakrishnan.

At the end, the biggest beneficiary is going to be the consumer as stringent competition may result into competitive pricing of products by insurance companies along with improved services and better claim settlement ratio.

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