Finance Minister Nirmala Sitharaman’s Budget proposal to raise the limit of foreign direct investment (FDI) from 49 per cent to 100 per cent in the insurance broking industry that accounts for a pie of Rs 4,500-5,000 crore has come under flak from domestic brokers.
Domestic insurance brokers, numbering over 400 consisting of direct brokers, reinsurance brokers and composite brokers, have opposed the 100 per cent FDI in the insurance broking industry as the segment doesn’t need much capital and the proposal wouldn’t ensure large inflows of overseas investment into the country. The segments in the insurance industry that will benefit from the new move are: insurance surveyors and loss assessors, third party administrators (TPA), web aggregators and corporate agents.
Currently, the insurance broking industry deals with over Rs 30,000 crore of premium primarily from the non-life industry which generated over Rs 170,000 crore of premiums in 2018-19. As insurance brokers receive between 15-20 per cent of commission in placing different categories of general insurance business, they account for around Rs 4,500-5,000 crore of business.
According to Sohanlal Kadel, former President, lnsurance Brokers Association of India, even considering for a moment to permit 100 per cent FDl in broking when it is 49 per cent in insurance companies would be “travesty of justice as it would be a direct discrimination against local insurance brokers”. Further, this would decimate most of the lndian brokers engaged in direct insurance and reinsurance broking and who do not have a joint venture with any overseas broker.
“It is very clear that 100 per cent FDI will not make any valuable contribution to the industry from the current permissible FDI limit of 49 per cent except perhaps repatriation of profit which can be more than the capital they bring in and thereby drain of our foreign exchange,” Kadel said.
IRDAI panel had suggested 100% FDI in sector earlier
A panel formed by the IRDAI in 2014, under Suresh Mathur, had suggested then that 100 per cent FDI be allowed over three years. However, the suggestions of the panel were not implemented after the FDI cap in the overall insurance industry was raised from 26 per cent to 49 per cent. The segments in the insurance industry that will benefit from the new move are: insurance surveyors and loss assessors, third party administrators (TPA), web aggregators and corporate agents.
Supriya Rathi, promoter director, Anand Rathi Insurance Brokers, said 100 per cent FDI in insurance intermediaries is not going to increase the insurance penetration in India as they will not be focusing on micro insurance or broking in smaller cities and towns but focus more on servicing large insured on their large policies or focus on reinsurance. “Proposing 100 per cent FDI in insurance intermediaries with a view to open up investment across sectors will not likely have much impact on the FDI inflows,” Rathi said.
Currently, half a dozen of foreign insurance brokers are operating in the Indian market through joint ventures (JVs) formed with Indian partners. Prominent among them are: Marsh, the largest insurance broker in the world, Willis Towers Watson, the third largest insurance brokers, Howden, UIB, Arthur J. Gallagher & Co and Toyota Tsusho Insurance Broker.
In FY 2018-19, new regulations by the IRDAI had specified Rs 75 lakh (earlier Rs 50 lakh), Rs 4 crore (Rs 2 crore) and Rs 5 crore (Rs 2.5 crore) of capital for a direct broker, reinsurance broker and composite broker respectively. “The industry may not get any larger benefits out the move to allow 100 per cent FDI in the insurance broking industry. On the contrary, small and medium scale brokers will be wiped out from the system as the overseas brokers have more muscle power,’’ said sources in the industry.
“Some international broking houses lobbied for 100 per cent FDI in the Indian insurance broking industry,’’ said sources.
A panel formed by the IRDAI in 2014, under Suresh Mathur, had suggested then that 100 per cent FDI be allowed over three years. However, the suggestions of the panel were not implemented after that FDI cap in the overall insurance industry was raised from 26 per cent to 49 per cent. However, in the domestic insurance industry, the current 49 per cent FDI cap has been maintained at the same level.
“Previously when the FDI was increased from 26 per cent to 49 per cent, only two foreign players increased their stakes in their insurance broking entities,” Rathi said. “This move will likely benefit just the top two or three global insurance brokers already present in the country and will increase foreign dominance in the insurance intermediary space. Moreover, it may increase outflows from the country as foreign players tend to repatriate their profits,” Rathi said.
However, several experts welcomed the move to hike the FDI. “The hike in FDI will bring in more technology and efficiency I the segment and boost insurance penetration,” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP.
Govinder Kapoor, Chairman, Proclaim Insurance Surveyors and Loss Assessors, said, “we are confident that an increase in FDI limits to 100 per cent would stimulate further investment in the insurance intermediary sector by foreign insurance surveyors and loss assessors, along with other intermediaries. This will also lead to enhancement of service standards in alignment with global trends which would benefit the ultimate policyholders interest.
Vikram Chhatwal, Whole-Time Director, Medi Assist Insurance TPA, “the change in FDI will attract significant investment in the sector and enable adoption of global best practices and lead to significant job creation both directly and indirectly. This policy will support the vision of ‘Ayushman Bharat’ and healthcare for all.”
Insurance broking is like any other financial or commodity broking services. The issue was recently discussed in a high level inter-ministerial meeting,” government sources said.