We are about to hit another Parliament session but the big bang liberalisation made by the Budget session for the insurance sector is yet to show more than fleeting results.
Four months since Parliament cleared a higher foreign direct investment (FDI) cap for the insurance sector at 49 per cent, none of the major Indian companies have made any tangible moves to rope in capital from abroad. As a result the cost of buying insurance for the domestic consumer is rising just as it did last year and the year before. All this is happening in one of the least penetrated insurance markets in the world. It is less than 4 per cent for the Indian economy and a terrible 0.8 per cent for general insurance, less than even Malaysia or Thailand, forget the other BRICS members. The cost of renewals of motor insurance premiums this year was over Rs 500 more as the regulator has raised third-party rates for all categories of vehicles. The choice for those who wanted to keep their renewal premiums low was to cut the declared value of their vehicles. It is bad for extracting claims and hits against the reason why insurance cover is taken out.
Similarly the health insurance rates could also rise as Insurance Regulatory Development Authority of India plans to ask insurance companies to set aside more capital for financing group health insurance. Most people in the organised sector avail of health insurance through the group cover their company offers.
The conclusion is clear. There is something bothering the 55 insurance joint ventures from making use of the opportunity to raise capital. There is no doubt that the insurance sector needs capital. The general insurance sector needs it even more — their combined loss in 2013-14 was Rs 7,549 crore. And that capital can only come from their overseas partners.
For the additional capital to come through, the companies need to do a valuation exercise of themselves. In other words they need to figure out how much is the worth of the capital the Indian promoter holds. It is a process of price discovery, says Ashwin Parekh, managing director of the eponymously named Advisory Services.
In other words, the Indian promoters have to take a haircut since their companies have lost money from the time they were set up because of the losses those companies have incurred. It is a painful process and as The Indian Express found out, it has made life difficult in some of the largest insurance companies.
Keki Mistry, CEO, HDFC and on the board of directors of HDFC Ergo, said that the company “has the ability or the option and agreement to take the stake to 49 per cent based on the valuation which would be done by two independent valuers. My sense is that … the process may take a little while because these things take time, you have to revise shareholders agreement, look at valuation and all of that”.
This is where the problem simmers. If the foreign venture were to use the market route to bring additional capital, they would need some data on valuation. But to decide on the valuation the companies would have to agree for listing in the market. The chunk available for the Indian partners to offer would be only 2 per cent, if they wish to retain 51 per cent of holding with themselves. Anything more and the control would pass to the foreign venture just when the market is looking up, hardly an appetising idea. There is a possibility that some of the better performing companies could still pick up the gauntlet. But here it is the foreign investor which plays spoilsport. Some of them want the division to happen at the old valuation rates without the market coming into play.
The only way for the respective percentages to work and yet leave some gravy on the table for the Indian promoters was if the rules for valuation of the insurance companies were to be relaxed.
Parekh said the most plausible way out this could happen would be for the Reserve Bank of India to offer a leeway for the Indian partner on the fair valuation rules.
And, till that happens while some companies have approached FIPB, IRDA, the list of them does not include the top five, says Shashwat Sharma, Partner, management consultancy at KPMG. Premium rates would remain high for now.