Insurers see a change agent in new FDI rules

Inflow of more funds is likely to widen the reach of insurance and drive M&A activities in the sector where growth has stalled.

Fifteen years after the privatisation of insurance, the archaic, pre-Independence laws governing the business will give way to updated rules once the Insurance Laws (Amendment) Act, passed by both the Lok Sabha and the Rajya Sabha, is notified.

While the industry is betting big on the Act raising the limit of foreign direct investment from 26 per cent to 49 per cent, the new legislation is poised to change the way insurance is bought and sold.

The new law provides for not only a higher foreign investment ceiling, but also major reforms in the insurance sector ranging from claims settlement, agent remuneration and enhanced powers to the regulator.

At a time when insurance penetration is flagging, it is expected to give a much-needed push to insurance distribution by enabling banks to sell insurance products of more than one company in each category.

The most tangible change will be the consolidation in the sector. Shashwat Sharma, partner (management consulting) at KPMG, says this will be driven by four aspects.

"First, in joint ventures, the existing foreign partner may exit and new investors may take its place,” he says.

“Second, an insurance company that does not have any alliance partner may rope in a foreign partner. Third, global mergers and acquisitions could have an effect on insurance tie-ups. And finally, an insurance company with a diverse portfolio could decide to shed a business or businesses,” he adds.

Raising FDI to 49 per cent could bring in up to Rs 25,000 crore over the next few months. Arundhati Bhattacharya, chairman, State Bank of India, says that with the financial inclusion proceedings in full force, the timing of the increase in FDI limit could prove a game changer.

In a recent report, Kotak Institutional Equities says that India’s top five life insurance companies — Bajaj Allianz, HDFC Standard Life, ICICI Prudential, Max Life and SBI Life — stand to make capital gains of Rs 20,000 crore if they pare their stake to 51 per cent without issuing additional shares.

The report says that improving the annual premium equivalent flows on strong capital markets will boost the embedded value growth, driving up the valuations of insurance companies and offering capital gain for parent companies.

The sector is also expected to see private equity deals aimed at price discovery.

In December 2014, the Housing Development Finance Corporation had disclosed that the Azim Premji Trust would buy 0.95 per cent stake in its life insurance venture, HDFC Life, for Rs 198.9 crore (Rs 1.98 billion). The deal valued HDFC Life at Rs 19,890 crore (Rs 198.90 billion).

There are media reports about ICICI Bank too planning to sell part of its stake in its life insurance venture.

However, the new Act has clarified that the stake increase would have to be done at a fair value transaction as per the Reserve Bank of India norms.

Some deals that had been done on a prior pricing arrangement would have to be renegotiated.

Similarly, the provisions on Indian management and control of companies are a dampener with clarity awaited from the insurance regulator on what this implies and whether voting rights would be curtailed.

Whether the foreign investor would be allowed to have a say in the decision-making and to what extent is another ambiguous area.

Compared with the Insurance Act of 1938, the new legislation will give more teeth to the Insurance Regulatory and Development Authority of India, or IRDAI.

It equips the regulator with the power to define the limits on management expenses, commission limits for agents, qualifications of agents and surveyors, extent of obligation of motor third party liability and impose additional penalties for fraudulent practices and violations by stakeholders.

IRDAI plans to bring in 38-40 regulations in the next few months.

A primary target would be a cap on management expenses to help reduce overall expenses and improve the solvency ratio.

Rajesh Sud, CEO & managing director, Max Life Insurance, says that insurance companies are hoping that in order to nurture the industry and nudge it toward a growth path, IRDAI will follow a phased regulatory agenda that will allow stability and growth.

More insured people
Insurance penetration in India, or the percentage of total insurance premia to GDP, currently stands at 3.9 per cent, down from 3.96 in 2012.

According to Swiss Re data, the penetration is 3.1 per cent in life insurance and 0.8 per cent in non-life insurance. Insurance density, or per capita premium, has fallen to $52 (about Rs 3,120) from $53.2 in 2012.

Given these slides, there is hope, says Deepak Mittal, MD & CEO, Edelweiss Tokio Life Insurance, of increased capital inflows being used to expand distribution and to invest in technology and service infrastructure.

In health insurance, which the new law has classified as a separate segment, the industry expects the universal healthcare initiative by the government to boost growth.

Ajay Bimbhet, MD, Royal Sundaram Alliance Insurance, says that the new investments will be utilised for product innovations and to widen market reach.

Banks now have the opportunity to sell more than one insurer’s product in life, non-life and health segments, provided enabling regulations are introduced.

This would spur opening of new branches, given that estimates suggest less than 10 per cent of the public sector banking network is used for insurance sales.

The Indian market will now also have more than one reinsurer.

The new Act enables UK-based insurance syndicate Lloyd’s and its members as well as other foreign companies to operate in the country through branches set up for the purpose of re-insurance business or as investors in a domestic insurance company.

IRDAI sources say that Lloyd is considering the idea of setting up operations in India.

With so many possibilities under the new law, there naturally is talk about initial public offerings by insurance companies.

Players like HDFC Life are expected to come up with an IPO now that the hurdle about private insurers listing only after 10 years of operations has been cleared.

Any listing will be accompanied by disclosures and transparency that, according to sector experts, would change the way the business is run in India.

Ultimately, the customer will have the last laugh.

Image: A paramedic distributes free medicine provided by the government to patients inside a ward at Rajiv Gandhi Government General Hospital (RGGGH) in Chennai July.

Photograph: Babu/Reuters