The liberalization of foreign investment in the Indian insurance sector has been a subject of much debate for over a decade.
The Insurance (Amendment) Bill, 2021, which seeks to amend the Insurance Act, 1938 and increase the foreign investment cap in Indian insurers from 49 percent to 74 percent has now been passed by both the houses of the Indian parliament.
The liberalization of foreign investment in the Indian insurance sector has been a subject of much debate for over a decade. In 2015, the sector was opened up substantially, when the FDI limit was increased from 26 percent to 49 percent. At the same time, the Government also introduced the ‘Indian Owned and Controlled’ requirement, which meant that the foreign investors could not exert control over significant policies of the company, and insurance companies would at all times be under the control of the Indian promoters.
Given the ‘Indian ownership and control; conditions, foreign investors approached the step up from 26 percent to 49 percent, quite reluctantly.
Insurance sector post-2015
Since 2015, the sector has seen a significant rise in foreign investment, influx of private equity funds, increased digitisation and the establishment of new insurance companies, particularly in the general insurance space. Insurance penetration in life insurance which had been declining between 2009 and 2014, has since been exhibiting an upwards trend (from 2.60 percent to 2.82 percent) and insurance penetration in general insurance has risen from 0.70 percent to 0.94 percent.
However, relative to the global insurance market, India remains severely under-penetrated. A key to alleviating this deficiency lies in insurance companies scaling up, and since insurance is a capital-intensive business, it is necessary to supplement domestic capital with greater foreign investment. The further liberalisation of FDI in insurance has been under consideration for some time.
The increase in FDI to 74 percent is being brought with ‘safeguards’ and conditions pertaining to the manner of bringing in the foreign investment. While the Bill itself does not lay down these safeguards, in her budget speech and during the debate in the Rajya Sabha, the Finance Minister, Mrs. Nirmala Sitharaman, indicated that there would be adequate protections in relation to the management and operations of an insurance company. These include a requirement that a majority of the directors and key managerial personnel of an insurance company will be resident Indians.
In addition, at least 50 percent of the board will be comprised of independent directors (similar to the current requirement for listed companies. Further, she also proposed that there would be restrictions in relation to the payment of dividends, as a percentage of profits (which will be specified later) will be required to be retained in the insurance company as a general reserve.
When FDI was increased in 2019 for insurance intermediaries (such as insurance brokers, web aggregators, corporate agents, etc.), several restrictions were also imposed, including on repatriation of dividends, and related party transactions. Insurance intermediaries have not seen any noteworthy rise in foreign investment despite the FDI cap being increased to 100 percent. Therefore, much will depend on what conditions are finally prescribed, as the level of safeguards imposed on foreign investment will truly turn the decision of foreign investors (including foreign portfolio investors) in relation to increasing their investment in Indian insurance companies.
As a next step, once the Bill receives the assent of the President, the Ministry of Finance and the IRDAI will notify rules/guidelines, setting out the exact modalities, and the attendant conditions and requirements in relation to foreign investment and the ‘safeguards’.
The increase in FDI is a much-needed step in the right direction for the Indian insurance industry. This is particularly lucrative for foreign private equity funds who are major investors in the insurance sector worldwide, but until now have not acquired major stakes in Indian insurers. Further, the FDI increase will encourage competition and we could expect to now see big global insurance players such as Zurich Insurance Group, Berkshire Hathaway Inc, Chubb Insurance and even smaller niche foreign insurers, which are yet to enter the Indian market. Increased levels of competition will in turn bring in novelty and innovation, and give Indian consumers access to better insurance products at lower costs.
This changes the Indian insurance landscape for the foreseeable future. The higher FDI limits are expected to spur growth and catalyse technological and infrastructural innovation in the insurance industry. It will propel the sector into the post-pandemic era, which will likely be dictated by increased digital and need-based insurance products.
The author, Shailaja Lall, is Partner at Shardul Amarchand Mangaldas & Co.