India’s 2021-2022 (FY2022) Budget, which proposes relaxing foreign-ownership caps on insurers, could lead to an influx of new capital that could be channelled to develop insurers’ distribution networks, enable digitisation and bring expertise to areas such as marketing and client servicing, which would improve insurance penetration in the long run, says Fitch Ratings.
India’s insurance penetration rate stood at 3.8% in 2019, according to Swiss Re Institute, lagging some peer countries in the Asia Pacific.
The international credit rating agency says that the higher FDI ceiling and the listing of India’s largest state-owned insurer, which is also proposed in the Budget, are measures that will help the industry attract foreign capital, strengthen solvency and promote competition.
The proposals could encourage global insurers to enter the fast-expanding Indian market, while international insurers already holding minority stakes in domestic companies may try to increase their ownership over the medium term.The Budget, presented on 1 February 2021, proposes to raise the foreign-ownership limit on insurers to 74%, from 49%, which would allow foreign investors to hold majority stakes in Indian-based insurers for the first time. The government has also proposed new requirements to ensure sufficient local participation, such as the majority of insurers’ key management personnel and board members to be resident Indians and a requirement that at least half of the board comprises independent directors. The government also plans to specify a percentage of profit to be retained as general reserve within the insurer to prevent excessive capital extraction by foreign parents.Fitch expects a relaxation of foreign-ownership rules to attract international insurers and promote competition within the sector. This would, in turn, increase insurers’ access to capital and thereby improve the industry’s solvency position.
The proposals, once implemented, could also boost M&A activity over the medium term. Last year, the government permitted full foreign ownership (previously 49%) in insurance intermediary companies, including insurance agents, brokers, loss assessors and surveyors.LIC’s IPOThe government also used the Budget to reiterate its commitment to list India’s largest state-owned insurer, Life Insurance Corporation of India, through an IPO in the financial year ending March 2022. Fitch believes the listing will improve the insurer’s accountability and transparency, while attracting more foreign interest in the industry.
The proposed IPO, once executed, could broaden the insurer’s capital base and improve its regulatory capital position, which was 165% at end-September 2020, marginally above the regulatory minimum of 150%.
Furthermore, the government has expressed its intention to privatise a non-life insurer along with some state-owned banks and corporations to meet its disinvestment target of INR1.75tn ($24bn), set in the Union Budget for the fiscal year ending 31 March 2022.