New phase in financial sector

IPOs by insurance companies have many benefits

The successful initial public offering (IPO) of state-owned General Insurance Corporation of India (GIC Re) marks a new phase in the financial sector. The national re-insurer’s large IPO raised more than the targeted Rs 11,300 crore. It is the first public sector undertaking (PSU) in insurance to float an IPO, and only the fourth insurance firm to seek a listing. A few more insurance IPOs are in the pipeline and by the time this financial year ends, insurers will be much better-represented on the bourses. This is a welcome development for several reasons. These companies have long histories and good track records, and as such, investors can be sanguine about the long-term prospects. At the same time, a publicly listed entity is more accountable and transparent, leading to improvements in efficiency, quality of service, and regulatory compliance.

India is hugely under-insured with vast potential for growth; it accounts for less than 1.5 per cent of all global premiums and just about 2 per cent of life insurance premiums. The sector is expected to quadruple over the next decade, from its current size of $60 billion to $240 billion, according to estimates by the Ministry of Commerce. As more insurers list, investors would get a chance to participate in that growth. Insurers with deep pockets and access to cheap long-term capital are also the ideal financiers of long-gestation projects. They can afford to deploy funds for tenures extending for a decade and more. This would help take some pressure off the beleaguered banking system in the country and give a fillip to infrastructure lending, in particular.

Insurers have been lobbying for access to the capital markets for many years. But it was only in August 2016 that the Insurance Regulatory and Development Authority (IRDA) finalised capital-raising norms and allowed insurers that had been in business for at least 10 years to tap the primary market. That opened the floodgates. ICICI Prudential Life Insurance launched the first IPO in September 2016; ICICI Lombard General Insurance and SBI Life have followed suit, and now the GIC Re issue. Each of these issues has raised substantial sums and done so comfortably. The Cabinet has given clearance for four other PSU insurers to go to the primary market. The government is seeking to divest a 25 per cent stake in each of these PSUs, in several tranches. This would bring it closer to the disinvestment target.

Several private insurance companies are also at various stages of processing their issues. Some have filed documentation with the Securities and Exchange Board of India, while others have cleared prospective issues at board level. The stock market is booming, which means that insurers might easily mop up Rs 35,000 crore or so in equity financing. However, as the sector expands, there will be an increasing need to combine tight regulatory surveillance with less governmental interference. India has had its share of insurance frauds. Infrastructure projects have an unfortunate tendency to run into interminable delays and insurers will need to do their due diligence before choosing which ones to back. Governments also have a habit of launching badly designed schemes for life insurance, crop insurance, etc., with the PSUs eventually being forced to bear losses. India’s insurers, especially the PSUs, must be allowed to run their business along commercially sound lines without interference, while the independent regulator ensures that everyone stays honest.