100% FDI in Insurance: Legacy distribution remains hurdle for foreign firms

The Union Cabinet’s decision to raise the foreign direct investment (FDI) limit in the insurance sector to 100 per cent is unlikely to significantly boost foreign investment as distribution remains a critical factor, requiring overseas players to partner with Indian businesses, experts said.

 

Interest is expected to be higher in general and health insurance than in life insurance, which is far more dependent on distribution networks, they added.

 

In addition, the proposed changes in the Net Owned Funds (NOF) for foreign reinsurers to ₹1,000 crore from ₹5,000 crore, are likely to bring them on par with the IFSC Insurance Office (IIO) in GIFT City and might evince some interest from foreign reinsurers to enter through the mainland route, they said.

 

According to Kamlesh Rao, MD & CEO, Aditya Birla Sun Life Insurance, while the proposal to increase the FDI limit is a progressive step which will lead to fresh thinking, product innovation and other aspects in turn strengthening customer experience, the business is deeply dependent on the distribution system that cannot be replaced overnight.

 

“Our growth model has been built over decades on the strength of deeply-entrenched distribution ecosystems — agency networks, bancassurance partnerships that for many players contribute 50 per cent or more, and long-standing institutional relationships. These are not easily replicated overnight, even with deep pockets. So, while the move may encourage more global players to explore India, translating that interest into meaningful scale will depend on how effectively new entrants can navigate this distribution landscape,” he said.

 

The FDI limit in the insurance sector was raised from 49 per cent to 74 per cent in 2021. It did not result in significant increase in foreign insurers’ interest.

 

There are 27 life insurance companies in India with Ageas Federal Life Insurance, Aviva Life Insurance, Generali Central Life Insurance having 74 per cent stake ownership by foreign insurers. In the non-life insurance segment, Zurich acquired a 70 per cent stake in Zurich Kotak General Insurance in 2024. Also, Prudential Group Holdings Ltd, UK Subsidiary of Prudential Plc, has announced a joint venture with 70 per cent stake with Vama – owned by HCL Group, holding remaining 30 per cent to set up a standalone health insurer.

 

Some experts believe that the 100 per cent FDI norm gives the foreign players authority and management control which could act as an incentive. Also, the players are more likely to focus on non-life insurance business due to lesser dependence on the agency-driven distribution model.

 

"The move to increase foreign investment up to 100 per cent in Indian insurers is a meaningful catalyst for inbound capital and new market entry. Global insurers and foreign private equity sponsors that were previously cautious given the absence of exclusive control may now be more inclined to commit at scale. General and health segments may witness sharper near-term momentum, including existing foreign shareholders seeking to consolidate their positions and greenfield ventures. In life insurance, we are likely to see foreign entrants prioritise partnerships with Indian players that bring proven distribution, particularly large bancassurance networks." said Aravind Venugopal, Partner, Khaitan & Co.

 

Amit Roy, partner and leader, insurance and allied businesses, PwC India, said: “This is a watershed moment for the industry, because there will be a lot of meaningful foreign players, because 100 per cent is something which gives management control. In the case of 74 per cent, the control was still in the hands of Indian investors. Insurance is a deep-pocket business – you need to have capital and conviction. Even in life insurance, a lot more players will come, and distribution will evolve gradually in a different way. I am also expecting more reforms. Also, there will be more traction towards life insurance business, also because of the evolving opportunities – like the growing silver economy.”

 

Currently, India has 12 Foreign Reinsurance Branches (FRB)s, including Munich Re, Swiss Re, Hannover Re and the Lloyds of London.

 

“In the past five years, there hasn’t been any new FRB application with the exception of a couple of syndicates in Lloyd’s India platform. GIFT City has witnessed a significant surge in applications from foreign reinsurers. Easing a key eligibility criterion may witness some interest from foreign reinsurers. However, it is pertinent to note that there are a range of other benefits under the GIFT City regulatory framework apart from lower NOF requirements for foreign reinsurers considering GIFT City,” said Satyendra Shrivastava, senior partner, Consortia Legal. 

 

There is a growing interest among reinsurers to enter through GIFT City. Currently, there are nine reinsurance companies in GIFT City, including Singapore Re, Peak Re, Everest Re and Doha Insurance, among others. There are 8-9 of the reinsurers in the advanced stages to get a licence and another 10 foreign reinsurers who are in the preliminary stages of discussions.