100% FDI in Insurance: Foreign insurers may face distribution challenges

The opening up of the insurance industry to 100 per cent FDI comes at a time when the insurance regulator has been advocating "Insurance for All" by 2047

Though the Budget proposal to increase the foreign direct investment (FDI) limit in the insurance sector to 100 per cent from the current 74 per cent is expected to bring in independent foreign insurers into the segment, as they no longer have to look for a minority Indian partner, but for them navigating the complexities of distribution landscape in the Indian market will require a considerable effort, said industry insiders.

 

In the Indian insurance market, bank-led distribution dominates the private life insurance sector, while the agency channel is preferred for non-life insurance, making it challenging for foreign insurers to navigate the distribution landscape without an Indian partner.

 

Having said that, the consensus view among the industry players is that the move to open up the insurance space to 100 per cent FDI will bring in much-needed capital into the insurance sector, and perhaps increase the number of players in the space, which is too little to manage the coverage needs of such a huge population.

 

Additionally, it is likely to create greater competition, facilitate technology transfer, and potentially reduce insurance premiums in the long run, experts said.

 

According to Pallavi Malani, India leader-insurance practice, Boston Consulting Group, it is not going to be easy because the foreign players will have to adapt their model to India-specific nuances. We are a very bancassurance-heavy model when it comes to life insurance, at least for private players, and an agency-led/broker-led model when it comes to health and other product lines. So, adapting to the Indian requirements is not likely to be very easy.

 

“Also, many of the banks are already partnered with most of the joint ventures (JVs) or private insurers. Even many of the foreign players are in existing JV partnerships. It might take some time for them to restructure their current JVs, form a revised format to address the market in India,” she said, adding that there could be increased action around mergers & acquisitions (M&As) for the mid-to-small-sized players.

 

The opening up of the insurance industry to 100 per cent FDI comes at a time when the insurance regulator (Irdai) has been advocating “Insurance for All” by 2047, a goal that requires significant capital inflows into the sector through the entry of new players or capital expansion in existing companies.

 

“This move holds significant potential, particularly for companies where the Indian partner is not deeply involved in the BFSI (banking, financial services and insurance) sector and seeks to cash out, as the foreign partner may opt to buy out the Indian partner. However, for top companies, unless the dominant Indian partner is willing to reduce its stake, there is limited room for the foreign partner. Additionally, if a foreign insurer chooses to set up shop independently, they will face challenges in navigating the distribution setup. And, distribution plays a far more crucial role in success than products and actuarial expertise in the Indian insurance industry,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.

 

Meanwhile, commentary on the expected capital inflows into the sector following the move has been largely cautious, due to past experiences.

 

According to a Crisil Intelligence report, Rs 27,379 crore in FDI flowed into the insurance sector since 2020-21 (FY21), when the FDI limit was increased to 74 per cent. In comparison, between FY14 and FY21, Rs 34,610 crore in FDI was recorded when the limit was 49 per cent, and between FY00 and FY14, Rs 20,858 crore flowed in when the limit was 26 per cent.

 

Additionally, the report mentioned, as of March 2024, out of the 26 life insurance companies in India, 20 have a foreign partner, with four partners holding a 74 per cent stake and five holding between 49 per cent and 74 per cent. In the non-life sector, of the 25 general and health insurers, 13 have a foreign partner, with five holding a stake of 49 per cent or more. In the specialised health insurance segment, of the eight companies, three have a foreign partner, with two holding 49 per cent or more.

 

Having said that, the industry is of the view that permitting 100 per cent FDI would be a game-changer, given its potential to address the under-penetration in India.

 

“Greater foreign participation will accelerate the adoption of global best practices, introduce innovative products, and elevate customer service standards. Additionally, the mandate to invest in premiums within India ensures that these funds contribute to domestic economic growth and infrastructure development,” said Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance.

 

According to Rushabh Gandhi, MD&CEO, IndiaFirst Life Insurance, the government's decision to allow 100 per cent FDI in insurance will attract more investments and create employment opportunities in India. However, its impact on the Indian market, driven largely by distribution, may be limited in the immediate future.