FDI in insurance may attract $400-800 million foreign investments

The government's decision to increase the cap on foreign direct investment (FDI) in the insurance sector may attract $400-800 million investments from global insurers as it provide exit options to Indian promoters for whom insurance do not form a part of their core business.

"While higher FDI participation may not contribute substantially to the medium term growth, it can potentially provide exit opportunity for existing promoters and stimulate listing of companies," said Dhananjay Sinha, economist and strategist at Emkay Global Financial Services, said.

"Our estimate indicates that if all promoters decide to sell additional 23 per cent stake to foreign players the potential inflows can be around $3.5 billion. However, in a more realistic scenario of only few promoters deciding to exit the inflows could be much lower at $400-800 million," he added.

As per current norms, foreign investors can hold up to 26 per cent stake in a domestic insurance company. But now the government plans to increase this cap to 49 per cent.

Sinha said the capital requirement for non-life insurers is likely to be higher than those in the life insurance space due to their weak profit and loss accounts. However, he does not expect large inflows immediately as "the sector is going through a normalisation phase."

The key issues faced by the non-life insurers include claims outpacing the premium pool, intense competition and rise in operating expenses.

Industry players also echoed a similar view and confirmed that many of the Indian promoters may exit the insurance space once the cap is raised.

"This (higher FDI cap in insurance) in my opinion is also a window for the Indian promoters to exit the insurance businesses if they feel it is not a part of their core growth strategy. Broadly this would tend to an environment, which consists of shareholders who are willing to invest and to stay committed to the Indian insurance growth story," Arun Balakrishnan, chief executive of BerkshireInsurance.com, said in an interview with Business Standard earlier this week.