Hike in aviation FDI lifts private insurers' hopes

The government's decision to hike foreign direct investment (FDI) in the aviation industry to 49 per cent has rekindled hopes of a similar increase in the insurance sector.

Philip G Scott, group executive director, Aviva Plc, said, "The 26 per cent FDI cap in insurance will restrict growth of private players as sizeable working capital is required to meet product distribution. On the other hand, a FDI hike will attract at least Rs 1,000 crore investment." If FDI cap is not increased, private players, which have grown over 150-250 per cent year on year, will have to pare their growth rates.

Growth could have been a bit stronger up to this point had it not been for the FDI ceiling, said Scott. "We have contingency plans in place, but in a worst case scenario we will need to grow much more slowly if FDI is not raised," he added.

Aviva is a 26:74 joint venture with the Dabur group. The two partners will infuse an additional capital of Rs 77 crore in January 2005 to take care of the growth in business for the current year as Aviva plans to add seven more branches to its existing 28 branches and double its 3,000-odd agency force.

Aviva India reported a 251 per cent increase in gross written premium for the first six months of the current financial year. CEO Stuart Purdy, however, added that these growth rates may not be sustainable. "If we are to maximise opportunity to grow in India, it needs to change the FDI limit," he added.

"Raising the cap will give confidence to foreign investors to do business on a scale that is not restrictive," said Sunil Mehta, country head, AIG. He added that it will also give foreign partners greater faith to undertake collateral business in India and prompt more global insurers to set up back-offices in the country.

There is hesitancy among international investors, which have only certain appetite to put in equity capital, bring in the necessary IT and expertise, when they can have only 26 per cent stake. "There are many more choices for us to deploy capital where we can best achieve the interest of shareholders," said Scott.

At the same time, every global insurance chief coming to India talks of India and China being the key markets for the future. Prudential Plc talks of its Indian joint venture, ICICI Prudential Life, topping all Asian countries and becoming the biggest market in the region in three to four years.

"This will happen even on the back of slower growth in terms of premium collections," said Dan Bardin, managing director South Asia & Greater China, Prudential Corporation Asia.

Aviva equally expects India and China to contribute up to 10 per cent to its turnover in five years. Today, the Indian business is four times that of its Chinese insurance business, Scott said.