100% FDI in insurance may attract global firms, boost competition: Experts

Six new players have entered the industry in the last few years, marking the first additions in the life insurance in over a decade and the first in the general and health insurance segments in nearly

It has been nearly a quarter of a century since the Indian insurance sector was liberalised. Despite the presence of 27 life insurers, 34 non-life insurers, one domestic reinsurer, and ten foreign reinsurance branches, the need for a greater number of players — particularly specialised ones — has never been more pressing, given the significant coverage gaps that continue to challenge the country.

 

In the last few years, six new players have entered the insurance industry, marking the first additions in the life segment in over a decade and the first in the general and health insurance segments in nearly five years.

 

 

Debasish Panda, chairperson, Insurance Regulatory and Development Authority of India (Irdai), has more than once highlighted that the number of insurance companies in the country is not enough to cater to the evolving needs of 1.4 billion people.

 

Speaking at a CII insurance event in October, Panda outlined the need to bring more and more capital into the sector from domestic and foreign sources.

 

“We have removed all the entry barriers for floating an insurance company. Today, every class of investor or funds — private equity, venture capitalists, institutional investors, family offices — can invest in the insurance sector and become an investor or promoter,” Panda said at the event, adding that large conglomerates and business groups in India should enter the insurance sector.

 

According to Irdai’s annual report for 2022-23, the penetration of the life insurance sector in India reduced from 3.2 per cent in 2021-22 to 3 per cent in 2022-23, while that of non-life insurance sector remained at 1 per cent in both these years. India's overall insurance penetration reduced to 4 per cent in 2022-23, from 4.2 per cent in 2021-22.

 

While penetration has gone down in 2022-23, the life insurance density increased to $70 from $69 in 2021-22. Non-life insurance density remained stable. In 2022-23, the insurance density in India increased from $91 in 2021-22 to $92 in 2022-23. 

 

Globally, insurance penetration and density were 2.8 per cent and $354 for the life segment, and 4 per cent and $499 for the non-life segment. Overall, insurance penetration and density were 6.8 per cent and $853, respectively, in 2022.

 

Insurance penetration is measured as the percentage of insurance premiums and insurance density is calculated in gross domestic product (GDP) as the ratio of premium to population (per capita premium).

 

According to Debashish Banerjee, partner and insurance sector leader, Deloitte India, India needs at least double the number of insurance companies.

 

He noted that the United States, with a population of around 340 million, has about 700 life insurance companies, which translates to roughly 500,000 policyholders per company. Similarly, the United Kingdom, with a population of 70 million, has 325 life insurance companies, averaging around 250,000 policyholders per company.

 

If the same analysis is applied to the number of cars, property assets, or other population-related data, a similar gap is seen. Reaching 1,000 companies is challenging, which is why Banerjee suggests at least doubling the size.

 

While the Irdai chief has urged conglomerates, private equity, venture capital funds, family offices, and others to invest in the insurance sector in India, the other way to bring more investment into the sector is to open up the sector to 100 per cent foreign direct investment (FDI).

 

“When we are talking about Insurance for All by 2047, obviously we need a lot of capital, which means we need a lot of new entities to come in. Some consolidation may also happen. If the FDI route is also opened, that will just augment the domestic investment. Otherwise, the domestic investment may get crowded”, said Panda at the Business Standard BFSI Summit 2024.

 

“Perhaps it is time to open up the insurance sector for 100 per cent FDI so that there could be more players who want to come to India to operate on their own terms without trying to look for an Indian partner. If somebody comes at 74:26, that is also fine. But opening up the sector for 100 per cent FDI will attract more investments to come into the country,” Panda added.

 

In December 2014, the government raised the FDI limit in the sector from 26 per cent to 49 per cent. Nearly seven years later, the government further increased the limit, allowing FDI investments of up to 74 per cent. The jury is divided on whether this move has led to the expected inflow of investments. That said, without full autonomy over business operations — something a foreign insurer would ideally need when setting up shop in a new country — and given the challenges of finding an Indian partner who aligns with the company’s culture and ethos, attracting inflows into the sector has become difficult.

 

Following the increase in FDI limit, only in a handful of companies, the foreign partners have increased stake. Ageas Insurance International has hiked its stake to 74 per cent in Ageas Federal Insurance, following IDBI Bank’s exit from the insurance venture. Similarly, in Aviva Life Insurance, the foreign insurer stake has gone up to 74 per cent. In Future Generali Life, Italian insurer Generali has upped its stake to over 72 per cent.

 

Meanwhile, Swiss insurer Zurich Insurance acquired a 70 per cent stake in Kotak Mahindra General Insurance for $670 million from Kotak Mahindra Bank.

 

Recently, Munich-headquartered Allianz SE – one of the largest insurers in the world – indicated that it could be exiting its India joint venture with Bajaj group in which it holds 26 per cent state each in the life and general insurance companies, since inception in 2001. However, it has also indicated that it remains committed to the Indian insurance market but will not speculate on alternatives.

 

 “A 100 per cent FDI is something most large players are asking for. We should keep norms in place to secure the investment to India and a steady flow for multi-year, including stricter exit clauses, business cases that allow for increasing the pie as opposed to eating into the pie, and a proven track record, but allowing 100 per cent stake will certainly help with the inflow of money, new transformations, global capability in India, more competition leading to better efficiencies”, Banerjee said.

 

He added that many markets and large brands across Europe and Japan are very interested in penetrating the Indian market, and a 100 per cent FDI will certainly help rather than trying to find JV partners with similar wavelength of thought processes.

 

According to Aniruddha Marathe, MD & Partner, BCG, the Indian insurance sector does not have a diversity of business models.

 

“When the global insurers look at expansion, they always keep India as their priority and then they want to build something in India on their own. So, it is not about just adding more number of players to the segment. It is about adding people who are more specialised in or more focused on different segments or different lines of business. We don’t need more insurers of the same kind. It is the kind of expertise, models, and innovation that potentially comes that is more required,” Marathe said.

 

“We actually have fairly significant under-penetration in commercial lines of business, especially when it comes to certain types of risks. So now, these are the things where some of the global players will have full control if they come into the Indian market with 100 per cent FDI,” he added.

 

According to an industry expert, existing large players in the industry have already built very large businesses and expertise. Hence, even if a new entrant comes, it is not possible for them to completely unseat this business.

 

While so many players have entered the insurance business, some of them are not able to exit. If a 100 per cent FDI is allowed, players who want to run the entire business may come. They can acquire the existing players and remodel their business. It opens up more opportunities, he said.