Insurance Article, The Insurance Times 2021, The Insurance Times March 2021


India’s life and non-life insurance penetration in 2019, at 2.82% and 0.94% respectively, are significantly lower than the global averages of 3.35% and 3.88%, respectively. Five years after India increased the ceiling on overseas ownership in its insurers, Finance Minister heralded bold reforms in a sector considered crucial for underpinning infrastructure financing.

Finance Minister raised the headroom on foreign holding to 74% in one go, potentially multiplying fund-raising avenues in a long-gestation industry that needs as much capital as is available. Under the new structure proposed by the Finance Minister, the majority of directors on the boards and key management personnel must be resident Indians, “with at least 50% of directors being independent directors, and a specified percentage of profits being retained as general reserve.”

This is bound to attract enhanced flow of capital to the sector, benefiting the economy. The non-life insurance sector has finally witnessed a long-standing demand being fulfilled in the increase in the FDI limit to 74% which will catalyze the long-term development and growth of the industry.

The FDI cap on insurance companies was first raised from 26% to 49% in March 2016. A further relaxation of this limit was a long-standing demand of the insurance industry. Insurance is a capital-intensive business and after the pandemic, many Indian partners are not in a position to invest further capital in their companies. Certain companies also require capital infusion to conserve Solvency Margins.

The move signals positive intent to private equity and global investors looking at India’s insurance sector for investment opportunities. This will allow a number of mid-sized and smaller players to recapitalize themselves and compete effectively with the larger players, thus making it a more level playing field with better outcomes for the customers.

The Union Budget proposes that the foreign direct investment (FDI) limit for the insurance sector be increased from the current 49% to 74%. Along with the higher FDI ceiling, Finance Minister mentioned that amendments to the Insurance Act 1938 will allow foreign ownership and control with safeguards.

LIC IPO to be a game changer

In the first paperless Union Budget, among other proposals mentioned in the Budget that pertain to the insurance industry, Finance Minister stated that the IPO of the country’s biggest life insurer, Life Insurance Corporation of India (LIC) will be completed in the fiscal year ending 31 March 2022 (FY2022).

The much-anticipated IPO for LIC will make the life insurer one of the largest companies in India in terms of market capitalization. LICI’s IPO plan was announced in the Budget last year and the groundwork for the flotation has begun. The government hopes that the listing would bring discipline to the market and also give retail investors an opportunity to participate in wealth creation.

LIC, which was set up in 1956, has assets close to $433bn. State-run Life Insurance Corporation dominates India’s life insurance market, but private players have rapidly grown in size. The imperativeness of the life insurance sector in the economy has gained paramount importance in the aftermath of COVID. The Central government had announced the stake sale in the LIC during Budget 2020-21. Meanwhile, the government has already initiated the process for LIC IPO. Currently, the government owns the entire 100 per cent stake in LIC.

Divestment of One PSU general insurer in FY22

Finance Minister announced the strategic divestment of one government-owned general insurance company in the next fiscal year. The name of the public-sector insurer that will be on the privatization block was not disclosed. It is among a group of several state owned companies operating in various sectors which will be privatized.

The government think tank NITI Aayog is to be asked to work on the next list of central public sector companies for disinvestment. There are four state owned general insurance companies: New India Assurance, United India Insurance (UII), National Insurance Company (NIC) and Oriental Insurance Company (OIC). The government had earlier dropped its plan to merge UII, NIC and OIC and decided to recapitalize them.

For some years now, the government has been divesting some of its interests in the insurance sector. The government divested close to 15% stakes in both New India Assurance and national reinsurer GIC Re in 2017. This entire plan is part of the government disinvestment programme.

The government budgeted Rs.1.75 lakh crore from stake sale in public sector companies and financial institutions in the fiscal year 2021-22. For the previous fiscal year, the government had proposed Rs.2.10 lakh crore to be raised from disinvestment. However, the Covid-19 pandemic impacted the government’s plan and the target for disinvestment has been lowered to Rs.32,000 crore in the revised estimates. The legislation amendments will be introduced in this session.

The road map for overhauling public sector enterprises with the announcement of the broad details of the privatization policy classifies CPSEs, banks, and insurance companies into four strategic areas —atomic energy, space, and defence; transport and telecom; power, petroleum, and other minerals; and, banking, insurance and financial services.

In all other sectors, PSUs will be either privatized or closed. There were about 249 PSUs in 2018-19, of which 70 incurred losses of Rs 31,635 crore, according to data from the Standing Conference of Public Enterprises. The decision to privatize two PSBs and one insurance firm underlines government’s commitment to limit its presence even in strategic sectors.

The government will also come up with a revised mechanism for timely closure of loss-making PSUs. The IRDAI has named three public sector insurance companies – Life Insurance Corporation (LIC), General Insurance Corporation (GIC Re) and New India Assurance – as ‘too big or too important to fail’ (TBTF) institutions or Domestic Systemically Important Insurers (D-SIIs) for the year 2020-21 fiscal year.

Maturity Proceeds of ULIPs

Insurance penetration in India is currently at 3.7% of gross domestic product (GDP) compared to the world average of 6.31%. Growth in the life insurance sector has slowed to 11-12% currently from 15-20% until fiscal 2020 as the pandemic pushed customers to save cash instead of spending on stocks or life insurance policies. The Finance Minister also proposed that there be no tax exemption for maturity proceeds of unit-linked insurance policies (ULIPs) with an annual premium of above INR250,000 ($3,420).

The rules will apply for ULIPs issued on or after 1 February 2021. Under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to notice where high net worth individuals are claiming exemption under this clause by investing in ULIPs with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.

Vehicle scrapping

In a boost for motor insurers, budget proposed a vehicle scrapping policy as an initiative to tackle air pollution. The move would help to phase out old and unfit vehicles. The general insurance sector is, however, growing at a robust annual pace of 18%, faster than in the previous years. Growth in this sector has picked up as COVID led more people to purchase health insurance policies.

The average growth in standalone health insurance is currently at 35-40%. Most private insurers in India have foreign JV partners who are expected to take advantage of the increased FDI limit to beef up their shareholdings. To phase out old vehicles finance minister announced scrapping policy in the budget. This will encourage fuel efficiency and environmental health. This will have an impact on oil import also. The government has also decided the age of your vehicles in the budget.

Now, private vehicles will be able to run for 20 years and this limit on commercial vehicles will be 15 years. According to an HDFC Bank report, 20 million vehicles will not be able to run on the road until 2025 and with a scrap of these vehicles, a new business worth Rs 43,000 crores will be created. Apart from this, the automobile sector will also get a new speed and new employment opportunities will also be created. That is, this step of the government can prove to be a game-changer.

Enhanced FDI cap

The Budget proposal to increase the foreign direct investment limit for insurers to 74% from 49% is credit positive, as it provides Indian insurers with new sources of funding and access to external knowhow that can improve their underwriting performance and unlock new operating efficiencies. The possibility of higher foreign ownership would improve insurers’ financial flexibility by offering additional opportunities to bolster solvency.

In addition, insurers would benefit from the sharing of risk management best practices, possibly leading to a lowering of exposure to high-risk assets and adoption of risk-based capital management.  Under the new structure, the majority of directors on board and key management persons will be resident Indians with at least 50% directors being independent directors and a specified percentage of profits being retained as general reserve.

The proposed relaxation of the ceiling was announced almost 10 years after the government granted approval for the increase of the FDI limit in the insurance sector in India from the 26% to 49% in 2012. The additional capital infusion in the sector will make the industry globally competitive and help with growth and increasing penetration. Raising the investment cap in insurance companies was one of the key demands of various global investors after the government had amended the FDI policy to allow 100 per cent foreign investment in insurance intermediaries during last year’s budget.

Finance Minister said investor charter would be introduced as a right of all financial investors across all financial products. Under the new structure, the majority of directors on the board and key management persons would be resident Indians with at least 50 per cent of directors being independent directors and specified percentage of profits being retained as general reserve.

Finance Minister proposed to amend the Insurance Act 1938 to “increase the permissible FDI limit from 49 per cent to 74 per cent in insurance companies and allow foreign ownership and control with safeguards”. The proposal is likely to help local private insurers grow fast and expand their presence in India, which has one of the lowest insurance penetration levels globally.

An increase of FDI in insurance to 74% will bring in more capital and more importantly fresh capital from firms which have been waiting to enter India. The move will also help in improving insurance penetration, job creation and would result in an increase in merger and acquisition activity in the sector.

Allied benefits

This move will help strengthen the sector and also help further penetration of insurance in the country, which still is far behind the world average. The budget 2021 has indeed taken cognizance of this and has taken the bold step of increasing the FDI limit which will provide an immediate backstop in terms of capital for growth and improve the insurance penetration and financial inclusion in the economy. Also increasing insurance penetration would pave the way for generating employment opportunities, which in turn would augment the efforts of the government to revive the economy.

The move will help make the insurance companies stronger and enable them to further expand their businesses, supplement their growing business needs, and deepen the market with new products and technology. The change could attract investments from international insurance companies, many of which have existing joint-venture operations in India, including from American International Group and United Kingdom’s Prudential Plc. Take up of life and health insurance products is low in the country of 1.3 billion people but is expected to grow.

The country’s investment promotion agency, Invest India, expects the insurance market to be worth around $250 billion by 2025. It’s a huge market by size for them. That is the main driving force for companies. More relaxed rules for foreign investment in insurance will also help some Indian insurers to attract capital and boost their businesses after a slowdown caused by the COVID-19 pandemic.

According to the insurance law, whenever any capital infusion is proposed in an insurance joint venture, all the partners are mandatorily required to bring in capital exactly in proportion to their shareholding in the company. If any JV partner is unable to infuse sufficient capital as per the shareholding, others are restrained from adding more capital. In such a scenario, the insurance company ultimately suffers as it is unable to grow its business or spend enough to sustain.


Spending Plan for Healthcare 

Additionally, the INR64,180 crores ($8.8bn) spending plan announced for healthcare over the next six years will provide a much-needed boost for penetration of health insurance and allow beneficiaries to access quality medical treatment, which will lead to aspirational India and economic development of our country.

The clear focus of the budget is to make quality healthcare more accessible and investment in this sector needs to go up. The Pradhan Mantri Atmanirbhar Swasth Bharat Yojana which is meant to strengthen the primary, secondary and tertiary health centers is an essential step for health facilities to reach every nook and corner of the country.

There have been a lot of positives for the insurance industry in the Budget. Healthcare spends, vehicle scrapping, spending on capex should all help the industry get back to 15% growth as seen during pre-COVID times and increase insurance penetration and density.

Increasing the FDI cap is a positive move for the insurance industry which will also enhance the overall performance of the sector. The increase in FDI will give a huge boost to the insurance sector towards improving penetration and its product suite to cater to a nation of 1.3bn people.

The diverse initiatives towards upskilling, employment creation, ease of doing business and improving investor confidence will cumulatively augur well for the Indian economy and the general insurance sector in the country. The Budget is focused on revival of economic growth and the higher allocation to capital expenditure should support growth revival and job creation.

The FDI increase in insurance, continuation of the disinvestment programme and ease of tax compliance are welcome steps. Under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50 per cent of directors being independent directors, and specified percentage of profits being retained as general reserve.

Insurance industry applaud the significant step towards 74%, as this will provide a boost to the sector, and look forward to the legislative amendments to come into effect at the earliest. Industry also welcomes the hassle-free pension for elderly citizens above the age of 75 years.

The budget proposal is likely to help local private insurers expand presence in India which has one of the lowest penetration levels The government’s proposal to increase the foreign direct investment limit in insurance from 49% to 74% is likely to accelerate growth and spur competition in the sector raising hopes of a flux of foreign capital into private Indian insurers.

Greater capital infusion by foreign insurers in Indian joint ventures could eventually lead to the transfer of control to the cash-rich foreign partners. This can cause a fresh challenge for state-run Life Insurance Corp. of India or LIC, which has a commanding 70% share of India’s insurance market. Insurance sector may also see an increase M&A in the sector while paving the way for private equity (PE) funds to enter the space.

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