Government's move to relax FDI limit for insurance a big boost for small insurers

MUMBAI: Five years after India increased the ceiling on overseas ownership in its insurers, Finance Minister Nirmala Sitharaman Monday heralded bold reforms in a sector considered crucial for underpinning infrastructure financing. She 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.

Her pronounced accent on reforms, evident elsewhere in the budget speech that included the ‘privatization’ word in the golden-anniversary decade of bank nationalization, hasn’t sacrificed ‘safeguards’ either.

Prominent industry CEOs and experts claim that the move will provide a fillip to an industry that needs more finances to insure more people in the world’s second-most populous nation – and raise funds for long-gestation projects such as ports, road assets and aviation hubs.


“This showcases the government’s intent to further liberalize the sector for global players,” said Ashish Vohra, the CEO of Reliance Nippon Life Insurance Company. “Insurance is a long gestation business…(the move) is a fresh window for accessing growth capital for unlisted insurers, which is likely to be deployed for expanding distribution reach, new product creation and investment in technology deployment.”

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, the government's latest Economic Survey showed.

Adequate Safeguards
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.”

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.

“The suggestions from various stakeholders to further open up FDI in the insurance sector have been considered,” said Pankaj Arora, MD and CEO, Raheja QBE General Insurance.

Experts expect the 23 private life insurers and 28 private general and health insurers would help boost coverage.

“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,” said Vighnesh Shahane, MD & CEO, Ageas Federal Life Insurance. “Certain companies also require capital infusion to conserve Solvency Margins.”

According to Sandeep Ghosh, the National Leader of insurance at EY, 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,” said Ghosh, who is also a Partner at EY.