Insurance reforms 2.0: Indians not required, and other relaxations to lure foreign money

The deliberations aimed at further liberalizing foreign investment rules for India’s insurance sector come just three years after an earlier attempt to attract more overseas capital to the sector saw a tepid response.

Apart from removing the condition on the presence of Indian residents, the government is discussing changes to rules on dividend payouts and board composition that apply to insurance companies with foreign investment exceeding 49%, two officials told. Mint,

These reforms are being considered with the prime aim of bringing more foreign capital to the sector as only a few investors have taken advantage of the government’s decision in 2021 to increase the foreign direct investment limit in insurance companies from 49% to 74%.

Earlier this year, Switzerland-based Zurich Insurance Group Ltd announcing plans to acquire a 70% stake in Kotak Mahindra General Insurance Co. Ltd for about 5,500 crores. In most other private insurance companies in India, the level of FDI is still close to or lower than 49%.

The finance ministry’s department of financial services will shortly initiate consultations on new FDI regulations for the insurance sector, said one of the officials mentioned above.

“The FDI policy has already been liberalized for the insurance and other regulated financial services sectors, with investment allowed up to 100% under the automatic rule,” said the second official. “There is no point now to have such restrictive operational conditions for foreign investors, and therefore a review of the rules is being undertaken by the government.”

Stringent Regulations a Dampener

Under the existing policy, foreign direct investment of up to 74% is allowed in insurance companies under the automatic route that doesn’t require any government or regulatory approval. Up to 100% FDI is permitted in insurance intermediaries such as insurance brokers, reinsurance brokers, and insurance consultants.

While the government increased the overseas investment limit, insurance FDI is subject to stringent conditions under the Indian Insurance Companies (Foreign Investment) Amendment Rules.

The rules mandate that in insurance companies with foreign investment, a majority of the directors, key management persons, and at least one top executive—the chairperson, managing director, or chief executive—should be resident Indian citizens.

In addition, insurance companies with FDI exceeding 49% need to maintain about half of their profit as reserve if they are paying a dividend to their shareholders. Also, their solvency margin has to be under 1.2 times the estimated claim amount liable to be paid by a company on the policies sold by it.

Solvency margin is the extra capital general insurance companies must hold over and above the claim amount they are likely to incur. It is a financial backup in extreme situations so a company can settle all claims.

Also, at least half of the directors in a company with 49% or higher foreign equity must be independent directors. If the chairperson is also an independent director, then one-third of the board should comprise independent directors.

The government proposes to amend these complex rules to level the field for both foreign and domestic insurance companies and build a competitive environment, said the first official mentioned above.

“It’s a good move from the point of projecting a liberal investment climate in the country,” said CR Vijayan, former secretary general, General Insurance Council.

“However, it is unlikely to result in sudden flow of FDI as even with 74% holding, very few overseas entities have come or raised their investment in Indian insurance companies,” he said. “Insurance provides returns only on a long-term basis. (10 years or more) and there will always be doubt among investors about the prospects of a change in government and its implications on investment policies, particularly in the financial sectors.”

Queries sent to the ministry of finance and the secretary of the financial services department on Wednesday remained unanswered.

An under-insured population

Other analysts and industry experts are more optimistic about the reforms being planned.

“Aligning the dividend payout with the insolvency criteria, albeit by reducing (the amount of profit to be kept as reserve), would improve cash flows in the hands of stakeholders and would have positive impact on investments in this sector,” said Rajiv Chugh, partner and leader, policy advisory and specialty services, EY India.

India opened up the insurance sector to foreign investment in 2000, allowing 26% FDI in private companies. The government increased the FDI limit to 49% in 2015 and then to 74% in 2021.

India’s insurance sector has received foreign direct investment worth 54,000 crore over the past decade, from 2014 to January this year, as per the finance ministry. The number of insurance companies increased from 53 to 70 in that period.

For all that, India remains an under-insured country, with very few of the country’s population paying to but risk-protection.

Between 2013-14 and 2022-23, Insurance penetration in India increased only marginally—from 3.9% to 4%. Insurance density rose from $52 to $92.

Insurance penetration and density are metrics used to assess the level of development of the insurance sector in a country. Insurance penetration is measured as the percentage of insurance premium to gross domestic product (GDP), while insurance density is calculated as the ratio of premium to population (per capita premium).

“These proposed discussions are a positive step forward and are likely to attract the right kind of foreign investments,” said Tarun Chugh, managing director and chief executive of Bajaj Allianz Life Insurance. “The regulatory environment is evolving to support the vision of ‘Insurance for All by 2047’.”

The Indian insurance sector’s assets under management nearly tripled to 60.04 trillion in 2022-23 from 21.07 trillion in 2013-14, as per the finance ministry. The total insurance premium more than doubled to 10.4 trillion from 3.94 trillion.