JOIN USThe Narendra Modi government's keenness to get things going a few weeks into the new government is clear with the decision to raise the FDI cap up to 49 per cent from the current 25 per cent.
Shoring up management control in the process without ceding it to a foreign investor does not, however, make much sense in the hugely organised insurance sector, where added investments and some level of management control actually helps guide strategy and deepen market reach in overseas markets.
Nevertheless, this long overdue step indeed shows a peachy sense of intent to move quickly on Finance Minister Arun Jaitley's budgetary announcement.
The good news riding on this sense of intent is that once proper clarity emerges on the interpretation of control by the Indian promoter as outlined in the upcoming Insurance (Amendment) Bill, additional foreign capital expected to surge down the exalted veins of our life, health and general insurance companies is expected to be between Rs 20,000-25,000 crore.
Capital market route
The hike in foreign holdings to 49 per cent will for a start enable more insurance companies to enter the capital markets. While insurers have claimed for long that they are not really short on capital or the ability to mobilise it through appropriate bond floatations, their expansion plans have either largely been put on hold or far too laggardly to match the growth of the 25-40 age target insuree populations.
The sense of uncertainty complements the high volume of complaints pointing to bad insurance claims settlements rocking the industry on a regular basis.
While the increase in FDI limit will enthuse insurers to tap the capital markets -- which many have hitherto shied away courting actively due to RBI’s conflicting FII policies due to the bank’s interest rate management compulsions --, cut expenses and increase distribution channel efficiencies, it would be reasonable to also view the FDI cap limit increase as barely the start of a possible tide in the affairs of the insurance sector.
Again, the full details of the bill will be known only once the Insurance (Amendment) Bill is passed by Parliament.
The reluctance of the insurance sector, importantly the medical and vehicle insurance segments, to raise capital for expansion has been noteworthy for its lack of vision as much as for their fragmented approach to distribution channel management.
Risk aversion has been the better part of the discretion exercised by insurance companies in the name of valour.
All insurers have been claiming to have enough capital even as they have been going slow on expansion and faster growth.
Notable it indeed is that of the more than two dozen life insurance players, and an equal number in the general category, not a single company has so far approached the market to go public despite the regulatory cap of 10 years of operation being completed two years ago. No government-run insurer, including LIC and the four general insurers, are listed.
Solvency margins
There are other important provisions of the proposed Insurance Bill over and above the capital structure that will benefit companies, and by implication, their customers.
Solvency margins have been cumbersome to maintain for insurance companies, with LIC and GIC being no exceptions.
IRDA never had clear guidelines on managing solvency margins. Unlike banking regulator RBI, IRDA could not frame clear regulations on cash reserves to be maintained by insurance companies to tide over solvency issues. The increase in FDI should help insurers maintain their solvency margins without much fuss.
With low levels of insurance penetration, the additional investments sluicing in through the secondary market route may well widen and deepen the reach of life and general insurers, as well as spur investments for innovation and greater efficiencies. Increased FDI flow is welcome from an economic point of view as well.
Once approved by the Parliament, the new capital mobilisation initiative should bring in much required long-term cash into the sector.
According to Rajesh Sud, CEO and MD of Max Life Insurance, this will also bring in domain capital which is of critical importance in this phase of growth of the life insurance industry.
Throwing more money at the industry may not spur innovation-linked growth, as the critics rightly point out, but hopefully, will nudge out more effective expansion initiatives in the Tier I and II from senior and middle level industry managers.