The Indian insurance sector has been parched for committed funds for years now. For a sector with alarmingly low market penetration, increase in the FDI cap has the potential to benefit the economy, the sector, insurance companies and also, ultimately the consumers. The consistent and multiple initiatives of the Insurance regulator, the IRDAI also seem highly promising for the growth of the sector.
A thriving insurance sector offers an important source of funds for multiple other sectors and serves as a pillar of the economy. Indian consumers currently have limited options while choosing a policy. India has less than 60 insurance companies (compared to close to 6000 in the US ). More players entering the market would provide competitive price and better options for corporates and individuals to insure risks.
The foreign investment limit in the Indian insurance sector has been liberalized to 74%, a much awaited change. In several cases, foreign partners of existing Indian insurance companies have risked sharing their expertise with the hope of securing proportionate equity incentive and more control. This change is likely to provide the needed impetus to the Indian insurance sector through investment by existing and new players.
Unlike in most other sectors, liberalization of foreign investment limit in an insurance company requires an amendment of the law (required to be passed by both houses of the legislature). The aforesaid amendment took effect on March 25, 2021 subject to such conditions and manner, as may be prescribed. For the change to be effective, an amendment to the exchange control regulations and a number of changes in the regulations issued by the insurance regulator (the IRDAI) are yet awaited.
Indian banks have historically been benefactors of insurance companies in India through equity investment. Despite consistent advice from the RBI to banks to reduce insurance exposure, a few banks continue to hold over 50% equity in their respective insurance arms. The current liberalization proposal will provide a viable opportunity for banks to exit/ reduce exposure.
The Government has also formulated a framework to safeguard against excessive foreign control through an amendment of the Indian Insurance Companies (Foreign Investment) Rules, 2015. The rules remove the requirement for Indian insurance companies to be “controlled” by Indian partners.
The rules have a clever proposal with respect to governance. Indian residents are required to form (a) majority of the directors, (b) majority of the KMPs and (c) atleast one of the following – chairman of the board, MD or CEO. These positions are proposed to be filled by Indian residents and not nominees of the Indian resident shareholder/s. Further, the board is required to have 50% independent directors (or 1/3rd if the chairman is an independent director).The rules also propose tightening of the requirement to maintain solvency (an insurer with over 49% foreign investment is required to retain at least 50% of the net profit for a financial year (FY) in its general reserve if, for such FY, dividend is paid on equity shares; and at any time during the FY, the solvency margin of such company is less than 1.2 times the control level solvency of 150% (i.e. 180%).
The proposed safeguards under the rules seem fair and practical.
A recent circular of the IRDAI that consolidates 28 regulations promulgated through the last two decades offers an insight on the phylogeny of insurance regulation in India. The regulatory framework now offers different forms of capital, opportunity to consolidate (through amalgamation) and access public capital.
The IRDAI has recently also permitted insurers to invest in debt securities of InVITs and REITs subject to prescribed thresholds and notified the extension of its sandbox regulations (regulations aimed at promoting innovation in insurance products) by two years.
Simplification of processes and broad outlook of the regulators have historically helped in increasing the ease of doing business and encouraged talent across the globe. The IRDAI Chairman has in a recent message encouraged the industry to recognize the potential and identified factors likely to transform the sector, including Indian demography, potential of high economic growth and low penetration level.
This article was originally published in The Economic Times on 26 May 2021 Written by: Roopal Kulsrestha, Partner. Click here for original article
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