Jul 21, 2013 12:33 PM IST | Source: CNBC-TV18

Insurance companies rejoice on hike in FDI cap

Indian insurance companies have raised their hopes after the government decided to hike the FDI cap in insurance sector from 26 to 49 percent under the automatic route.

The Indian insurance industry is holding its breath and crossing its fingers. Key companies in the sector are on the verge of a turning point. If the foreign direct investment (FDI) limits in the sector are hiked, increased competition will just be one of the many benefits, reports Manasvi Ghelani of CNBC-TV18.

The government's proposal to hike the FDI cap in insurance from 26 to 49 percent under the automatic route has raised hopes in the insurance sector. While insurance companies wait with bated breath for parliament to sign off on the hike, they are not quite succeeding in holding back a smile.

Also read: Government gives nod to hike FDI caps in 13 sectors

Insurance regulatory Development Authority (IRDA) says that the sector needs capital infusion to the tune of Rs 60,000- 65,000 crore over the next five years to add to the growth. It is over and above the Rs 25,000 crore that came in as foreign and domestic capital combined in FY13. But the joy goes beyond just capital infusion.

“It brings in product expertise, risk management expertise, distribution expertise. So it is a very welcome move. Given what is happening in the economy, this is a win-win for the economy and the industry”, says Puneet Nanda, executive director (ED), ICICI Prudential Life Insurance.

FDI to shake up insurance companies

The hike may remake fortunes in the sector. But experts warn that a shakeup in terms of competition and market share will be inevitable.

Monish Shah, partner at Deloitte,  said, "There will be some fallout on the share of the public sector players. The increased access to capital will empower the private players to shore up their competitiveness. It will then be those who will be able to leverage their operating costs and develop better products and service better that will succeed."

Experts say that this competition will force companies to look at newer markets, and push them to increase penetration to rural India. But the bigger plus will be in insurance companies taking less time to turn profitable.

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