Insurance stocks in focus

The Insurance Amendment Bill, titled Sabka Bima, Sabki Raksha, is expected to be tabled in the Lok Sabha on Tuesday, December 16, and according to analysts, the Bill could have wide ranging implications for listed insurance companies.

Here are some of the key proposals and what they could mean for the sector:

100 percent FDI in insurance

One of the most closely watched proposals is the move to allow up to 100 percent foreign direct investment (FDI) in the insurance sector. According to experts, if this is cleared, the move could intensify competition, especially in the health insurance segment, wherein foreign players are expected to show strong interest.

For incumbent insurers, especially standalone health players, this could prove negative as new entrants will flood the market. Investors will also watch for conditions attached to higher FDI, including requirements around Indian resident board members and key managerial roles.

Peuli Das, Partner Actuarial Services at BDO India, said the sector has already absorbed the current 74 percent FDI limit well. Das added that higher foreign participation could improve capital availability, strengthen financial discipline and aid long term growth through better price discovery and tighter cost controls.

Merger of insurance and non insurance companies

Another proposed amendment is to allow the merger of an insurance company with a non insurance entity. This is seen as a positive for Max Financial Services, as it would facilitate the merger of Max Life Insurance into the listed parent, according to Emkay Global. Such a move would simplify the group’s corporate structure and remove the holding company discount that currently weighs on Max Financial’s valuation.

Open architecture left out

The bill does not include provisions for open architecture for individual insurance agents. Under the open architecture framework, agents are allowed to tie up with more than one life insurance, general insurance and health insurance firm.

The absence of this clause will negatively impact companies such as LIC, said Emkay, which rely heavily on tied agents. LIC and SBI Life source about 92 percent and 28 percent of their new business premium through individual agents. Therefore, in open architecture system, these insurers would either pay higher commissions to retain agents or risk losing business.

Composite insurance licence missing

The bill also does not provide for a composite insurance licence, which would have allowed insurers to operate across life, general and health segments under a single licence.

This omission is seen as negative for companies like HDFC Life, LIC and Star Health Insurance. While HDFC Life and LIC had indicated plans to enter the health insurance space, Star Health was keen to expand into motor insurance. Without a composite licence, these diversification plans are likely to remain on hold.

Lower capital norms for reinsurers

On the reinsurance front, the bill proposes to sharply reduce the minimum capital requirement to Rs 1,000 crore from Rs 5,000 crore earlier. While this could encourage more players to enter the reinsurance market, it is seen as a negative for some as increased competition could pressure market share and pricing.

Caps on commissions

Further, the Proposed Bill will empower IRDAI, the insurance regulator, to put a cap on commissions via regulations, therefore tightening payouts. This could have an adverse impact on PolicyBazaar parent, PB Fintech, which has seen its share tumble five percent in trade on December 16.

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