Opinion | For an insured India, FDI cap in sector needs to be hiked to 74 percent

The coronavirus pandemic has served to highlight the fragile state of the insurance sector in India. COVID-19 related claims are on the rise and a slew of high-value medical/death claims have the ability to wipe out the fortunes of smaller firms. It is imperative that the foreign direct investment (FDI) limit be raised to 74 percent from 49 percent immediately especially since local companies lack the wherewithal to invest during these uncertain times.

The increase in the FDI cap has been on the agenda of the government for quite some time now. Even the regulator, the Insurance Regulatory and Development Authority of India (IRDAI), has recommended that FDI in insurance be brought on par with the banking sector.

Why is the government then hesitating on following through with this decision? One reason could be the lack of consensus among ruling party members and allies on the FDI hike. A few party members themselves are opposing this move on the ground that MNCs may take over the Indian insurance sector.

Remember that, the increase in the limit from ​26 to 49 percent took seven years to be passed after stiff opposition. Even after it was finally passed in March 2015, the sector did not live up to expectations of an increase in foreign investment inflows. While reports then had pegged the inflow of capital at Rs 25,000 crore after the FDI limit was relaxed, actual infusion into the business was just around Rs 5,400 crore. The rest was local firms selling their stake to foreign joint venture partners. Such stake sales did nothing to increase the capital position of insurance companies.

Moreover, no new foreign company entered the Indian market after the FDI hike. This was not only because a further relaxation in the FDI limit was anticipated but also the Indian management control clause proved to be a thorn in the side of foreign companies. This clause said that even if a foreign player were to buy 49 percent stake in an Indian insurer, any board-level decision or business strategy change would need approval from the majority of Indian shareholders. This turned out to be a pain point for foreign companies who wanted equal rights with their Indian joint venture partners.

Thus, if we need to bring capital to the insurance sector, removing these restrictions and allowing foreign firms to hike their holdings to 74 percent is the way to go. Estimates by consulting firms show that Indian insurance companies need at least Rs 15,000 crore over the next three years. Where will this money come from?

Given the current uncertainty, some Indian shareholders in insurance joint ventures are not too keen to make further investments while others are heading for the exit. Recent examples include the Rajan Raheja Group announcing plans to sell its entire 51 percent stake in Raheja QBE General Insurance to Paytm’s Vijay Shekhar Sharma and Wadhawan Global Capital selling DHFL General Insurance to Sachin Bansal.

Public sector banks, which own a clutch of insurance firms, too are looking to considerably pare down their stake in their insurance ventures after the government asked them to focus on their core business amidst bad loan worries. IDBI Bank, for instance, has announced its plan to sell stake in IDBI Federal Life Insurance. Moreover, PSB mergers have added to the confusion with banks like Union Bank and Punjab National Bank being the promoters of more than one life insurance company which is not permitted by law. Within a few quarters, these banks will have to exit one of the ventures.

But how do they find buyers in India? Again, increasing FDI to 74 percent with equal rights for foreign partners could come to the rescue. India needs to do quickly also because the insurance sector will transition into a risk-based capital regime by FY23. This will mean that an insurance company’s minimum capital requirement will be directly proportional to the type of business written. So, an insurer writing risky businesses like fire insurance and group health where claims are higher will be mandated to maintain higher capital levels.

Currently, the solvency margin, or the minimum capital requirement, has been set at 150 percent. All private insurers have met this requirement but some are too close to the minimum capital needed, like for example, Future Generali Life, whose solvency margin is 159 percent, the lowest among private insurers. In the general insurance space, average solvency was 220 percent and Future Generali General Insurance was the lowest at 151 percent followed closely by Reliance General at ​152 percent as of FY20 end.

For general insurers, the situation is even grave because combined ratio stood at 117 percent for the industry at the end of FY20. This means that for every Rs 100 paid as premium, Rs 117 was being paid out as claims.

Thus, a relaxation in FDI limits now would serve the triple purpose of bringing in more foreign inflows (always welcome in a capital starved nation), create jobs and increase the penetration of insurance. According to estimates from consulting firms, the increased FDI limit could boost India’s insurance penetration (premiums as percentage of GDP) that is stagnant at 3.76 percent as against the world average of 7.23. Similarly, there is expected to be a 15 percent growth in the 1.5 million employment base in the insurance sector if foreign players enter.

This is one area where India could probably learn from its neighbour China that has increased insurance FDI to 100 percent.