Mumbai:
International credit rating agencies have given thumbs up to Union finance minister Nirmala Sitharaman's budgetary proposal to to increase the foreign direct investment limit for insurers to 74% from 49%
India’s budget proposal to increase the foreign direct investment limit for insurers to 74% from 49% is credit positive, as it provides Indian insurers with new sources of funding and access to external know-how that can improve their underwriting performance and unlock new operating efficiencies, said international rating agency Moody’s.
India’s move to raise the cap on foreign direct investment (FDI) in insurance companies from 49% to 74% is viewed by AM Best as credit positive to the country’s fast-developing insurance market.
Prospectively, given the historical trends and the opportunity to hold greater ownership in the insurance companies, AM Best is of the opinion that the Indian insurance industry is likely to attract significant overseas capital inflow.
The potential capital inflow is paramount to strengthening the solvency of the overall industry, particularly for the general insurance companies, which have recorded declining capital buffers over the last few years.
The increase in FDI limit, will allow Indian insurers greater financial flexibility in additional capital raising and over time is expected to support a bolstering of the sector’s solvency, said AM Best.
The possibility of higher foreign ownership would improve insurers’ financial flexibility by offering additional opportunities to bolster solvency. In addition, insurers would benefit from the sharing of risk management best practices, possibly leading to a lowering of exposure to high-risk assets and adoption of risk-based capital management, explained Mohammed Ali Riyazuddin Londe, vice President – senior analyst, Financial Institutions, Moody’s Investors Service.
AM Best notes that the raised FDI cap will enable the overall Indian insurance industry to attract fresh capital and further expand underwriting operations, which will contribute to growing the insurance penetration in the country.
The potential boost in foreign ownership–particularly in the case of overseas insurance investors–will also support knowledge transfer and process improvements that will accelerate the development of India’s insurance industry into a globally competitive marketplace, said AM Best.
However, AM Best notes that the government’s mandate for control of the companies to remain with resident Indian citizens may be a limiting factor for foreign insurers looking to hold majority interest.
These benefits are expected across the insurance market as the government has simultaneously announced that it will take LIC to IPO and privatize one of the government-owned general insurers, which along with the changes in foreign-owned insurers will cumulatively improve the pricing discipline of the market's underwriting performance given their dominant positions, he added./.
Under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50% of directors being independent directors.
A specified percentage of profits is also to be retained as general reserve, which will contribute to strengthening companies’ capital positions.
The government commenced liberalising the Indian insurance industry in 2000, with FDI restricted to 26%. A second set of reforms was introduced in 2015, which raised the foreign
investment cap for the sector to the current 49%. In addition, during 2019, the foreign investment cap for insurance intermediaries was raised to 100%.
Between 2000 and 2020, data published by the Ministry of Commerce and Industry showed that FDI equity inflows to India’s insurance sector amounted to Rs 849.2 billion (USD 13.5 billion).
Of this, almost 79% was recorded during the period from January 2015 to September 2020, following the government’s relaxation of the foreign investment limit in 2015.
The market posted a record investment inflow of Rs 240.9 billion (USD 3.6 billion) in calendar year 2016.
The Indian general insurance market has also been dragged down by poor underwriting performance, which has hampered insurers’ capital growth.
As of March 2019, three large public sector companies were found to be heavily under-capitalised and had to seek favourable treatments from the regulator on certain investment assets to alleviate pressures on their capital adequacy. In our view, the fresh capital infusion is not likely to exacerbate the persistent competitive conditions as the Indian insurance market may not remain sustainable with further weakening of pricing levels on some of the unprofitable lines.
Between March 2017 and March 2019, the number of companies which maintained a capital buffer of 10% or less over the minimum solvency ratio (1.5 times) nearly doubled to almost one-third of the general insurance segment.