MUMBAI: The government's proposal to hike foreign direct investment (FDI) limit in the insurance sector to 74 per cent will bring in new sources for funding for the players, which will help them in strengthening their solvency, say experts.
The move will also help in improving insurance penetration, job creation and would result in an increase in merger and acquisition activity in the sector, industry players believe.
While presenting the Union Budget 2021-22, Finance Minister Nirmala Sitharaman said, "I propose to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49 per cent to 74 per cent in insurance companies and allow foreign ownership and control with safeguards.
" She said under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50 per cent of directors being independent directors, and specified percentage of profits being retained as general reserve.
Moody's Investors Service senior analyst (financial institutions) Mohammed Ali Londe said the proposal to increase the FDI limit for insurers to 74 per cent is credit positive for insurers.
"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," he said.
These benefits are expected across the insurance market as the government has simultaneously announced that it will take LIC to IPO and privatise 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, Londe noted.
According to Canara HSBC OBC Life managing director and CEO Anuj Mathur, relaxation in FDI is positive news for the insurance sector as raising the investment cap in insurance companies was one of the key demands of various global investors after the government had amended the FDI policy to allow 100 per cent foreign investment in insurance intermediaries during last year's budget.
"The move will help insurers attract more capital to expand the business and would also potentially boost the government's divestment programme," he said.
Increase in FDI limits will help insurance companies to raise funds to ensure their solvency is maintained in line with growing business needs, he said adding, "We may also see an increase M&A in the sector while paving the way for private equity (PE) funds to enter the space".
Commenting on the development, Reliance General Insurance executive director and CEO Rakesh Jain said the increase in the limit was a long-standing industry demand and will certainly help attract larger foreign investment, technical know-how and strengthen the ability of the insurance sector to become globally competitive.
Edelweiss General Insurance executive director and CEO Shanai Ghosh said the move will help strengthen the sector and also help further penetration of insurance in the country, which still is far behind the world average.
Echoing the view, Future Generali India Life Insurance chief investment officer Niraj Kumar said budget 2022 has indeed taken cognizance of this and has taken the bold step of increasing the FDI limit which will provide an immediate backstop in terms of capital for growth and improve the insurance penetration and financial inclusion in the economy.
"Also increasing insurance penetration would pave the way for generating employment opportunities, which in turn would augment the efforts of the government to revive the economy," he said.
Liberty General Insurance CEO and whole-time director Roopam Asthana said the move will help make the insurance companies stronger and enable them to further expand their businesses, supplement their growing business needs, and deepen the market with new products and technology.
"Moreover, it would foster the growth of the insurance industry and take it to the next level by bringing in global products, practices, and sales strategies to India's insurance market," Asthana said.
HDFC Life managing director and CEO Vibha Padalkar said FDI increase in insurance, a continuation of the disinvestment program and ease of tax compliance are welcome steps.