Indian insurance: opening up?

In the wake of the recent flood of reforms in India, Mumbai is awash with rumours that the government will next enact long-awaited liberalisation of insurance and raise the limit for foreign direct investment from 26 per cent to 49 per cent.

On Friday, shares in Max India, in which Mitsubishi Sumitomo owns a stake, spiked 6 per cent on reports of a policy move.

On Tuesday the insurance regulator told a conference he favoured reform. “Insurance, like many other sectors in India, requires greater levels of investments and in that regard we would welcome steps to increase FDI in the insurance industry,” said J Hari Narayan, chairman of the Insurance Regulatory and Development Authority.

After around 20 years of discussion, change won’t be a moment too soon for foreign insurers. But unlike the spate of reforms the government passed over the past two weeks, insurance reform will require parliamentary action – something that, if the monsoon session is any indication, is sorely lacking.

But in the event that the government’s current reform momentum does shove through FDI in insurance what is likely to happen?

To be blunt: not all that much.

Because international companies cannot own controlling stakes, they must seek strong local partners – but most of those entered foreign partnerships ten years ago, when foreign companies began seriously entering the market. An increase to 49 per cent FDI will not change that need – or the dearth of free partners.

“The biggest challenge for global players for India entry is finding credible partners in India to be able to set up their insurance ventures,” said Shashwat Sharma, partner at KPMG. “I do not think there are too many viable options left anymore from the partnership perspective.”

Those existing Indian companies, however, are very likely to see great benefits, as foreigners increase their stakes in their existing partnerships. That could be Nippon Life increasing its 26 per cent stake in Reliance Life to 49 per cent, for instance, or Germany’s Allianz and Bajaj wanting to take their relationship to the next level.

India’s insurance industry is dominated by state-owned companies, which control 60 per cent of the general insurance market, while the state-run Life Insurance Corporation controls 65 per cent of the life insurance game, said Sharma. The rest of each pie is made up of about 20-to-25 insurers, giving India around 50 operators in total – compared to 700 in the US.

Their dominance is unlikely to be affected until the improbable event that FDI increases closer to 100 per cent, because the jump to 49 per cent won’t increase competition very much, said Sharma. That’s good news for the government which, as beyondbrics has reported, over the years has treated LIC in particular, as a veritable cash machine, swooping in during times of trouble to help Delhi meet its divestment targets.

The decision to amend the act governing FDI in insurance remains tabled in parliament, with little indication that the opposition is ready to play ball, or what clout the ruling Congress Party will have in the next session.

Still, if the government does decide to open up the sector, Rohan Sachdev, of Ernst & Young, said there were foreign insurance players interested in entering India despite the fact that the country’s strongest players are already taken. But he did not name names.

“There is still a lot of interest in India from foreign players,” he said. “There are at least 4-5 foreign players looking at the market and hoping to set up ventures in India.”

Related reading:
Indian insurance: rogue agents, The Economist
Cigna in Deal to Sell Health Insurance in India, NYT
Buffett, India’s Insurance Salesman, NYT
Investors pour money into India after reforms, FT