FDI hike gives boost to investment starved insurance sector!
Trithesh Nandan/Zee Research Group/Delhi
Hungry for new investment, the NDA government has pushed for reforms in the insurance sector with the cabinet committee on financial affairs approving 49 percent foreign direct investment (FDI). This is a complete turnaround from the party’s earlier stance of opposing it for the last six years.
With the Cabinet decision, shares of insurance companies like Reliance Capital (4 percent), Sundaram Finance (2 percent) and Max India (1 percent) traded marginally high on Thursday.
The green signal from the Cabinet comes after finance minister Arun Jaitley in his budget speech early this month said, “The insurance sector is investment starved. Several segments of insurance sector need expansion.”
The market responded to the government’s decision, but it is felt that there is a huge need of investment. Some of the figures indicate why this sector, which attracts only 26 percent of FDI, needed extra funds and more players.
Since 2010-11, there has been slowdown of life insurance penetration in India. In 2010, the insurance penetration in life insurance was 4.4 percent, while it dipped to 3.17 percent in 2012-13, according to the IRDA annual report released this year. The report states that there is hardly any growth in the non-life sector either in which penetration remained at 0.55-0.71 percent, while it marginally went up to 0.78 percent in 2012 from 0.71 percent in 2011.
India’s insurance sector market is also misbalanced. Its life insurance market is very high at 80.2 percent, while the share of non-life insurance is quite low (19.8 percent).
When the insurance sector was first opened by the NDA-led government in 2000, many believed a dramatic change would be seen in the sector. But nothing as such has materialised.
Some of the figures are startling. In a country with a population of 1.2 billion only 6 percent Indians have insurance cover. About 4.4 percent of Indians have life insurance while 5 percent have a reasonable health cover proving that insurance penetration is very low. The unbanked segment is also huge, calling for more insurance inclusion.
The sector needs big capital investment and break-even for companies comes after a long time. Capital shortage has stopped the sector from growing in the unbanked areas though the potential is huge. The Insurance Laws (Amendment) Bill, first tabled in 2008 to increase FDI in the sector, has been pending in Parliament.
Twenty-five life insurance companies and 27 non-life insurance companies, including four pure health insurance companies, operate in India. Some of the foreign players like MetLife Inc. of the US, France’s AXA, Germany’s Allianz SE, and Japan’s Nippon Life Insurance Co have been in India but only held minority stakes in joint ventures. The public sector Life Insurance Corporation (LIC) dominates with a 70 percent-plus market share with a 60 percent share of the market.
In the last couple of years, confidence of few foreign insurance companies dipped. Frustrated with sluggish policy and losing hope of gaining increased stake in joint ventures, few foreign companies exited. Foreign companies like Australian insurer AMP, American insurer Chubb and New York Life sold their stake, Dutch financial services ING left the country while Berkshire Hathaway closed its online insurance business. Even domestic players like Bharti exited the sector.
“A well-developed and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development at the same time strengthening the risk taking ability of the country,” said the IRDA report.
Foreign insurance companies have been demanding much-needed parity to do business in India. With the increase in FDI to 49 per cent, they might get the requisite demand. But will they be able to tap the real market — the large unbanked areas?