Context:
The Indian Government is working to relax the FDI limit in the insurance sector up to 100% with an intention of providing global companies an entry into the country and increasing the inflow of capital.
Key Highlights:
- Benefits of 100% FDI in Insurance:
- The step is likely to promote an increase in the number of players in the insurance sector bridging the Indian under-penetrated market.
- Such a move could attract foreign capital in the sector by increasing competition resulting in technological transfer, and hopefully that would bring a reduction in long-term premia.
- The target of Insurance for All by 2047 by Insurance Regulatory and Development Authority of India (IRDAI) also aligns with the need for more capital in the sector.
Concerns for Foreign Insurers
- Distribution Complexity
- Foreign insurers would have to adjust to India’s bancassurance model, where the bank is leading in distribution for life insurance, and agency-led model for non-life insurance. This is a huge deviation from the distribution models of most other countries.
- Reconfiguring Partnerships
- Most foreign insurers are currently operating in joint ventures (JVs) with Indian partners. Full ownership might require restructuring of existing relationships and navigating mergers and acquisitions.
Industry Perspective:
- Foreign Insurers’ Adaptation
- Foreign firms would find it challenging to adapt in India’s peculiar distribution system. According to Pallavi Malani, a partner with Boston Consulting Group, “the market setup is a little different, especially life and health insurance, compared to any other market across the world”.
- Capital Flow
- The step will raise FDI, but past experiences are a cautious one regarding the immediate capital inflows. FDI trends show that capital flow has been fluctuating with an inflow of 27,379 crore since FY21 even after raising the FDI cap to 74%.
Market Penetration and Growth
- Under-penetration
- India’s insurance market is under-penetrated, and 100% FDI will be able to bridge this gap. Higher foreign involvement will be bringing global best practices, innovative products, and improved customer service to the market.
- Local Impact
- According to Bajaj Allianz Life Insurance’s Tarun Chugh and IndiaFirst Life Insurance’s Rushabh Gandhi, foreign investment would be good for India, but the distribution-driven market will not show any changes.
Distribution Challenges
- Banks and Agencies
- Foreign insurers will find it difficult to operate in India’s bank-led distribution model for life insurance and agency-led distribution for other insurance products without local partnerships.
- M&As
- Smaller insurers may consider mergers and acquisitions to restructure their presence and adapt to the market dynamics.
