49% Insurance FDI: 6 months later foreign firms still elusive

In December 2014, three months before the Insurance Act was amended by Parliament, finance minister Arun Jaitley had said hiking of the foreign investment cap in the insurance sector to 49 per cent, which has been pending since 2008, will result in a capital inflow of $6-8 billion.

While six months have passed since then, not a single foreign reinsurer has entered India and not a single foreign insurance giant has hiked stake in an Indian entity from 26 per cent to 49 per cent.

Since the regulator Insurance Regulatory and Development Authority (IRDA), has not brought out the regulations, experts and industry insiders feel that while a delay in issuing final guidelines is hampering investments and growth within the industry, it will affect the ability of companies to offer a better and wider range of products at competitive prices.

“A hike in foreign direct investment would result into better options for customers to choose from a wide range of insurance products at competitive prices,” said the chief executive officer of a general insurance company. The three-month period of March-May this year witnessed just $184.97 million (about Rs 1,186 crore) foreign direct investment insurance plan sector, commerce minister Nirmala Sitharaman had told Parliament.

The initial brouhaha over the insurance foreign direct investment seems to have vanished and nobody talks about bringing billions of dollars into the Indian insurance segment these days. Although Insurance Regulatory and Development Authority chairman TS Vijayan had recently said at least six insurance companies have expressed interest in raising their stake in their foreign partners from 26 per cent currently to 49 per cent, the government is yet to receive any formal proposal from global giants to raise their stake in the Indian joint ventures in the last six months.

Insurance Regulatory and Development Authority is yet to bring out regulations — over 40 of them — to align the new Act with the market and regulatory requirements. Lloyds has been waiting for quite some time for the regulatory framework. “Foreign reinsurers are also not waiting. Many of them have already indicated that they are not going to set up base in the much-touted GIFT City in Ahmedabad as it doesn’t make sense anymore,” said the chief executive of an insurance company.

The Insurance Laws Amendment Act, 2015, was passed in March 2015, bringing out key amendments like enhancing foreign direct investment to 49 per cent, permitting foreign reinsurers and Lloyds of London to establish reinsurance branches in India and recognising health insurers as a separate class different from general insurers, among others. “These changes in laws require corresponding operative changes in regulation. Though more than six months have passed since the law was amended, regulatory changes to implement the changes in the law have not been notified. The delay seems abnormal,” said former Insurance Regulatory and Development Authority member KK Srinivasan.

However, some of the changes like how to permit foreign reinsurance branches to operate do seem complicated. “Particularly how to enable Lloyds to form reinsurance branch is not easy. Lloyds Corporation is not the risk taker. It is the Members and Syndicates of Members who are the risk takers. How to permit and how many members or how many syndicates to permit could be issues. Then again many of the global reinsurers themselves seem to hold Lloyds memberships. They will not come in as branches of foreign reinsurers if there are regulatory arbitrages in favour of Lloyds branches and vice versa,” Srinivasan said.

Two major issues which are vexing the sector are: Valuation (pricing) while hiking the foreign direct investment and management control. “We need to follow Indian regulations on valuation and management control. Insurance Act states that management control has to be with the Indian partner. This means Indian partner will have majority on the board,” Bajaj group chief Rahul Bajaj said. 

In fact, some of the insurance joint ventures are stuck in the valuation aspect.

Source: http://indianexpress.com/article/business/business-others/49-insurance-fdi-6-months-later-foreign-firms-still-elusive/