Foreign Direct Investment (FDI) cap increase for Indian insurers

Foreign Direct Investment (FDI) cap increased

The first major reform initiative by the new Indian government, increasing the FDI limit in India's insurance sector from 26 percent to 49 percent is a welcome move for many companies wishing to enter the market or expand the ownership of their current operation.

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In December 2014 the Indian Government announced the increase of Foreign Direct Investment (FDI) from 26% to 49% for the Insurance industry. As one of the fastest growing insurance markets in the world, this increase presents a great opportunity for insurers who are already in India to increase their stake, or for those considering entering the market. In this article we provide an overview of the change and the opportunities associated with a rise in the FDI limit.

About the proposed change

The Union Cabinet in India approved promulgation of an ordinance on the Insurance Laws (Amendment) Bill, 2008 on 24 December 2014. The ordinance was then signed by Mr. Pranab Mukherjee, the president of India, on 26 December 2014. While this still needs to be ratified by parliament, legal experts in India believe it is valid.

A turning point for the industry

  • Annual industry growth over the past three years in India has exceeded 18 percent, with the Indian non-life insurance industry estimated at USD 12.9 billion at the end of 2014, and predicted to reach USD 30 billion in five years. Total life insurance premium is estimated to be USD 92 billion in 5 years.
  • The increase in FDI cap is expected to act as catalyst to help the industry re-discover growth after a challenging period with an increased focus on innovation, international best practice and improving standards which in turn will drive better customer experience.
  • Market dynamics are strong, supported by favorable demographics, rising middle class, low penetration levels and macro-economic factors. The long term outlook for the insurance sector is bright.
  • While the operating environment remains challenging it’s improving due to supportive regulatory and/or government initiatives.

Key considerations for existing investors:

  • Should you take the opportunity to increase your stake and at what price?
  • What is the market outlook and your competitive position, how will you manage the increased risk profile associated with a shareholding above 30%?
  • How will you ensure adequate funding for future growth and the optimum operational structure and strategy for your joint venture?

Or, for new investors

  • Is now the right time to enter India and if the answer is yes, what is the best approach and strategy to ensure success in a challenging environment?

Key highlights from the new Law

  • Foreign ownership increased to 49%
  • Control, including appointing majority of directors, must remain with Indian partner
  • Reinsurers allowed to establish a branch for reinsurance business
  • Health insurance to be treated as a separate category
  • New regulations to reduce malpractice and promote a vibrant health insurance sector
  • Commissions structure to be determined by IRDA based on market conditions
  • Open architecture model to be developed to encourage penetration

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