India's 2021-2022 Budget has proposed relaxing foreign-ownership caps on insurers and listing the country's largest state-owned insurer, measures that Fitch Ratings says will help the industry attract foreign capital, strengthen solvency and promote competition.
The proposals can encourage global insurers to enter the fast-expanding Indian market while international insurers already holding minority stakes in domestic compes may try to increase their ownership over the medium term.
The Budget presented on February 1 proposes to raise the foreign-ownership limit on insurers to 74 per cent from 49 per cent which will allow foreign investors to hold majority stakes in Indian-based insurer for the first time.
The government has also proposed new requirements to ensure sufficient local participation like majority of insurers' key management personnel and board members to be resident Indians and a requirement that at least half of the board comprises independent directors.
The government also plans to specify a percentage of profit to be retained as general reserve within the insurer to prevent excessive capital extraction by foreign parents.
Fitch said it expects a relaxation of foreign-ownership rules to attract international insurers and promote competition within the sector. This will in turn increase insurers' access to capital and improve the industry's solvency position.
"We also believe an influx of new capital can be channelled to develop insurers' distribution networks, enable digitisation and bring expertise to areas such as marketing and client servicing, which will improve insurance penetration in the long run," said Senior Analyst Rishikesh Sivakumar.
India's insurance penetration rate stood at 3.8 per cent in 2019, lagging some peer countries in the Asia Pacific.
The proposals once implemented can also boost merger and acquisition activity over the medium term. Last year, the government permitted full foreign ownership (previously 49 per cent) in insurance intermediary compes, including insurance agents, brokers, loss assessors and surveyors.
India's foreign-ownership liberalisation will correspond with the deregulatory measures undertaken in some other Asia Pacific countries.
For instance, China permitted foreign compes to own 100 per cent of domestic life insurers in early 2020 while Indonesia's regulator allowed foreign investors with an ownership stake of above 80 per cent in a private insurer to maintain their ownership percentage despite additional capital injections.
This compared with a previous foreign ownership cap of 80 per cent. Similarly, Thailand's Ministry of Finance relaxed restrictions on foreign ownership in local insurance compes to 100 per cent from 49 per cent in 2017 and allowed boards of insurers to comprise majority foreign directors upon acquiring regulatory and ministry approval.
The government also used the budget to reiterate its commitment to list India's largest state-owned insurer Life Insurance Corporation (LIC) of India through an IPO in financial year ending March 2022.
"We believe the listing will improve the insurer's accountability and transparency while attracting more foreign interest in the industry. The proposed IPO once executed could broaden the insurer's capital base and improve its regulatory capital position which was 165 per cent at end-September 2020, marginally above the regulatory minimum of 150 per cent," said Sivakumar.
Besides, the government has expressed its intention to privatise a non-life insurer along with some state-owned banks and corporations to meet its disinvestment target of Rs 1.75 lakh crore set in the Union Budget for 2021-22.
( With inputs from ANI )
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