India’s Changing Insurance Market
Growth in India’s insurance market has been hampered by a lack of capital, and also a lack of consumer demand. The two problems are related: with the market still dominated by large, government-linked companies, insurance products have not always been effectively promoted by stakeholders. This in turn has left individuals and small businesses unaware of available products and the benefits of purchasing them.
Thirteen years after the last major change to India’s insurance laws, the current government is seeking to address these issues with its new Insurance Laws (Amendment) Bill 2015 (the “Bill”). The Bill—which was passed by the Indian Parliament on March 12, 2015—not only consolidates the existing legislation, but includes a number of significant changes relevant to foreign investors.
First, the government intends to increase the permitted level of foreign equity in insurance companies from 26% to 49%. Also, and unlike the existing legislation, the Bill no longer requires foreign investors holding less than 26% of the equity in an insurance company to register and receive prior approval of their investment. While foreign investors will not be able to buy controlling stakes in Indian insurers, these reforms could nonetheless allow multinational insurers to increase their presence in the Indian market.
Further, the Bill permits insurance companies to raise capital using preferred shares and other equity and securities instruments, as specified by the Regulatory Development Authority of India (“IRDA”). Foreign reinsurance companies are also permitted to engage in business directly in India through the establishment of a local branches and registration of those branches with the IRDA.
The Bill should have a noticeable impact on the Indian insurance market, allowing companies that have previously been on the periphery of the market to rethink their strategy. As reported by the Wall Street Journal, analysts anticipate a surge of between $1 billion and $3 billion of fresh foreign investment in the Indian market. Experts also predict that global reinsurance companies such as Berkshire Hathaway Inc. and Lloyd’s of London will set up branches in India; and companies such as Allianz and Standard Life PLC, which already operate in India, will increase their stakes in their local insurance operations.
The importance of the Bill is well illustrated by the recent earthquake affecting Nepal and parts of India. Reports of the damage so far are estimated between $1 billion and $10 billion, yet it is unclear how much of this will be recoverable through insurance companies. As Swiss Re recently reported, despite Asia suffering losses of $52 billion in 2014 from natural catastrophes and man-made disasters, only 10% of these losses were covered by insurance. With the Bill expected to receive formal assent soon, giving international insurance and re-insurance companies an opportunity to grow in India, the percentage of recovery in future years may present a different story.