Indian FDI progresses, but hurdles remain

Indian currency

Insurers hailing the Indian cabinet's approval of a bill raising the foreign direct investment limit in insurers to 49% may be celebrating prematurely, as opposition parties could still block the bill's passage through parliament.

But while the cautious may be keeping the champagne on ice, there are positive things to be taken from the developments in India last week, according to RSA's head of emerging markets Phil Bulgin.

"We see this as good news rather than bad. What this represents is a clear declaration by the government that it wants to push the Insurance Laws (Amendment) Bill through, which contains a number of provisions including the increase in FDI," he explained.

"However, the Bill still needs to go through parliament. And it should be remembered that the last attempt to steer the Bill through did not succeed, notwithstanding support within the government at the time."

If the bill is passed most agree that it will be good news for foreign insurers, which have previously had their investment in local insurers capped at 26%.

"There are several insurers that have been seeking opportunities to enter the Indian market, primarily owing to its high long-term growth outlook," commented Vivek Jalan, director of risk consulting at Towers Watson India.

"The increase in FDI to 49% would help them get a suitable Indian partner as well as reduce financial strain on the Indian partner.

"The higher stake will also allow foreign insurers to participate more actively in operational aspects, essentially allowing them to leverage their existing advantages to extract maximum return from this high potential market."

However, despite some local concern regarding an influx of foreign capital into the Indian insurance market, foreign insurers are not the only ones that stand to benefit.

"In a market that offers tremendous growth potential, all insurers are likely to benefit from the enhanced capital base to support their growth plans," said Jalan.

"Foreign insurers are also likely to bring in advanced practices, technology and experience from having worked in more developed insurance markets, which will enhance the overall operating standards of the industry.

"The move has been received positively by private insurers, which believe the additional capital will enable companies to tap the market more actively."

The need for capital in India's insurance industry has been widely publicised. J Hari Narayan, head of insurance watchdog the Insurance Regulatory and Development Authority, said last week that FDI is vital if the sector is to reach its growth potential in the next few years.

Jalan agrees that this is an issue. "Quite a few existing large insurers have enough capital already to run their business and some of them have been profitable for the last few years and are able to support their growth plans," he said.

"But some of the smaller insurers are in immediate need of capital to support their business and to grow as well. Higher capital is essential for all insurers irrespective of size to capitalise on the full potential of the market by upscaling operations."

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