Foreign insurers bet big on their Indian ventures

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Once foreign insurance companies' fears over management control were allayed, they spent large sums of money to up their stakes

M Saraswathy | Mumbai January 20, 2016 Last Updated at 21:30 IST

In February 2015, when the Insurance Laws (Amendment) Act was passed, the cap on foreign ownership of Indian insurers was raised from 26 per cent to 49 per cent. This, it was widely believed, would open the sluice gates for foreign investment in the capital-starved sector. However, a new term in the rule book, "Indian management control", began to haunt the industry.

With no clarity on what this meant, the industry was understandably apprehensive. The FDI limit change was meant to be a game changer. But doubts persisted over control and Indian management. Some interpreted it as no foreigner being allowed to be a part of an insurer's top management, while others saw it curtailing their voting rights.

Several estimates of FDI inflows, ranging from Rs 20,000 crore to Rs 30,000 crore, were aired, yet analysts were reluctant to provide timelines, because they felt that Indian management control could be a dampener - with a higher stake, the foreigners were bound to ask for more say in the management.

Ten months later, the fears have proved baseless. At least 12 insurance companies have sent their applications to the Foreign Investment Promotion Board (FIPB) to increase the stake held by their foreign partners.

Bharti Enterprises became one of the first to state that its overseas investor, AXA, would step up its equity investment in the life and general insurance companies to 49 per cent. Shortly afterwards, it applied to FIPB.

In December, AXA increased its stake in Bharti AXA Life Insurance and Bharti AXA General Insurance to 49 per cent after receiving approvals from FIPB and the Insurance Regulatory and Development Authority of India (IRDAI). FIPB had approved AXA's proposal to invest Rs 1,290 crore in Bharti AXA Life and General Insurance.

The future, say experts, looks promising. Amitabh Chaudhry, MD & CEO of HDFC Life, says clarity from the regulator on Indian management control has helped insurance companies, and now more of them are going to FIPB for approval of a higher foreign stake. He says a couple of billion dollars will come in as FDI in the next 12 months.

"Companies will have to comply with Indian management control first before getting into valuation discussions. They are involved in that," he adds.

Bringing clarity

In October, IRDAI defined Indian management control, which includes the right to appoint a majority of the directors and authority over management decisions, including by virtue of shareholding, management rights, shareholders agreement or voting agreements.

It also said control over significant policies of the insurance company should be exercised by its board. Quorum shall mean and include presence of the majority of the Indian directors, irrespective of whether a foreign investor's nominee was present or not.

Insurers have been given three months to comply with the guidelines, but IRDAI will grant them another three months to meet the requirements.

High valuations

However, in anticipation of the policy changes, the valuation process in the insurance sector was set off much before the new policy was announced. In December 2014, Housing Development Finance Corporation had said the Azim Premji Trust would buy a 0.95 per cent stake in its life insurance venture, HDFC Life, for Rs 198.9 crore. The deal valued HDFC Life at Rs 19,890 crore.

In August, Standard Life announced it would buy a 9 per cent additional stake in its Indian insurance venture, taking its stake to 35 per cent. The foreign insurer was to pay Rs 1,705 crore for the 9 per cent stake, valuing HDFC Life at Rs 1,8951.4 crore.

In October, ICICI Bank said it would sell a 9 per cent stake in ICICI Lombard General Insurance to Fairfax Financial for Rs 1,550 crore. The deal valued the company at Rs 17,225 crore, making it the most valued private general insurer.

Valuations previously unheard of came into play. In November, ICICI Bank announced it would sell a 6 per cent stake in ICICI Prudential Life Insurance to Premji Invest and its affiliates, and Compassvale Investments Pte, a unit of the Singapore-based Temasek, for Rs 1,950 crore. The deal values the life insurance company at Rs 32,500 crore, making it the highest valued private insurance company.

At a time when insurance penetration is low, IRDAI is of the view that FDI will enable more funds into the sector, thereby improving penetration.

The additional funds brought in by foreign joint venture partners will be used by insurers not only to expand presence across the country, but also for digital initiatives to make the process of buying and selling insurance more efficient and easier. This would include creating new distribution channels and enabling tablet-based sales to allow insurance agents to access all information they need about products or the client on the go.

In addition, in places where internet connectivity is an issue, insurers are also looking at setting up branches and offices adjacent to their bank partners. The idea is to not only increase the number of sales points but also be closer to the policy holder so that better after-sale service can be provided. At present, private sector insurers are lagging large public sector insurers when it comes to their presence in rural and semi-urban areas.

While foreign insurers are a little disappointed over rules that restrict their rights, given the potential for business, newer players are also expected to enter the country.

How the insurance landscape is changing in India - BusinessLine

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How the insurance landscape is changing in India

RADHIKA MERWIN

BL RESEARCH BUREAU

After grappling with regulatory changes, the industry is now looking at balanced products and better profitability

January 17, 2016: 

Insurers have been grappling with a host of regulatory changes the last couple of years. Here’s a look at what lies ahead.

Life Insurance

Regulatory changes, volatile capital markets and decline in financial savings have impacted the performance of private life insurers in the last five years. In 2010, the focus of the insurers was on first year premium growth and market share gains. However, post the regulatory changes in product structures, particularly ULIPs, companies have been focussing on cost rationalisation. The operating expenses as a percentage of total premium have been trending lower in the last four years.

Looking ahead, increase in financial savings and low insurance penetration vis-à-vis other countries should drive growth. Coming out of the regulatory overhang, players are looking at a more balanced product portfolio. Life insurance policies are broadly categorised into traditional and ULIPs. Within traditional policies, life insurers sell participating (bonuses declared at the discretion of the insurer) and non-participating policies (bonuses clearly defined; pegged to an index).

Non-par products, though a smaller portion of traditional polices, typically provide higher margins. Due to regulatory changes in 2013-14, many life insurers, had to withdraw non-par policies and shifted the product mix towards par policies. Players are now rebalancing their portfolios, with focus on higher margin non-par policies and ULIPs. This should aid margin improvement. ICICI Pru and HDFC Life have a higher proportion of ULIPs, while Reliance, Max Life and Bajaj Allianz have a traditional (policies) heavy portfolio. Max Life has a sharp focus on participating policies, while SBI has a balanced mix between participating policies and ULIPs. However, diversification will be important as dependency on a single product — ULIPs in 2010 and NAV guaranteed products in 2013 — can be risky.

Also, distribution mix will be critical. Over the last four years, bancassurance has come into focus as agency distribution became less cost efficient. Insurance players will continue to improve the productivity of agency channel and build a diversified distribution channel. Besides, given that the top seven players account for over 70 per cent of the private insurers’ markets, there could be consolidation of the small players who are yet to achieve scale.

General Insurance

The Indian non-life insurance sector, which was opened to the private sector in 2001, has also gone through various regulatory changes. The sector’s performance can be tracked in two phases — 2001 to 2007 before de-tariffing, and post de-tariffing in 2007. Pre-2007, premium rates of policies were fixed by the regulator except for marine and health. The private insurers had an excellent run between 2001-02 and 2006-07 — their gross premiums growing at more than 70 per cent annually during this period. In 2007, the Insurance Regulatory and Development Authority of India (IRDAI) decided to de-tariff most of the policies except for motor third party pool. This triggered a price war amongst players. Between 2007-08 and 2014-15, gross premium for private insurers grew 17.8 per cent annually. Growth has been healthy, thanks to the strong prospects in the health and motor insurance space.

However, the main overhang for this sector has been the losses on account of the motor third party pool. In 2007, while IRDA deregulated the premium for all other general insurance products, it continued to fix the tariff for third party motor insurance. The third party pool was created to make available Third Party Insurance to all commercial vehicle owners at reasonable rates. Hence, players did not have the leeway to price in the higher risk but the claims were unlimited. This led to huge losses for insurers on account of this portfolio.

In 2011, the IRDAI dismantled this pool and set up a declined risk pool. Insurers are given a minimum quota of standalone third-party policies that they have to underwrite in their books. If the quota is not met, then the shortfall has to be met from the declined pool (policies rejected by individual insurers).

However, the losses in the motor segment continue to persist because the pricing is still regulated. In the long run, however, implementation of the Road Transport and Safety Bill of 2014 which, among other things, proposes stiff penalties and streamlines the process for dealing with accidents, may help to bring down the frequency and severity of accidents. This, in turn, should help reduce claims cost.

Insurance companies have been generating losses in recent years, mainly due to the third party motor pool. But there are some signs of improvement in profitability of players. Besides, insurers have been delivering healthy growth in premiums driven by retail products, such as health and motor insurance.

Importantly, prices have dropped substantially since 2007, post de-tariffing. However, insurers believe that given the experience of players in the last couple of years, there is likely to be more sanity in pricing of products and premium rates are likely to recover from here. This should bring more value and margins to the business.

(This article was published on January 17, 2016)