Mumbai: In what could be the first step towards the globalization of Indian insurers, the sector regulator is planning to allow domestic insurance companies and reinsurers to establish overseas joint venture firms and subsidiaries by buying stake in foreign insurers.
The Insurance Regulatory and Development Authority, or Irda, recently circulated draft guidelines to allow all categories of insurers that have completed 10 years of operations in India to set up insurance joint venture companies, subsidiaries or branches overseas. The foreign partners in the joint venture firms will not be allowed to set up branches in India.
The regulator has sought feedback from insurers by 31 December. Mint has reviewed a copy of the draft guidelines.
Easing norms: Irda chairman J. Hari Narayan. Photo: Mint
Currently, private insurers are barred from setting up overseas branches or acquiring stakes in foreign entities to set up joint venture businesses. Foreign insurers, however, can buy up to a 26% stake in an Indian insurance firm.
Once implemented, the new regulations will allow Indian insurers to set up foreign insurance joint ventures by subscribing to the paid-up equity capital of such firms. Indian insurers will also be able to form foreign subsidiaries by holding at least 50% of the paid-up equity capital or gaining control of the boards of such firms, and expand their networks through full-fledged branch offices abroad.
The draft guidelines require Indian insurers to have adequate financial networth before approaching the regulator to set up foreign ventures. The minimum net worth has not been specified.
T.R. Ramachandran, chief executive and managing director of Aviva Life Insurance Co. Ltd, said actual expansion will depend on jurisdictions of the countries where the Indian insurers want to set up joint venture firms. “But there is a huge opportunity with the NRI (non-resident Indian) diaspora,” he said.
There are 24 life and 24 non-life insurers in India, many of these formed in partnerships with foreign insurers. Reliance General Insurance Co. Ltd is one of the few private non-life insurers without a foreign partner.
The provision for Indian insurers to go global is being mooted at a time when they are struggling to expand within India. While life insurers are settling down with new models to adapt to new rules that came into effect from September 2010, non-life insurers are reeling under losses on account of huge claims in their motor and health insurance books.
“Public sector companies have been doing it for a long time, and private companies can also set up shops now,” said Irda chairman J. Hari Narayan. “Our only concern is that the liabilities arising out of their businesses overseas should not affect their local business. Some of the companies want to set up branches in Middle East and cover Indian populations residing there.”
“We need to get some clarifications from Irda on the capital requirements, stake to be held in JVs overseas, and the networth,” said the CEO of a general insurance company, asking not to be identified. “The guidelines will help us expand business in other geographies.”
There are certain stringent conditions. The insurer should have a capacity for underwriting risks and claims, and liabilities have to be met out of the shareholders’ funds beyond the solvency margin requirement—the minimum capital an insurer needs to set aside to meet its liabilities.
“Under any class, the liabilities shall be restricted to the paid-up capital of the foreign insurance joint venture company (including subsidiary). The solvency margin requirements recourse may be taken to the shareholder’s funds only,” says the draft guidelines.
To protect Indian policyholders from any trouble arising out of the foreign operations of Indian insurers, if an overseas branch’s results indicate a loss, additional capital requirements for compensating the losses can be contributed only by the shareholder’s funds, the guidelines say.
“If a domestic insurer has Rs1.5 million (Rs15 lakh) as solvency capital and is taking out Rs1 million to set up a foreign insurance joint venture, the solvency should be at least Rs2.5 million,” explained S.B. Mathur, secretary, Life Insurance Council, the representative body of Indian life insurers. “Under no circumstances should the policyholder’s fund in India be disturbed.”
Mathur added that as far as returns to shareholders are concerned, there could be a risk of foreign currency convertibility, especially as India itself currently offers the best interest rates.
The draft guidelines also state that for overseas branch offices, Indian insurers will have to review the underwriting limits delegated to the branch at the beginning of the year, and such limits will be decided on the basis of exposures and business plans of the insurer for that year. They will be required to formulate special underwriting policies for the foreign branches.“It will be a great opportunity to not just insure expat population and their assets overseas but also underwrite local business,” said Gaurav Garg, managing director and CEO of TATA AIG General Insurance Co. Ltd. “We will consider such a business plan in future and are right now concentrating on the India business.”