To grow, Indian insurance companies need IPOs
The Indian insurance sector is conceivably as longstanding as the banking industry, but it has seen a sea change in business expansion and disclosure standards over the past 10-15 years. The Insurance Regulatory and Development Authority of India (Irdai), which was instituted in 2000, opened the insurance sector to private enterprises allowing Indian companies to partner with foreign establishments. This has redefined the insurance sector, allowing common people to have adequate financial cover at reasonable cost. A developed and evolved insurance sector is a catalyst for economic development of a country. It provides long-term funds for various developmental activities and simultaneously strengthens the risk-taking ability of the country.
Strong insurance IPO pipeline
This year is a landmark year for the Indian insurance sector as a spate of initial public offerings (IPO) are expected from leading insurance companies, with at least 5-6 in advanced stages of hitting the bourses. Irdai’s move to relax capital raising norms last August (allowing insurance companies over 10 years to go public), has pushed many companies to tap Indian capital markets. Industry estimates suggest that insurance companies are eyeing a mop-up of Rs30,000-35,000 crore this financial year. Union Cabinet has also approved the public listing of five state-owned general insurance companies, and reduction of government’s stake to 75% from 100%. The current buoyancy in Indian stock markets, which are trading near all-time highs, should also support these public issues.
Indian insurance sector consists of 57 companies, out of which 24 are life insurance, 31 general insurance, and two are re-insurance companies. Ironically, there are only three listings on the stock exchanges.
However, the public listing initiative by insurance companies has gained tremendous momentum this year, with growth potential in the sector and acceptability among institutional and retail investors. This signifies increasing traction in the sector on the IPO front. Listing is also a step towards improving disclosure standards and their periodicity, which will make businesses answerable to investors, and society in general. Till a decade ago, there was little transparency in terms of policy details, claims and surrender rates. The insurance regulator changed the landscape by bringing in more disclosures.
Growing accountability for insurers
India’s economy gives further impetus to international investors’ interests, leaving constructive circumstances to attract IPOs in the insurance sector. A public listing fundamentally amends a company’s legal and economic structure. The management becomes more accountable to a new group of shareholders, unlike the concentrated ownership of a private company. Information regarding the company’s financial health and operations, which were kept private, gets publicly disclosed. This reflects on the company’s performance in many areas including: growth, innovation, managing fraud, customer service, and regulatory compliance.
The IPO channel is essentially taken by companies to raise capital for expansion of operations, increase liquidity for shareholders, improve brand image and create valuable currency stocks that can be used to make acquisitions and compensate employees. An IPO also enhances a company’s public profile—increasing its visibility and giving recognition of its products and services. This progressively benefits customers as the company constantly brings in better products and enhanced service standards to remain proficient, while outspreading penetration of insurance services.
Indian insurance IPO market is taking off at a time when the sector itself is poised for a giant leap. India’s insurance market is expected to quadruple in size over the next 10 years from its current size of $60 billion, according to a report published by India Brand Equity Foundation (IBEF), an initiative of the Ministry of Commerce and Industry, Government of India. This is an opportunity waiting to be harnessed. India currently accounts for less than 1.5% of world’s total insurance premiums and about 2% of its life insurance premiums, despite being the second most populous nation.
India’s insurable population is anticipated to touch 750 million by 2020, with life expectancy reaching 74 years. In addition, life insurance is projected to comprise 35% of total savings by end of this decade, as against 26% in 2009-10. There is substantial potential for growth in the sector due to several factors that include initiatives like Pradhan Mantri Jan-Dhan Yojana aimed towards enhancing financial inclusion, raising financial literacy along with increase in domestic savings, expanding coverage of crop insurance, expected revival of the investment cycle, and increasing penetration of auto and health insurance. Demographic factors such as a growing middle class, young insurable population and growing awareness for protection and retirement planning will also support the growth of Indian insurance companies. The country is the 15th largest insurance market in the world in terms of premium volume, and has the potential to grow exponentially. This certainly makes a strong case for insurance companies to unlock value and tap stock markets for future expansion plans.
Antony Jacob is chief executive officer of Apollo Munich Health Insurance Co. Ltd.