The government’s decision to permit 100% foreign direct investment (FDI) in insurance intermediaries is expected to help foreign brokerages buy into Indian companies and deepen the market in terms of new products and technology. This could help bring in global products, practices, and sales strategies to India’s insurance market.
Insurance intermediaries are brokers or agents who function as links between insurance companies and customers.
Till now, FDI in the sector was capped at 49% under the automatic route, including for insurance broking, insurance companies, third party administrators, surveyors, and loss assessors.
However, the latest Union budget proposed to allow 100% FDI in insurance companies and the department of financial services issued a notification in this respect on 27 August.
As insurance broking is a capital-intensive business, companies are in constant need of funds to enter smaller towns and cities. Opening up the sector to foreign investment could bring in more capital, which will boost investment and augment the reach of intermediaries to larger customers.
“This is a welcome step for the long-term development of the insurance sector in India. FDI will bring in capital for this capital intensive business along with global practices, products, and technology. It would increase insurance penetration and thus generate long-term capital for the economy by channelising long-term savings," said Gopal V. Kumar, consulting actuary, Radgo & Co. Actuaries and Consultants.
According to the notification issue on 27 August, any non-insurance company, such as a bank with more than 50% revenue from non-insurance business, will have adhere to the respective FDI limit for that particular sector.
“India’s move on insurance intermediaries will attract more international companies into the rapidly growing Indian market and promote competition within the sector," Fitch Ratings said in a report in July.
“We believe increased international involvement, particularly from developed markets, will contribute positively to the development of distribution networks, use of technology in distribution as well as bring in expertise in areas such as marketing and client-servicing. Fitch also expects the proposal, once implemented, to boost M&A in the fragmented insurance intermediary market over the medium term," the report said. There are 368 direct broker firms, 60 composite brokers, and five reinsurance brokers as of end-June 2018, according to the Insurance Regulatory and Development Authority of India.
On Wednesday, the Union cabinet cleared changes in FDI regulations, including easing rules for foreign single-brand stores and permitting FDI through the automatic route in contract manufacturing and all areas of coal mining.
“The changes in FDI policy will result in making India a more attractive destination, leading to benefits of increased investments, employment and growth," the government said.
“FDI inflows into India have remained robust despite global headwinds. Global foreign direct investment flows slid by 13% in 2018, to $1.3 trillion from $ 1.5 trillion the previous year, the third consecutive annual decline, according to UNCTAD’s World Investment Report 2019… I propose to further consolidate the gains to make India a more attractive FDI destination," finance minister Nirmala Sitharaman had said while presenting the Union budget proposals.