Insurance -- The spontaneous reaction to that word is 'get coverage to secure your life, health, and property'. The Indian insurance industry comprises approximately 57 insurance companies - 24 in the life insurance space and 33 in the non-life. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company, which is currently preparing for an IPO. In the world’s second-most populous country, statistics show that only about 4 in 100 Indians have life insurance coverage – a huge potential market for companies and investors.

Given the sensitivities of this sector, the industry is highly regulated by the Insurance Regulatory and Development Authority of India (Irdai) acting as its watchdog. This sector has opened up to foreign direct investment (FDI) after much deliberation over several years. From an initial FDI limit of 26 percent under the automatic route and 26 percent to 49 percent under the approval route, the Insurance Law (Amendment) Act, 2015 increased the FDI limit in the insurance sector to 49 percent under the automatic route, resulting in many successful insurance joint ventures such as Tata AIG General Insurance Company Limited and Bajaj Allianz General Insurance Company Limited.

Pursuant to the Insurance Law (Amendment) Act, 2015, the Indian Insurance Companies (Foreign Investment) Rules, 2015 (Foreign Investment Rules) were ratified. Under these rules, in addition to insurers, foreign investment in insurance intermediaries, was also to be capped at 49 percent. The cap was considered unfair, because insurance intermediaries, unlike insurers, are not custodians of policyholders' money. As a result, the Union government ratified the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2019, on September 2, 2019, increasing the FDI limit for insurance intermediaries to 100 percent.

Raising FDI limit

In addition to the Foreign Investment Rules, insurers and insurance intermediaries are also required to comply with Irdai's guidelines on the Indian owned and controlled of October 19, 2015 (IOC guidelines). The IOC guidelines mandate insurers and insurance intermediaries to be Indian owned and controlled, by ensuring: (i) the majority of the Board of Directors, excluding independent directors, be nominated by Indian investors/promoters; (ii) key management persons, including the CEO and principal officer, be appointed by the Board of Directors or the Indian investors/promoters; (iii) control over 'significant policies' be exercised by an appropriately constituted (as per (i) above) Board of Directors; (iv) in cases where the chair of the Board of Directors has a casting vote, they are nominated by the Indian investors/promoters; and (v) the quorum for a board meeting is a majority of the Indian directors.

A circular in November 2019 and the Irdai (Insurance Intermediaries) (Amendment) Regulations 2019 relaxed these compliances vis-a-vis insurance intermediaries, making the IOC guidelines inapplicable to insurance intermediaries.

The government is looking at further liberalisation of this sector, as indicated by the finance minister in her budget speech. A further increase of the FDI limit in this sector, from the existing 49 percent to a proposed 74 percent under the automatic route, is on the cards. To facilitate this increased investment limit, the government will have to amend the Insurance Act, 1938, the Foreign Investment Rules, and other allied legislations. In addition, the government will have to alter the provisions pertaining to the IOC guidelines. Other factors that will have to be considered are solvency of firms owned by foreign promoters, the exercise of long-term liability contracts on overseas owners, and securing the rights of policyholders in case the insurer is foreign owned. The extent to which the applicability of the IOC guidelines are withdrawn/altered for insurers is yet to be seen, especially in light of the fact that though the IOC guidelines are withdrawn for insurance intermediaries, insurance intermediaries with majority foreign shareholding are still required to ensure that the majority of their key management persons and Board of Directors are resident Indian citizens.

IPO of LIC a sure-shot success

Such liberalisations will definitely help India further improve its ranking in the Ease of Doing Business Index. India jumped from rank 142 in 2014 to rank 63 in 2020 on the World Bank Ease of Doing Business Index. With 16 percent surge in FDI inflows in 2019, India drove the FDI growth in South Asia. Per the Global Investment Trend Monitor Report of the United Nations Conference on Trade and Development (UNCTAD), India attracted $49 billion FDI inflows in 2019, compared with $42 billion in 2018.

As far as the LIC IPO is concerned, if the precedent set by the IPO of Indian Railway Catering and Tourism Corporation (IRCTC) is anything to go by, the IPO of LIC is a sure-shot success for the government and will improve product transparency and efficiency across the entire life insurance sector. LIC is likely to become the nation’s largest company by market value on the day of the listing, given that it is the largest company based on assets under management (AUM).

The insurance sector is sure to get a boost with all these measures in the government’s plan of action.

Pallavi Puri is Partner and Pooja Thomas is Senior Associate at J Sagar Associates. The views are personal.

First Published:Feb 11, 2020 6:00 AM IST