The promulgation of the insurance ordinance in December 2014 and the subsequent passage of the insurance (amendment) law by Parliament in March this year have raised expectations from the sector. After an arduous wait of more than seven years, the Bill has moved from the labyrinth of Parliament to the board-rooms of insurance companies, where the course will be chartered out to implement its provisions.
So, what does the bill entail for the industry? Is it going to be business as usual or is there a transformation on the cards? A relevant question that arises here is whether this law would only bring about an incremental change with little impact on the end-customer or is the story going to be customer-centric?
Based on a reliable level of industry thought-process, past trends and reasonable expectations, there could be two developments as mentioned below.
n The creation of a new market with the entry of new players such as insurers, brokers, reinsurance companies and perhaps players such as Lloyd’s, agents, third-party administrators, etc, is expected.
n In the existing market, there could be stake increases in JVs, a consolidation amongst existing players, capital infusion for mid-tier or on-the-fringes players, IPOs for the right players, and greater focus on technology, risk management, distribution and governance.
From 2015 onwards, India may witness a round of intense market-making efforts. There are a number of players, especially within the direct segment, that has been on the fringes waiting for the right signals. Regulatory changes in 2010, coupled with a downswing in the Indian economic climate, had kept it on the tenterhooks for a while. With both of these factors undergoing a change now, there is renewed energy amongst players to accelerate their India plans. A significant milestone of this bill would be to facilitate a regime that will welcome reinsurers in India. With only one reinsurer—the General Insurance Corporation (GIC) of India—the Indian market certainly has more appetite, which will not only energise the reinsurance sector but will also evolve it. Not only will these global giants bring in terabytes of data and years of global experience with them but will also support the local markets through sharing knowledge of product pricing, underwriting guidelines, distribution experiences and an overall holistic risk management philosophy. They may also save insurers from making big mistakes by handholding them through the evolution process, thus freeing up capital and bringing speed to success. The positive fallout of all this is on the end customer, who end up getting better-designed products at higher values. For instance, the bill, which has special provisions for Lloyd’s and their operations in India, when enacted, will bring tremendous confidence for them as they enter India. Though, some reinsurers are likely to have concerns about withholding-tax issues which remains a grey area. Clarity on this aspect from the government will help build confidence and commitment to market.
The existing set of insurers are likely to witness a round of stake increases, most likely upto 49%, by the foreign shareholder. Foreign shareholders, who had waited patiently for this resetting of the FDI cap to receive legislative approval, will now be looking at exercising this change through the pre-determined call or put options, leveraging any of the fair-valuation methodologies such as price-to-earnings, price-to-book-value discounted cash floor, embedded value or any other internationally accepted method. Computing FDI seems to be conservative, i.e, taking into account both the FDI and IRDA norms. Some clarification on this would help Indian groups which have foreign investment in their flagship companies. The element of ‘control’, as defined by the bill, has dampened spirits to some extent as it disrupts players’ original plans, but this shouldn’t be a roadblock for the committed.
The insurance market has entered its teenage and a shakeout is imminent, as shareholders reassess their global strategies and place India in the overall scheme of things. This is also the time for Indian shareholders to test their continued interest in the sector within the gamut of their core businesses, which may or may not necessarily be aligned with ‘insurance’. This thinking has already nudged a couple of players such as New York Life, ING, and recently, Royal Sun Alliance, to exit life- and general-insurance businesses. The new law will only facilitate such thinking further. A process of evolution and consolidation is expected to play out. This may also be the time to induct new minority shareholders. For instance, Azim Premji Trust was recently inducted into the shareholder fold by HDFC Life.
Mid-tier players waiting for guidance from the government are now positive about the India story and will be looking at further capitalisation of their businesses. Cash constraints for such promising mid-sized players may no longer exist and the redeeming of their promises could be triggered. This would signal consistency for the JV with no major changes at the promoter level rocking their boats. IPOs will be the another harbinger of unlocking values. Although IRDA had stipulated a 10-year period before insurers could tap the capital markets and several eligible companies have existed for some time now, none were keen to take this route due to the lacklustre market. We might see this sentiment change now. Listing is always a positive step for the industry as it brings in more transparency, higher governance standards and access to new capital. It will also reward the risk appetite of shareholders and their perseverance over the years. In the past, the leadership at HDFC Life, amongst others, have provided signals of interest in the IPO, and in FY16, we might witness the onset of such activity.
The new insurance law has a lot of potential to go beyond just market-making activities. It holds potential to create and establish a long sustainable regime of evolved risk management, better distribution practices while leveraging technology and institutionalising governance. To focus solely on FDI would be akin to missing the woods for the trees as FDI is only incidental to the entire ecosystem of insurance. Foreign players, with decades and even centuries of managing insurance businesses, bring in experiential and data-driven risk management, underwriting and claims protocols and a sharper view to price risk better. With greater capital at stake, it would be only natural to have foreign players unleash their wherewithal as they participate in a resurgent India.
Distribution has evolved multifold over the last 15 years. From a single distribution channel (agents), we have brokers, corporate agents, bancassurance, online, web aggregator, digital medium, etc, today. As the sector looks towards greater participation from the digital world for distribution of insurance products, (for instance, Google taking up distribution for auto insurance in the US earlier this year), overseas experience of leveraging these platforms for greater penetration will help all stakeholders.
The insurance sector in India has leapfrogged way beyond anyone’s imagination since the Malhotra Committee days. It has for a long time contemplated actions that can be taken on the opening up of the sector. Now, that the government has done that, it is up to the players to put that promise in motion and demonstrate the promised value. The only question now remains is: How soon can this be done?
The author is managing consultant (Financial Services), PwC India.