Reliance Industries (RIL?s) entry into the insurance sector may signal the beginning of a gradual consolidation process. The sector has been experiencing a rough patch because of sweeping regulatory changes.
On Friday, Reliance Industries announced that it reached an understanding on the acquisition by RIL and its associate Reliance Industrial Infrastructure (RIIL) to acquire Bharti?s shareholding of 74% in Bharti Axa Life Insurance and Bharti Axa General Insurance Co. Analysts have estimated the deal size at R1,500-2,000 crore.
Currently, there are around 40 private sector insurance companies including some blue chip companies and top state-owned banks banks like Tatas, Birlas, Bajaj group, State Bank of India, ICICI Bank, HDFC, Bank of Baroda with international financial conglomerates. The existing players feel that with the entry of Reliance Industries, there will be significant changes in the way the industry has operated over the last 10 years. ?I do expect much larger consolidation in the industry in a year?s time,? said Ashvin Parekh, partner and national leader, financial services, E&Y. Though the industry is facing problems now, it will bounce back in next two to three years, he said. Describing the future of life insurance as bright despite the ongoing hiccups, K Sahay, CEO, Star Union Dai-ichi said the recent development in which Japanese firm, Nippon, had picked up 26% stake in the Reliance Life Insurance, at a cost of R3,000 crore despite the fact that the company incurred losses, is a clear-cut indication that investment in the life insurance sector will value to the promoters.
Hence, more and more entrepreneurs are likely to put in their money into the sector now. Only eight out of 22 private players in the space have been able to become profitable during the last fiscal. Still, it seems the value of life insurance companies are far more than it appears to be, said Sahay. ?The attractiveness of a life insurance company doesn?t lie with its profitability but with its actuarial valuation,? agreed Parekh.
If bigger players enter the market, it will create a new benchmark in terms of customer service, product, premium income and overall growth thanks to the fierce competition. The regulatory environment was also favouring the customers, added Sahay.
?Ultimately, I believe that there will be limited number of players over a period of 15 years. Another reason why some players will exit the sector is because of the delay in raising the FDI limit to 49% in the sector by the government,?? he said.
M Ramadoss, CMD, New India Assurance Assurance, which majorly insures the existing projects of Reliance Industries, said Reliance Industries need to have an aggressive plan to grow in the competitive industry. ?We have to wait and watch to see the real impact,? he said.
Rajesh Relan, MD & CEO, Metlife said the life insurance industry which is currently contributing 4.6% to the country?s GDP at present, is expected to grow by 15%.
?So, there is an opportunity for all the players to continue in the sector,? he added.
Another CEO of a private sector non-life insurance company said it is a clear indication that only the serious players will stay.
?Not only that, insurance is a difficult business, but also the fact that immediate return on investment is not there in the industry. If the non-finance promoters find their core sectors of business more lucrative, they can exit from the insurance sector. While Dabur has already exited after venturing into the general insurance sector, Hero also did the same in the life sector,? he said.