Insurance Regulatory and Development Authority (IRDAI) Chairman Debasish Panda recently spoke of how India needs more global players to grow the insurance sector. Panda believes it is time to allow them to set up shop on their own without a local partner. A 100% foreign direct investment (FDI) policy, he says could bring in more foreign insurers.
The regulator is reading the writing on the wall. Many foreign players are unhappy that their local partners are not allowing them to raise their stakes in joint ventures (JV) and give them more say in running the business. Although the government liberalised the rules in2021, there are just a few JVs where the overseas insurer has a 74% stake. In 2022, Aviva upped its stake to 74% in AVIVA Life Insurance while Generali’s stake in Future Generali Life Insurance went up to 74%. Swiss Insurance giant Zurich now holds 70% in Kotak General Insurance.
Some players like Axa, have exited India. Abdrn, or Standard Life Aberdeen, exited HDFC Standard Life Insurance in June 2023 after a 22-year-long partnership. The last foreign player to enter the life insurance space was Japan’s Tokio Marine which floated Edelweiss Tokio Life. Some like Germany’s Allianz are divorcing their local partners but could end up marrying someone else.
As Kamlesh Rao, MD & CEO, Aditya Birla SunLife Insurance puts it, foreign players want the comfort of being in control and the satisfaction of being able to run it themselves without having to partner a local entity. “Psychologically, it makes a difference if they own 100%. They can always hire local professions to run the operations,” he points out. However, the truth, as Aniruddha Marathe, MD and Partner at Boston Consulting Group (BCG) points out, is that most large insurance companies are backed by financial institutions or conglomerates which are generally unwilling to give up control especially since the businesses are doing well and there’s potential to grow.
And they’re not apologetic about it. Vibha Padalkar, MD & CEO, HDFC Life Insurance, has discounted the need for a foreign equity partner, saying home-grown companies understand the needs of Indian customers better than their foreign counterparts. In Padalkar’s view there is no need for a foreign partner. “I think that ship has sailed where we need any intellectual horsepower from elsewhere,” she said in a recent interview.
The confidence, say experts, comes from their ability to raise capital. As another insurance sector CEO conceded to FE, the promoters would prefer to list on the exchanges to raise capital rather than sell a stake sale to foreign partners.”It would allow us to retain majority ownership and management control in a fast-growing market,” he said. A McKinsey analysis shows Indian life insurers command valuation multiples of 7-10 times price-to-book compared with just 1-2 times for their regional peers in Asia. The reasons for this include their strong performance over the years. India’s insurance sector recorded a gross written premium exceeding $130 billion, with an 11% CAGR during FY 2020-23, outpacing Asian peers like Thailand and China, which grew at less than 5%.
As Birla Sunlife’s Rao points out there are now options to capitalise the business by raising subordinated debt, depending on its size and net worth. “Companies use a combination of equity and debt to ensure their growth ambitions are met. The last 5-6 years have shown that domestic firms have the capital to inject it whenever needed, Rao says.
About a month back it became clear that Germany’s Allianz Group intended to exit its 26% stake in both Bajaj Allianz Life Insurance and Bajaj Allianz General Insurance, ending a partnership of over two decades. Industry insiders attribute the split to Bajaj Finserv’s reluctance to allow Allianz to raise its stake in the ventures.
To be sure, the global insurers are aware of how difficult it can be to build a business on their own. “Foreign partners do recognise that much of the value in the partnership comes from the Indian partner’s brand and distribution capability,” says BCG’s Marathe. “Even if they want to increase their stake, it could come with a steep valuation,” he adds.
Also, as McKinsey has pointed out while achieving a CAGR growth of over 17% in new business premiums, India’s top five private life insurers have seen tepid net profit growth of less than 2% CAGR over the past five years. This is thanks to challenges in cost management and operational efficiency due to escalating expenses, including increased commissions, operational costs, employee-related expenditures, and marketing expenses.
Debashish Banerjee, Partner, Insurance Sector Leader, Deloitte India, says foreign players are still keen on investing in India at the 74% level with a 26% local partner but need a compelling trigger. “They’re looking for a spike in the penetration levels or the possibility of handsome exits,” he observes. There is no doubt India is the ideal market for insurers over the next 10-15 years given favourable demographics and low insurance penetration.
Nontheless, Casparus JH Kromhout, MD & CEO of Shriram Life Insurance believes that for more foreign players to come in, a strong catalyst, such as a sharp rise in penetration, is required. “The challenge is that with GDP growing 7-8% annually, the economy expands so quickly that to make a noticeable impact on penetration, the insurance sector has to grow at an even faster rate,” Kromhout points out. It’s a challenge that must be overcome and overcome soon.