Does it pose any danger?
In the General Budget of 2021, Finance Minister Nirmala Sitharaman announced the privatization of many central banks and one General Insurance Company in the next FY. This announcement has led to the strengthening of the new “Aatmanirbhar” project of the BJP government under Narendra Modi’s leadership.
It was also announced that the earlier limit of 49% on FDI in the Insurance sector increased to 74%, which will allow foreign ownership of Insurance companies that were earlier only owned by Indians.
This will further allow them to have their majority in directors and control policy decisions for the company. This move has been implemented to allow Insurance companies to have an option to further increase their capital through foreign borrowings/investments.
This step is expected to increase India’s insurance premiums involvement in the GDP, which is a mere 3.6% in comparison to the global average of 7%.
What will privatization and higher FDI mean for Indian Policyholders?
A higher FDI cap means that more foreign investors can enter the market and bring their practices to this market. This will result in better pricing and higher facilities coming along with your insurance policies.
However, there is still speculation about how privatization will play out. A simple IPO does not seem quite suitable for government PSUs; the same was seen in the case of Air India, where the IPO price was Rs 800, and the share price dropped down to a mere Rs 170.
All of this will be taken into consideration when this step actually attracts any investors in the first place. There are still not many benefits to investments in PSUs as it is still risky.
The availability of a license is not much attractive anymore since it is quite easy to get a license if you can match the regulatory criteria.
The main issue with General Insurance policies is that it requires a long term customer base. The main turning point for any consumer is the price point and any customer sways the more economical way. Moreover, there is also the impact of intermediary remuneration, which is the commission given to mediators. RBI has put a limit on the amount of intermediary remuneration, but this does not change the fact that companies are still trying to woo the intermediaries their way.
It is most probable that the companies considered for privatization is General Insurance Corporation of India and United India Insurance. This is more than the intended number of 1 company initially.
How can FDI help?
The insurance sector is a capital intensive sector, and foreign investments will provide the much-needed capital. Opening up the sector will also bring in better technology, more efficient policies and give a much-needed push in the positive direction to the sector. It will also bring the attention of many more investors to the insurance sector.
More foreign investment will also mean that the sector will get better digital infrastructure, much broader databases, world-class customer support, skills, expertise and knowledge of the sector, which will make insurances more prominent in rural and remote areas too and touch a much wider audience.
Foreign investment also leads to an increase in competition which is of utmost importance in the Indian insurance sector since it is still much behind the global levels.
For establishing India as an investment hub for the world, the government will most likely classify insurance as a strategic sector. This will put insurance as one of the 18 strategic sectors where private enterprises are promoted by putting a minimum limit of 1 and a maximum limit of 4 Public Sector Units.
What are the safeguards for policyholders?
To protect the interests of policyholders while the sector experiences fast growth, the Finance Minister has pointed out some guidelines.
It is mandatory to keep a majority of Indians in the Board of Directors of the company so the companies will be in a better position to follow Indian Laws.
It is also compulsory to create a general reserve by the company such that the policyholders can still receive their claims despite the condition of Foreign investors and will make it safer for policyholders to buy such insurances. This clause has been put to have a situation similar to the 2008 Financial Crisis when the situation got so worse for Foreign investors that they started taking their capital out of Asian and European markets.
In the end, privatization and higher Foreign investment are needed for the Insurance sector in India. It will have a more significant stake in the GDP of our country while providing more Indians with insurance policies.
Therefore, it is wrong to assume privatization of the Insurance sector is a danger to this sector since it will be beneficial and a significant step in making India a Global Investment hub.