India’s Politics Hampers Foreign Direct Investment Reform, Experts Say

India’s complicated political environment is a factor hindering the advance of foreign direct investment reform, experts said. The government is simply not encouraged to make the move, particularly ahead of the state elections in 2011, according to Ashvin Parekh, national leader of financial services at Ernst & Young India.

Insurance deregulation was first proposed in India’s 2005 budget and was presented in Parliament in October 2008. Since then, the bill had been on hold.

Currently, the reform framework and specific investment scheme are being reviewed by a standing committee of Parliament and regulators. “The good news is that you can see some activities in Parliament but it still takes some time for a final announcement,” said Parekh.

Foreign insurers have prepared to raise their ownership stakes once the 26% investment cap is lifted. This change in ownership should not affect operations in India, said Bruce Bowers, chief executive of the Asia/Pacific region at Allianz S.E., which operates life and nonlife ventures with Bajaj Finserv, a financial services unit of conglomerate Bajaj Group.

The government is committed to market liberalization, and is providing some room for foreign investment, said Rajagopalan Krishnamurthy, managing director of Towers Watson in India. Foreign institutional investors and investment funds are now allowed to invest directly in unlisted life and nonlife companies. Prior to that, investment could only be made indirectly in the listed parent companies.

This move has opened one more channel for foreign investors as well as a window to raise capital for insurance companies amid the delay of foreign investment reform, according to Krishnamurthy. Insurance companies in India are also looking into initial public offerings to raise capital in the stock markets.

Various insurance companies are preparing to list on India’s stock exchange. In the next two years, Krishnamurthy said four insurance companies, including one public and three private insurers, plan to be publicly listed.

These capital-raising activities show India is still a vibrant market for foreign investment, he said, noting the Indian market has good appetite for insurance investment. For foreign players, finding the right investment mechanism is the important thing, Krishnamurthy said.

Bancassurance joint ventures have been the popular mechanism for foreign insurers in India. Most major Banks formed joint ventures with life and nonlife insurance companies, mainly foreign insurers.

However, the regulatory policy only allows a bank to tie up with one life and one nonlife insurer. The second wave of insurers entering India has been left with no major bancassurance options, so regulators are looking at the development closely, and a proposal for multiple partnerships has been under discussion (BestWire, June 1, 2010).

In the beginning, bancassurance joint ventures were mostly one-to-one bank and insurer partners. The trend now is for multiple Banks to enter a joint venture with an insurer. In 2009, Dai-ichi life insurance Co. Ltd. formed a three-way life venture, Star Union Dai-ichi Life, with Bank of India and Union Bank of India taking respective 51% and 23% stakes.

The capital position of banks in bancassurance ventures is a major concern for regulators because life business requires substantial capital in the long term. Therefore, banks are now not allowed to hold more than 51% stake in new venture.

A direct branch or wholly owned subsidiary for foreign insurers is not foreseen as likely to happen in India, said Krishnamurthy. Foreign ventures already take up about 45% and 50% of the market share in life and nonlife private sectors, respectively.

India’s top four private life insurers all come from foreign joint ventures. The progress they made to build a strong market share in about a decade’s time is a “unique” development, said Krishnamurthy.

Apart from uncertainty in risks, nonlife business is less complex for foreign insurers, which would be able to make good progress with less time invested while life business requires vast investment in distribution and products. The motor, health and pension lines still offers ample opportunities for foreign insurers, said Krishnamurthy.

The three health insurance joint ventures, including Apollo Munich, Max Bupa and Star Health and Allied Insurance, have advanced successfully in building up a stand-alone health insurance sector, according to Krishnamurthy.

However, Parekh said India may not see as many foreign new entrants as in the past decade. The trend will become more stabilized as the market may see some sort of consolidation.

In the life sector, Parekh said four insurers out of the 26 players are making a profit and some are “almost getting there.” This performance is encouraging for the life business as the market was liberalized in less than a decade.

Insurers have yet to turn a profit in nonlife business as the sector had been de-tariffed not long ago in India, according to Parekh.

The strategic focus of nonlife business is to start with a simple “entry-level” policy, followed by retention of customers for other products driven by growing income and insurance needs, said Bowers.

“Sales of motor vehicles as well as large infrastructure investment remain a basis for solid further growth in property and casualty,” said Bowers. The fast-growing services sector is expected to drive demand for liability lines in India.

In the next five years, increasing demand for medical and savings protection, economic growth, rising car sales and low insurance penetration, especially for India’s vast rural population, will fuel premium growth of between 15% to 20%. International insurance groups are attracted to invest new capital to strengthen development in India, said Parekh.

Aegon recently said it plans to infuse 6 billion rupees (US$133 million) into its life venture Aegon Religare to fuel expansion in India where the Netherlands-based insurer sees a strong middle class and locally driven economic growth.

Also, ING Groep NV said it is looking to grow its life business five-fold for its life joint venture, ING Vysya Life, supported with investment in the expansion of distribution and operations. The group plans to inject 2.4 billion rupees in additional capital in the 2010 financial year to fuel growth (BestWire, July 16, 2010).

In emerging markets like India, it is important to strike a balance between premium and profitable growth. “Allianz will only consider business that generates profitable growth because profitable guarantees sustainability,” said Bowers. This is especially true for life business as the contracts run for 30 or more years.

Nonlife business requires good management of claims and expenses to create profitable underwriting. Though the emerging markets offer a lot of opportunities, underwriting discipline remains an important factor in sustaining profit, according to Bowers.