The government raised the foreign direct investment limit in insurance from 49% to 74% while announcing the union budget 2021 on Monday.
The step is expected to help private insurers get access to more foreign capital, which is expected to accelerate their growth and improve the insurance penetration in India.
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As per the insurance law, whenever any capital infusion is proposed in an insurance joint venture, all the partners are mandatorily required to bring in capital exactly in proportion to their shareholding in the company. If any JV partner is unable to infuse sufficient capital as per the shareholding, the others are automatically restrained from adding more capital. In such a scenario, the insurance company ultimately suffers as it is unable to grow its business or spend enough to sustain its existing business.
Most of the private insurers in India have foreign JV partners and shares of the listed insurers surged soon after the announcement by finance minister Nirmala Sitharman.
SBI Life Insurance shares jumped 2%, ICICI Prudential Life Insurance shot up by 6%, General Insurance Corp Ltd shares gained 5.4%, HDFC Life Insurance Co.’s stock grew 5%, ICICI Lombard General Insurance co. stock gained 3.2% and Bajaj Finserv’s shares jumped 4% on BSE.
“The government’s decision to increase the FDI limit in the insurance sector from 49% to 74% is a welcome move as it was a long standing industry request and will help attract greater foreign investment and strengthen the insurance sector,” said Russell Gaitonde, partner, banking and finance sector at Deloitte India.
There are 23 private life insurers in the country, which together recorded a new business premium of Rs. 57,296.19 crore during April-December 2020, according to the insurance regulator. In total, there are 32 general insurers in India, which underwrote a combined gross premium of Rs. 1.25 trillion during April-December 2020.
Currently, India’s insurance penetration is 3.7% of gross domestic product (GDP) against the world average of 6.31%. The life insurance sector in India is growing at 11-12%, slower than the 15-20% growth until fiscal 2020. The tapered growth is due to to the covid-19 pandemic which has pushed customers to save more instead of investing in stocks or locking it in life insurance policies.
The domestic general insurance sector is growing at 18% a year, which is higher compared to previous years. Growth has picked up after covid-19, especially due to the increase in the health insurance sector with more people opting for health insurance policies.
For standalone health insurers, the average growth rate is now 35-40%.