Insurance Bill set to alter sector's landscape, boost capital growth

The Insurance (Amendment) Bill 2015, allowing increase in composite foreign investment cap for insurance companies from 26% to 49%, has been passed by Parliament. The cap includes foreign direct and foreign portfolio investments.

Under the new law, foreign investment up to 26% will be under the automatic route. Any increase beyond this will require approval from the Foreign Investment Promotion Board. The new law will replace an ordinance the government had promulgated on 26 December 2014 to increase the cap.

The industry is set to get more funds. Tarun Chugh, managing director and chief executive officer, PNB MetLife, says, "Increasing the FDI cap will deliver significant benefits to the Indian economy. At present, the capital deployed in the life insurance sector is close to Rs 35,000 crore. FDI (assuming 26%) is close to Rs 8,700 crore. At 49%, the sector stands to get additional Rs 7,800 crore."

Experts say the industry needs long-term capital for growth which FDI can bring. Chugh says, "FDI will not only bring capital and foreign exchange immediately but also help companies in increasing managerial ability, technical knowledge, administrative organisation and innovation in products and production techniques."

A report from Khaitan & Co states, "We expect several existing foreign shareholders to increase stake in Indian insurance companies. This development is also expected to trigger the entry of new players in India's insurance and reinsurance sectors, which will also now get the attention of global private equity funds, sovereign wealth funds and other institutional investors."

Experts say the industry will also be able to invest in innovative products. Sandeep Bakhshi, managing director and chief executive officer, ICICI Prudential Life Insurance, says, "The passage of the insurance Bill is a welcome development at many levels. It indicates the intent of the government to push forward the economic revival agenda. As India's insurance industry expands, it will need additional capital to build scale. The increased FDI limit will provide the much-needed flexibility to raise this capital. Customers, too, will benefit from better products and services."

Anoop Pabby, managing director and chief executive officer, DHFL Pramerica Life Insurance, says, "The approval of the much-awaited insurance Bill is likely to bring another wave of growth and, hence, increase penetration in insurance. It will also give the industry the much-needed stability and enable it to focus on investing more in technology to revamp backend operations for smoother and better customer service. The industry will also be able to invest in better-researched and innovative products that will cater to the evolving needs of Indian customers."

For policyholders it proposes that no life insurance policy should be called into question on any ground after a period of three years instead of the existing provision of two years. At present, the insurer can reject a claim even after two years in case of fraud and misrepresentation of facts. But now the insurer will not be able to challenge the policy after the end of three years. Under the new law you can also hold an insurer responsible for fraud by the agent. The Bill has provision for penalty of up to Rs 1 crore in case of fraud by agents. Private insurers have, however, expressed concern that it is too stiff and will discourage companies from expanding.

Moreover, so far the insurance sector had two branches, life and general insurance. But now there is a new vertical-health insurance. V Jagannathan, chairman-cum-managing director of Star Health and Allied Insurance, says, "The inflow of fresh capital will help us innovate with products and expand offerings to the last mile to serve the national health agenda. Among other things, the Irdai (insurance regulator) has now got powers to fix commission rates for selling insurance. Foreign re-insurance companies will also be allowed to directly engage in the re-insurance business in India."

According to Sandeep Patel, MD and CEO, Cigna TTK Health, as health insurance is clubbed with general insurance, it does not allow them (health insurers) to have long-term products. "The Insurance Bill defines health insurance as separate line of business and that would enable us to have long-term products," he says.