What’s next for India’s newly liberalized insurance industry?

Last year’s passage of an insurance industry bill, which permits Indian insurers to offer a 49%

stake to foreign investors and take their companies public, counts among the reform successes

of Narendra Modi’s government.

At Bloomberg’s Insurance Focus Day in Mumbai in June, a panel of experts discussed the

impact of these changes and whether they will provide the Indian insurance industry with the

capital it needs to continue its recent rapid growth. Here are the key takeaways from their

discussion:

THE MODI GOVERNMENT HAS DELIVERED SOME KEY REFORMS

"The expectations set for the NDA government of Prime Minister Narendra Modi were

unrealistically high," said Jyoti Vaswani, Chief Investment Officer, Future Generali Life

Insurance, "but while the pace of reform has been slower than hoped significant progress has

been made in sectors such as FDI, power, textiles and roads, as well as insurance. Competition

between the states for investment is increasing while corruption is falling."

Further success in passing big bang reforms such as the GST would be a “game changer,”

according to Nilesh Sathe, Member (Life) at the national insurance regulator, IRDAI.

“A lot of significant developments have happened and a roadmap is set for India to be one of

the best destinations for investment,” he said. Significant foreign direct investment is already

flowing into the insurance sector following legislation to increase the cap on foreign ownership

from 26% to 49%. Commitments to other sectors such as software, telecoms, infrastructure and

manufacturing could soon see India overtake China as the world’s leading destination for FDI.

BUSINESS ISSUES ARE NOW THE MAIN CHALLENGES FOR INSURERS

Recent reforms mean that regulation is no longer a barrier for insurance companies. Instead

business issues, such as an inability to scale, are the major challenges to be faced.

Consolidation may continue as takeovers can provide returns for investors that have been

pumping money into the sector since the first liberalization measures were introduced in 2000.

“This is a capital intensive industry,” said Ms. Vaswani. “After 16 years of putting in capital,

Indian promoters will want to share the burden. The capital has to come from various sources.”

Companies that cannot find the capital required to scale will need to right-size their distribution

costs to match the level of business they have.

INNOVATION CAN PROVIDE A FURTHER BOOST TO THE INDUSTRY

As Indian consumers and companies become more tech savvy, new solutions will help the

industry scale and increase penetration in a geographically challenging market. Simplified

policies, ecommerce and electronic policy certificates can all play a role. Technology such as

iris scanning to confirm customer identities is also becoming more available and affordable.

“Insurance companies can ride on those external systems,” said Abhijit Gulanikar, Chief Officer

- Investments and Business Strategy, SBI Life Insurance. “They just need to build applications

around them.”

INSURERS NEED LONG-TERM SECURITIES THAT MATCH THEIR LIABILITIES

"While regulatory change means that insurers are allowed to hedge interest rate risk on their

internal investments, financial markets have few products suited to their needs. Instruments

such as swap options beyond 10-years and 20-year zero coupon bonds are lacking," said Ms.

Vaswani. Low liquidity in the telephone-based corporate bond market and equity derivatives is

also an impediment. “The liquidity is all in 3-month equity derivatives; those are not going to

help insurance companies,” said Gulanikar. “Officially you have much longer derivatives

available, but they don’t really trade.”

THE ECONOMIC OUTLOOK IS POSITIVE

While many observers anticipate a 0.25% interest rate cut in the next financial year, Sathe

believes that a 100 basis-point reduction is possible over the next 12 months. “The government

is always talking about a reduction in interest rates. If inflation is under control, why is it that

interest rates cannot come down?” he said. While banks did not pass on recent rate cuts, they

may be coerced into doing so with future reductions, boosting the economy.

Equity markets look set for a breakout, with consumption and infrastructure themes promising

gains for road builders, cement manufacturers, mid-cap construction companies, the automotive

sector, and select FMCG, healthcare and retail banking players, as well as the IT space.

Investment will also provide an impetus. “If even a fraction of the FDI money that we have been

talking about comes in it will lead to a lot of employment generation,” said Vaswani. “And the

Make In India initiative, if it takes off, is going to generate a lot activity at the ground level.”