India's budget proposals could help insurers woo foreign capital

A capital influx could allow the sector to develop distribution networks.

The relaxation of foreign ownership caps proposed in India’s 2021-2022 budget will help insurers attract foreign capital, boost solvency and promote competition, according to a Fitch Ratings report.

The government has also proposed new requirements to ensure enough local participation, such as the requirement that the majority of insurers’ key management personnel and board members be resident Indians and that at least half of the board comprises independent directors.

It also looks to specify a percentage of profit to be retained as general reserve within the insurer to prevent excessive capital extraction by foreign parents.

The proposals could push global insurers to enter the fast-expanding Indian market, whilst international insurers already holding minority stakes in domestic firms may try to increase their ownership over the medium term.

Aside from a more robust solvency and better competition, an influx of new capital could be channelled to develop insurers’ distribution networks, allow digitisation and bring expertise to areas such as marketing and client servicing, therefore improving insurance penetration in the long run. It could also spur M&A activity over the medium term.

Moreover, the government has used the budget to emphasise its support to state-owned Life Insurance Corporation of India, through an IPO in FY ending March 2022. Once executed, the IPO could strengthen its accountability and transparency, the report said.