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What Lifting the Cap on FDI in Insurance Really Means

India’s move to allow greater foreign investment in insurance companies will help breathe life into a hitherto listless industry, and could entice global reinsurance companies like Berkshire Hathaway Inc. and Lloyd’s of London to set up units in India.

Late Thursday, India amended an insurance law to raise the cap on foreign investment into Indian insurance companies to 49% from the 26%– a step that has been discussed for nearly a decade. The amendment also allowed global reinsurance companies to set up branches in India, something that wasn’t allowed before. 

Experts say these steps could help bring in $1billion to $3 billion of fresh foreign investments, needed to take the insurance industry to the next level.

“The industry, at this stage, does need long-term capital for growth and expansion,” said Tarun Chugh, managing director of PNB MetLife India Insurance Co., a joint venture between India’s Punjab National Bank and American insurer MetLife Inc.

Only a small percentage of India’s 1.2 billion-strong population has insurance cover, either for life or health, so experts agree that there is huge scope for growth. Major global insurers, including the  U.K.’s Prudential Plc., Germany’s Allianz SE and France’s Axa S.A., are already present in India through joint ventures created since the industry was partially opened to foreign investment in 2000. 

Still, the industry continues to be dominated by state-run Life Insurance Corporation of India, particularly outside the metropolitan cities.

“If the 70% market share of LIC has to reduce, private sector has to put in a lot of money and make a stronger presence in semi-urban and rural areas,” said S.B. Mathur, former chairman of Life Insurance Corp. Mr. Mathur said that the Indian partners of insurance companies don’t have the money needed to fund this growth, so foreign investors will have to fill the gap.

India’s life insurance industry, which had grown rapidly until 2008-2009, has stagnated in the past few years following a series of regulatory changes, and a slowdown in the economy and rising inflation, which kept individuals away from buying new insurance products. But analysts hope that an expected turn in the economy, and a more stable regulatory regime, will help send the industry back to double-digit growth in the next few years.

Analysts expect companies like Allianz and Standard Life Plc. of the U.K., among others, to increase their stakes in the local insurance units.

David Nish, chief executive officer of Standard Life, said last month on an earnings call that the firm would consider raising its stake in its Indian insurance joint venture with HDFC Ltd. “It is probably unlikely we would go as far as 49 (%), but it would be in between,” 26% and 49% stake, said Mr. Nish.

An Allianz spokesman said Friday that the firm was happy that India had finally raised the foreign investment cap, but said that it would discuss the new law with its Indian joint venture partner, Bajaj, to decide a further course of action.

The ability to absorb more foreign capital, including by portfolio investors, will also likely spur some insurance companies to list on the local stock exchanges via initial public offerings.

“In the next 18 months, you’ll see three to five insurance IPOs,” said Srinivasan Subramanian, managing director of investment banking at Mumbai-based Axis Capital.

Meanwhile, analysts say the move to allow foreign insurers to set up branches in India will help grow India’s reinsurance industry, which is currently dominated by the state-run General Insurance Corporation of India.

Up till now, global reinsurers were limited in their capability to reinsure Indian assets, but now many of them will look to set up Indian units, said Shashwat Sharma, partner, management consulting at KPMG in India. He expects firms like Berkshire Hathaway, Swiss Re, Munich Re AG and Lloyd’s of London to consider setting up branches in India.