The recent increase in the foreign direct investment (FDI) cap within India's insurance sector has led to a surge in international investment. According to AM Best, this trend is expected to boost market growth through the introduction of new capital and the implementation of global best practices.
The AM Best commentary said the Indian government raised the FDI limit in 2021 in the insurance sector from 49% to 74%. Following this change, numerous international insurance companies have transformed their minority stakes in Indian insurers into majority or controlling positions.
A notable example is Zurich Insurance Group's proposed investment of US$487 million in Kotak General Insurance. According to AM Best's commentary titled “International Insurers Seize Opportunities to Expand in India,” the potential for high growth in India's insurance market is drawing the attention of global insurance entities.
Michael Dunckley (pictured above), associate director at AM Best, noted that large international insurance groups, which typically operate in high-penetration but low-growth developed markets, are facing challenges in effectively deploying capital.
“As the cost of capital has increased, several are buying back equity from their shareholders due to a lack of growth opportunities,” he said. “These investments have allowed the international insurance groups to take effective control of the local insurance companies and dictate their strategic direction.”
According to the commentary, the liberalisation of India's insurance market, coupled with the influx of foreign funds, is anticipated to provide the necessary financial resources for expansion. It is also expected to facilitate knowledge transfer, enhance corporate governance and potentially increase market competitiveness.
The increased FDI is also likely to boost underwriting capacity and spur product innovation, aiding in the expansion of insurance coverage to a broader array of risks. This, in turn, said the commentary, is expected to contribute to greater insurance penetration in India over time.
However, the commentary also highlighted that foreign investors must find local partners willing to maintain the minority share in these ventures. Despite the relaxation of FDI restrictions, several limitations remain in place, presenting additional factors for foreign investors to consider.
Elsewhere in the country, a committee of Indian lawmakers is scheduled to hold discussions with representatives from four state-owned banks as well as insurance companies in 2024.
What are your thoughts on this story? Please feel free to share your comments below.
