Budget booster for insurance sector

The Union Budget has brought cheer to the insurance sector. Finance minister Nirmala Sitharaman, in her speech while delivering the Union Budget on February 1, said she proposed to amend the Insurance Act, 1938, to increase the permissible foreign direct investment (FDI) limit in insurance companies from 49% to 74%, and allow foreign ownership and control with safeguards.

“Under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50% of directors being independent directors, and specified percentage of profits being retained as general reserve,” Sitharaman said.

Industry observers say that this move was on expected lines. “Given that FDI in insurance intermediaries has already been permitted up to 100%, so this was an expected next step to provide effective stimulus for the sector,” says Bengaluru–based Raj Ramachandran, partner at J. Sagar Associates, a leading national law firm.

Welcoming the finance minister’s move as a positive, Shanai Ghosh, CEO and executive director of Edelweiss General Insurance, says that the move will help increase avenues to bring in capital in order to realise the full potential of insurance in the country. “This move will help strengthen the sector and also help further penetration of insurance in the country, which still is far behind the world average,” says Ghosh.

According to Niraj Kumar, chief investment officer at Future Generali India Life Insurance Company, the importance of life insurance has come to the fore in the aftermath of the Covid-19 pandemic, reinforcing the need for wider penetration of insurance in terms of protection and building a safety net.

“The Budget has indeed taken cognizance of this and has taken the bold step of increasing the FDI limit to 74% from the incumbent 49% which will provide an immediate backstop in terms of capital for growth and improve the insurance penetration and financial inclusion in the economy,” says Kumar. “Also increasing insurance penetration would pave the way for generating employment opportunities, which in turn would augment the efforts of the government to revive the economy.”

According to Sumit Bohra, president, Insurance Brokers Association of India (IBAI) and CEO of GlobeSecure Insurance Brokers, the increase in FDI limit will give a major boost to the insurance industry. “The move will help in garnering more capital, improve solvency, and retention capacity within our country,” says Bohra.

Calling the enhancement of FDI cap to 74% a big change, Shoubhik Dasgupta, counsel at Pioneer Legal, a Mumbai–based boutique law firm, says that the immediate impact will be for the big joint ventures to re-think their strategy in India with their domestic partners. “How soon the Insurance Act will be amended to reflect these changes will, of course, remains to be seen,” says Dasgupta.

What Dasgupta points towards is visible in the share price movement of the insurance sectors stocks. HDFC Life Insurance touched the day’s high of ₹713 a share, until 2.30 p.m., which was a jump of ₹35.2 a share over Friday’s close of ₹677.85 a share, which works out to 5.2%. Similarly, SBI Life Insurance Company also saw its share price hitting the day’s high at ₹897 a share—an increase of ₹32.4 a share against the previous day’s close of ₹864.6 a share, a jump of a little over 3.7%.

At the same time, the life and non–life insurance arms of the ICICI Group saw upward movement in their share prices. ICICI Prudential Life Insurance Company saw its share price jump ₹28.9 a share, from Friday’s close of ₹481.1 to Monday’s high of ₹510 a share. This worked out to a little over 6% gain in day trade.

ICICI Lombard also registered an upward trend in its share price; with a gain of ₹52.3 a share from ₹1,317.7 on the close of trade on Friday to ₹1,370 a share at the day’s high on Budget day. This works to a percentage gain of nearly 4% until 2.30 p.m.

Clearly, the current Budget has provided the booster shot that the insurance industry had been waiting for long.