English
Apr
12
IPOs Heating Up Indian Insurance Industry
Posted on Apr 12, 2011 by Sergio Ulloa (G+)
The Insurance Regulatory and Development Authority of India (IRDA) announced that will soon allow private insurance companies to put forth their initial public offerings (IPOs), and raise funds through the stock market to further fund their individual expansion plans. Speaking at the 14th Annual Conference on Insurance, 'India Insurance: Turning 10, Going on 20', IRDA Chairman Mr J. Hari Narayan stated that the IPO guidelines and regulations would be in place by the end of April. "Several insurance companies will be completing 10 years in business, later this year. Our IPO guidelines must be in place by the end of this month," he said. The proposal permitting the listing of insurance companies on the Indian stock market has been pending for almost 3 years. The Standing Committee on Finance in India's Parliament is expected to finally give its report on the Insurance Laws (Amendment) Bill 2008 by the end of the month. The bill is projected to grant the insurance regulatory authority more autonomy and flexibility, in addition to increasing the capacity of foreign equity in insurance joint ventures to 49 percent, significantly higher than the previous level of 26 percent, among other provisions. Chairman Narayan explained the impact of the bill: "The changes in the regulatory environment will not bring in more regulation, but better regulation of the insurance sector with a view to widening and deepening the market." The current law technically allows any company to become listed on the Indian stock exchange after successfully completing 10 years of operations in the country. A number of joint venture insurers, including HDFC Standard Life and ICICI Prudential Life Insurance, qualify under the present standards with several more companies set to complete a decade of service shortly. The IRDA is expected to allow public float by insurance businesses that have been in the market for at least 10 years and have demonstrated three successive years of profit. At present, excluding the State-run Life Insurance Corporation, there are 22 private life insurance companies operating in India. The general insurance sector features 21 companies. Several of these private insurers, including the aforementioned HDFC Standard Life and Reliance Life, have sounded out an interest in tapping the global capital market to improve their resource base. Financial Services Secretary Shashi Kant Sharma forecasts that, once the new guidelines are established, we will see increased movement throughout the insurance sector: "The coming decade will see lot of activities in the insurance industry. Keeping in view the immense business potential in tapping Indian insurance market, we expect more foreign joint ventures to materialize and slew of IPOs in the sector." At the conference, the IRDA also discussed impending adjustments on premium rates for non-life insurance policyholders. Insurance companies in India are looking to raise cover prices in conjunction with industry growth, and to better enable themselves to set aside more capital for claim settlements. Several insurers have incurred significant losses in the current fiscal year, particularly in regards to motor insurance. As Chairman Narayan explains, the IRDA has increased provisioning requirements and further supports attempts to help insurers enhance their solvency margin and better insulate themselves from losses. "Because of the requirement of increase in provisioning, there will be a reduction in capacity and because of that there will be a hardening of prices. I think the demand and supply position in the non-life industry will be such that prices should harden½ I would like to make it even harder as we go along," the Chairman said. The IRDA Chairman conferred that, in the next few years, insurance companies in India will see changes to both regulatory development and distribution channels within the industry, and companies will need to evolve their marketing, pricing and claim settlement systems to remain effective. "The agency model that we see right now has serious deficiencies and that requires to be strengthened. I do not think the agency distribution model is going to last very long." The Chairman further predicted that Indian health insurance and pension-linked insurance products would eventually gain predominance in the market. Mr. Sharma further added that the insurance industry would need to work hard to promote its products, and increase awareness about the benefits of insurance among the populace. "It would be difficult to market insurance policies in rural areas purely on commercial or non-subsidized rates as the cost of marketing and servicing in such areas would be much higher," he said. Insurance consciousness and penetration in India has been particularly low outside the large cities, despite almost 70 percent of the population residing in rural areas. The insurance industry in India was first opened up to the private sector in 1999. In the following decade, total insurance penetration has doubled, rising from 2.3 per cent of the GDP in 2001 to 5.2 per cent of GDP for 2011. According to industry analysts, premium income for the Indian insurance market is projected to reach $350-400 billion by 2020. There has been a substantial rise in insurance coverage, with both the number of life and health insurance policies increasing many times over. Despite these promising figures, the insurance sector has been hampered by profitability issues - premium density is currently a paltry US$4.4 dollars - and financial issues aplenty for non-life insurance companies. While insurers in India are trying to improve their underwriting losses through regulating more practical premium prices for certain types of coverage, there remains a heavy reliance on investment to support operations. Raising the foreign direct investment cap from 26 to 49 percent, as proposed in Insurance Laws (Amendment) Bill 2008, would help inject funds, technical knowledge and expertise into these domestic insurers who are looking to grow. In addition to this, the IRDA's continued stewardship in adapting international best practices will be critical in developing India's insurance market further. India has tremendous economic potential due to its large labor force and rapidly growing middle class. The projected increase in per-capita GDP will correlate with an increased demand for a wide variety of insurance and investment products.