Fierce competition and potential regulatory change could trigger consolidation among Indian insurers while simultaneously making the sector more appealing to foreign investors, industry experts believe.

As it stands, India has 24 life insurers, 33 general insurers and two re-insurers, data from the country's Insurance Regulatory and Development Authority (IRDAI) shows.

And a government pledge in the last Budget to merge National Insurance Company, United India Insurance Company and Oriental India Insurance Company to create a behemoth controlling up to a third of the non-life market for the moment appears to have stalled. 

But with pricing pressures taking their toll on profit margins as the battle for market share intensifies, a wave of mergers and acquisitions looks likely, said Sudhakar Shanbhag, the chief investment officer of Kotak Life Insurance, which has about $3.8 billion in assets under management.
 
Looming new risk-based capital rules could add to those pressures, even though the underpenetrated Indian insurance market has huge room to grow. 

Rising disposable incomes and increased marketing by global insurance firms could help the Indian insurance industry grow to $280 billion by March 2020, according to local industry body Assocham-Apas.

That's only 4.5% higher than the industry's assets under management ($268 billion) at the end of March 2017, as measured by the IRDAI. But the Indian market is still in its nascent stages and there is the promise of much higher growth further ahead, with the country's overall insurance penetration rate estimated at just 3.7% in 2017, up from 2.7% in 2001, Assocham-Apas said.

In addition, state-owned insurers still control a majority of the market. Life insurance also predominates, accounting for almost 80% of total premiums, significantly more than in other large emerging markets such as China and Brazil, another report published in April by the International Monetary Fund shows.

INCREASED COMPETITION

Reforms have increased competition. In 2015, foreign insurers were allowed to increase their stakes in Indian insurers to 49% and given the okay to operate as branches. 

Competitive pressures were further strengthened in 2017 when capital-raising norms were relaxed, prompting a spate of insurers seeking finance from public markets to expand their operations.

Sudhakar Shanbhag

So far, six insurers have listed on the main stock exchanges – General Insurance Corp., HDFC Standard Life, ICICI Lombard General Insurance, ICICI Prudential Life Insurance, SBI Life Insurance and New India Assurance. More are scheduled to follow, the most recent applicant being PNB Metlife, a joint venture between US-based  Metlife, Punjab National Bank and other entities.

“With some large insurers having listed, there is reasonably fierce competition to retain clients and corporate agents like banks, which can lead to compression of margins for the industry as a whole and add to the risk,” Shanbhag said.

Consequently, a change in the rules in India to a more risk-based capital regime for insurers, as seen elsewhere in Asia, seems increasingly justified, he said. 

“Having said that, since perception of risks is very subjective, the method of measurement and reporting has to be evolved appropriately,” he added.

RBC SHIFT?

The Insurance and Regulatory Development Authority of India set up a committee in September last year to consider how the insurance industry could move towards a risk-based capital regime by March 2021, according to local media reports. 

India currently has a solvency regime for insurers that is factor-based, which, while building in prudent margins (in assets and liabilities), is relatively simple and moves in line with business volume. It is otherwise insensitive to risk, including investment and operational risks.

India is an outlier – both in Asia and internationally – in not having shifted to a risk-based capital regime as yet, according to the IMF report.

A risk-based capital regime would improve the sophistication of the insurance industry in India – and make it more attractive to foreign investors and re-insurers, noted Mohammed Ali Londe, assistant vice president and analyst with the Europe, Middle East and Asia insurance team at Moody’s Investor Services.

It would also add to consolidation pressures, with some smaller insurance players likely to suffer as they struggle to cope with the enhanced requirements under RBC, he said.

Still, consolidation won’t come easy: Even among larger [insurance] players, it is often tricky as conflicts typically arise around board-sharing and management-sharing powers, he noted.

“Sometimes, there are even political hurdles and often such mergers and acquisitions are postponed, derailed or completely shelved,” he said.

If true, that will be welcomed by foreign players, many of whom already have tie-ups with local insurance firms and are in the process of implementing RBC guidelines in other parts of the world.

On paper, that would mean adhering to a different capital regime within and outside India; but in reality, it should not pose much of a problem, according to Moody's Londe.

“Foreign insurers who already monitor themselves on a risk-based capital basis are likely to be already in line with the relatively simpler capital regime in India,” he said.

A shift to a RBC regime will also help Indian insurers if they decide to expand more extensively in foreign markets, given that the lack of solvency standards that are recognisably equivalent to the international framework could be an obstacle, the IMF report noted.