India's proposed removal of the foreign-ownership cap on insurance intermediaries is likely to increase competition, strengthen distribution capabilities to enhance insurance penetration and boost M&A in the medium to long term, Fitch Ratings says. More international companies are likely to enter the fast-expanding Indian market. The proposal comes at time when other countries in the region are planning to lift restrictions on foreign ownership in their insurance markets.
The government of India proposed on 5 July 2019 to permit foreign companies to own up to 100% of insurance intermediary companies, including insurance agents, brokers, loss assessors and surveyors, from the 49%, to attract more foreign direct investment into the industry. The proposed change is only applicable to insurance intermediaries while the cap on foreign ownership in insurance companies will remain at 49%. Still, the government has indicated that it may take further measures to open up the insurance market to foreign investors. This could include the relaxing of foreign ownership restrictions on insurance companies.
Fitch believes India's move on insurance intermediaries will attract more international companies into the rapidly growing Indian market and promote competition within the sector. We believe increased international involvement, particularly from developed markets, will contribute positively to the development of distribution networks, use of technology in distribution as well as bring in expertise in areas such as marketing and client-servicing. Fitch also expects the proposal, once implemented, to boost M&A in the fragmented insurance intermediary market over the medium term. There were 368 direct broker firms, 60 composite brokers and five reinsurance brokers as of end-June 2018, according to the Insurance Regulatory and Development Authority of India (IRDAI).
India's move corresponds well with the deregulatory measures some other countries in APAC have undertaken, particularly in easing restrictions on foreign ownership of domestic insurance companies. China said in July 2019 that it will permit foreign companies to own 100% of domestic life insurers by 2020 by removing the cap of 51%. Similarly, Thailand's Ministry of Finance relaxed in 2017 the restrictions on foreign ownership in local insurance companies - from 49% to 100% - upon acquiring regulatory and ministry approval. Indonesia also put forward a similar proposal in July 2019 to relax the 80% cap on additional capital infusions by foreign owners of insurance companies.
India has also proposed reducing the minimum net-owned funds requirement for foreign reinsurers willing to open branches in India to INR10 billion from INR50 billion, to encourage reinsurers into the domestic market. The IRDAI amended the reinsurance regulation in 2018 to permit foreign reinsurers to compete with the state-owned General Insurance Corporation of India (GIC). However, GIC retains the right of first refusal under the amended regulation.