FDI in Insurance in India

8/6/2019 FDI in Insurance in India

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FDI in Insurance in India

http://www.docstoc.com/docs/21598472/Foreign-Direct-

Investment-in-Insurance-in-India

Background of FDI in Insurance in India

With the enactment of Insurance Regulatory and Development Authority (IRDA) Act,(1999),

foreign participation in an Indian insurance company is restricted to 26.0% of its equity /

ordinary share capital. The Insurance Regulator has stipulated that foreign investment

in Indian Insurance companies be limited to 26% of total equity issued (FDI limit) with

the balance being funded by Indian promoter entities. Since then many foreign Insurance

companies have formed joint venture with domestic players. For example, Allianz with Bajaj,

Standard with HDFC, Prudential with ICICI, to name a few.

The prime objective of the JV companies to enter Indian market is to reap benefitsfrom the booming economy. India is worlds second fastest growing economy recordingan impressive growth rate of 8% and above. With this accelerated economic activity,comes the rising income and affluence which has been complimented by greaterconsumer awareness in regard to insurance. As a result major insurance players begantheir operations in India, but with this developing industry, insurance companies face arange of common challenges. They need to develop innovative bundles of products andservices, cross-sell more effectively and strengthen their relationship with salesintermediaries in order to drive top-line growth (Global Insurance Outlook 2007 -Deloitte Research).Most of the joint ventures formed have similar structure as prescribed under the act,but what makes every JV distinct from each other is the source ofattractiveness/willingness to enter into such an alliance with their joint partner. Withthe foray of new JV companies into Indian market, not only they provided morechoices to consumers, but also ushered in a new and a much needed wave ofinnovative products and services. The formed JV works as a good fit; since theIndian partner brings : In-depth knowledge of market (demographics of Indian consumer andenvironment) Extensive customer base and strong existing distribution channels Greater acceptability and reliability of the product

While, foreign partner provides : Insurance expertise and effective risk management practices Sound understanding of risks and knowledge of products Brand Image and International recognition to JV


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Key joint ventures in Indian Insurance

1. ICICI Prudential Life Insurance - It is a joint venture between ICICI Bank andPrudential plc, which is a leading international financial services. ICICI Prudentialbegan the operations in December 2000. It has been voted as Indias MostTrusted Private Life Insurer for three consecutive years.

2. Birla Sun Life Insurance Company (BSLI) is a joint venture betweenthe Aditya Birla Group and Sun Life Financial Inc of Canada and wasestablished in India in the year 2000. Aditya Birla Group has established astrong financial presence in India through Aditya Birla Financial Services Groupwith expertise in a wide array of products which include wealth management,consumer finance, broking, lending and private equity. Sun Life Financial is aCanadian based financial services conglomerate with a major chunk of itsbusiness in the insurance domain with a history of over 140 years and henceprovides the much needed expertise to this joint venture in India. Birla Sun LifeInsurance Company has a vast distribution network of almost 600 branchesacross India reaching out t more than 1500 towns. The already establishedcompanies of the Aditya Birla Financial Services Group give it the expertise andreach to service and add more consumers to the life insurance business. Thecompany has a wide array of life insurance products catering to all aspects of apersons life from traditional plans to unit linked market plans.

3. Max New York Life is a joint venture between Max India Ltd. a $1.5 billion multi-business corporate in the business of life and and New York Life, a Fortune 100company. MNYL, incorporated in 2000, is one of Indias leading private lifeinsurance companies. The Company offers both individual and group lifeinsurance solutions.

4. Star Union Dai-ichi is a joint venture between Bank of India and Union Bank ofIndia, two leading Public Sector Banks in India and the Dai-ichi Mutual Life InsuranceCompany, a leading Japanese Company in the Life Insurance market.The Company has a capital stake of 48% by BOI, 26% by Union Bank and 26% by Dai-ichi Life. The Company has authorized capital of Rs. 250.00 Crores.

5. Tata AIG Life Insurance Company Limited (Tata AIG Life) is a joint venturecompany, formed by Tata Sons and AIA Group Limited (AIA). Tata Sons holds amajority stake (74%) in the company and AIA holds 26% through an AIA Groupcompany. Tata AIG Life Insurance Company Limited was licensed to operate in India onFebruary 12, 2001 and started operations on April 1, 2001.

6. HDFC Standard Life Insurance It is a joint venture between HDFC Limited

and a Group Company of the Standard Life Plc, UK. The Company is one of

leading private insurance companies, offering a range of individual and group

insurance solutions, in India. Being a joint venture of top financial services groups,


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HDFC Standard Life has adequate financial expertise to manage long-term

investments safely and resourcefully. The Companys business premium income

stood at Rs. 1,839.70 Crores in 2008; it has covered over 812,811 lives so far.

7. ING Vysya Life Insurance It is a joint venture between Vysya Bank, which isone of the largest private sector banks in India, and ING Insurance Co., which is

the worlds second largest life insurance company. It presently has around 4.5

lakh customers.

8.Met Life India Insurance Co. Pvt. Ltd. It is a joint venture between MetLife

Group and its Indian partners, are J&K Bank, Dhanalakshmi Bank, Karnataka

Bank, Karvy Consultants, Geojit Securities, Way2Wealth, and Mini Muthoothu.

MetLife is 88 of the top one-hundred FORTUNE 500 companies. MetLife entered

Indian insurance sector in 2001.

9. Kotak Mahindra Old Mutual Life Insurance Ltd. is a Joint venture betweenKotak Mahindra Bank Ltd. (KMBL), and Old Mutual plc. Kotak Mahindra Old

Mutual Life Insurance Ltd. is a company which offers Life Insurance products.

10. IDBI Fortis Life Insurance - It is a joint venture of IDBI Bank, Federal Bank

(India) and Fortis Insurance International. IDBI has a 48% stake in the venture,

while Fortis and Federal Bank 26% stake each. While IDBI and Federal Bank are

major Indian banks, Fortis has the expertise of bancasurance across global

markets. IDBI Fortis Life Insurance has become 18th life insurer in India.

11. AVIVA Life Insurance - AVIVA Life Insurance, one of the popular insurance

companies in India, is a joint venture between the renowned business group,

Dabur and the largest insurance group in the UK, Aviva plc. AVIVA Life Insurance

has an extensive network of 208 branches and about 40 Bancassurance

partnerships, spread across 3,000 cities and towns across the country.

Performance of joint venture companies

LIC still remains the largest life insurance company accounting for 64% market share. Mainly owing to

entry of private players with innovative products and better sales force.

Bajaj Allianz Life Insurance Co Ltd has reported a growth of 52% and its market share went up to 6.98%in 2007-08. The company ranked second (after LIC) in number of policies sold in 2007-08, with total

market share of 7.36%.

ICICI Prudential Life Insurance Co Ltd is the biggest private life insurance company in India. Accounting

for increase in market share to 8.93% in 2007-08.

SBI Life Insurance Co Ltd in terms of new number of policies sold, the company ranked 6th in 2007-08.

New premium collection for the company was Rs 4,792.66 crore in 2007-08, an increase of 87% over last


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year.

Reliance Life Insurance Co Ltd Total collected was Rs 2,792.76 crore and its MARKET SHARE went up

to 2.96% from 1.23% a year back.

HDFC Standard Life Insurance Co Ltd with an income of Rs 2,680 crore in FY2007-08, registering a year-

on-year growth of 64%. Its MARKET SHARE is 2.88% and it ranks 6 th among the insurance companies

and 5th amongst the private players.

Birla Sun Life Insurance Co Ltd market share of the company increased from 1.22% to 2.11% in 2007-08.

The company moved to the 7th position in 2007-08 from 8the a year before.

Max New York Life Insurance Co Ltd has reported growth of 73% in 2007-08. Total new business

generated was Rs 641.83 crore as against Rs 387.51 crore. The company was pushed down to the 8th

position from 7th in 2007-08.

Kotak Mahindra Old Mutual Life Insurance Ltd the fiscal 2007-08, the company reported growth of 80%,

moving from the 11th position to 9th. It captured a market share of 1.19% in 2007-08.

Aviva Life Insurance Company India Ltd ranking dropped to 10th in 2007-08 from 9th last year. It has

presence in more than 3,000 locations across India via 221 branches and close to 40 bancassurance

partnerships. Aviva Life Insurance plans to increase its capital base by Rs 344 crore. With the fresh

investment, total paid-up capital of the insurer would go up to Rs 1,348.8 crore.

Impact of FDI

Product innovations, features

Common practice is to divide innovation into two categories product and processinnovation The fact that insurance is still in a nascent stage (owing to low insurancepenetration rate) is a pertinent point that is leading to adaptation of innovative ideas toreach, lure and cater to untapped customer base in this vast and demographicallydiverse nation. Hence this generates a large pool of uninsured urban, semi urban andrural middle class population, which is: both in need of insurance; and have the extradisposable income to buy, is therefore the target market for these JV companies.Therefore rising affluence and awareness on one hand and application of innovative

ideas on the other are prime contributing factors in growth and development ofinsurance industry in India.Innovation represents the adoption of new idea, process, product or services, eitherdeveloped internally or acquired from external environment. Joint venture is viewed as amode for growth and expansion in target market by applying Resolve or Involveideology. This is necessary for value creation and enhancing learning curve. Theimproved performance of Indian economyhas been reflected in incremental growth ofinsurance industryand vice-versa. While looking from endogenous factors, the kind


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of growth that we are currently seeing in Indian insurance industry is largely attributed toinnovative techniques introduced and applied by Indian and Foreign joint venturesentrants.

I.) Product Innovation Number and types of products introduced, some examples

are mentioned as under : Life / Health / Accidental/ Rural insurance Fire / Professional indemnity / liability insurance Underwriting / Premium collection / Renewals / Endorsements Claim processing and settlement practicesII.) Process Innovation - some examples are mentioned as under : Distribution channels/ Sales offices / Agents (Individual/Corporate) Intermediaries - Bancassurance / Consultants / Risk Managers / Brokers Marketing strategy / Advertising / E-insurance / (CRM) Role of Information communication technology (ICT)

In the past 8 years, Indian insurance industry has witnessed an unprecedented levelof innovation and growth, but little research addressed or examined this phenomena.This growth is largely due to innovative products and processes introduced byformation of joint ventures (JV) between foreign and Indian companies postliberalization of insurance market in early 2000. The services sector constitutesapprox. 55% of Indias GDP and it has maintained a higher growth of10.3%. The opening up of insurance sector has contributed favorably to insurancegrowth in the country. GDP from insurance sector which constituted 12% of GDP in2000-01 increased to 19.3% in 2004-05.Essentially being a financialservice industry, insurance remains an industry with a greater appetite forinnovation, be it product or process innovation. This intangible character of theproduct and service(s) makes it more inclined to adopt innovative ideas to developand maintain growth. Due to entry of JV companies, consumer awareness hasimproved; stiff competition has brought more products and better customerservicing. It is having a positive impact on the economy in terms of incomegeneration and employment growth. Not only did the liberalization brought these

joint venture companies but also ushered in an era of innovative ideas and practicesthrough them, virtually unseen or adhered to before in the industry.

Technology transformation

Market penetration

Comparison of Public Vs Private firms

Need for increase in FDI

Likely impact of increase in FDI


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If the proposed FDI bill 2008 to increase the FDI to 49% from the current level of 26% is

passed successfully in parliament it will help the private insurance companies to mobilize much

needed capital requirements through their foreign partners. Barring few private firms most of

them are incurring lose due to stringent regulations and increasing operational cost.

Increasing FDI will help more foreign firms to enter Indian market through joint venture.

Firms awaiting for entry in India

Due to Indias huge market potential for insurance many more are to soon enter the

Indian market:

y US health insurers Aetna (a 158-year old company with total revenues for thecalendar year 2007 at US$ 27.6 billion and net income at US$ 1.8 billion) isinterested in setting up stand-alone health insurance companies.

y CIGNA, another US-based company (a health insurer, and it also provides life,

accident, health and expatriate employee benefits insurance coverage in a fewinternational markets) is interested in setting up stand-alone health insurancecompany.

y UK-based company, Bupa, is also interested in setting up stand-alone healthinsurance company.

y American company Ace, a leading global commercial property and casualtyinsurance group, is looking at entering the life and non-life sectors.

y US-based Travelers Group (Travelers is a big underwriter of property andcasualty insurance in the US and reported a net written premium of US$ 21.1billion in 2006) is interested in the non-life sectors. It is planning to sign anagreement with Indian engineering major L&T.

y

US-based Liberty Mutual is interested in the non-life sectors.y Germany-based Talanx is looking at entering both the life and non-life sectors.

Major investments

y Reliance Capital is planning US$ 432.26 million as investment for its insurancebusiness over the next three to five years.

y Bharti AXA General Insurance (a JV between the Bharti Enterprises and AXA) isplanning to invest US$ 152.92 million spread over the next five years.

y Ranked among the top five life insurance companies, Birla Sun Life Insurance isplanning US$ 274.30 million as investment for further expansion. It is presently

the fastest growing life insurer in 200809, with a 187 per cent growth in newbusiness during the first quarter.y In the first quarter of 200809, insurance companies have invested US$ 3.18

billion in equities, which is four times of what was invested a year ago.


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Political background over FDI Bill 2008

FDI in Insurance in India

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