The bill, once approved by the president, would allow 49 per cent overseas investment in Indian insurance companies. This will mean that 51 per cent stake will still have to be retained by Indian owners. Thus insurance companies already floated will be able to sell up to 49 per cent of their stake to overseas investors. The direct fall out would be on the existing insurance companies and those who have floated insurance outfits so far. It will be boom time for them. No doubt that there will be hefty premium on the existing insurance companies’ shares.

Already, the stock markets are showing some such trends. Insurance companies listed with the stock exchanges are seeing an inflation in their values. Max India (MAXI.NS) gained 4.8 percent, Reliance Capital (RLCP.NS) added 3.9 percent while Exide Industries surged 2.7 per cent in early trades.

The question is however why is the response somewhat muted? The reasons are that the hike in foreign stake was in the air for some time now and the market has already taken note of it. Besides, the insurance sector investors are long term players and are not likely to act in haste. They will wait and watch. Once this has been gained, they will gun for permission to hold controlling share, that is, at least 51 per cent of the stake.

Will India gain from opening up the insurance sector to foreign investors? This is the question which has been raised time and again in course of the almost interminable debate on the question in last eight years. This should be looked at from two perspectives. First, from the viewpoint of funds flow; secondly, whether entry of foreign insurance firms could contribute towards enlarging the insurance market and insurance penetration.

Surely, there is no harm if money is invested into the country by global fund managers. Nobody can reasonably believe that opening up insurance sector to overseas investment would result in outflow of funds.

After all, the global insurance majors were looking at the Indian market not for mobilising funds here and investing outside, but for mobilising funds and then investing these in India. A stake in Indian business could enable them to bring in funds from overseas for investment purposes. The world, the developed world, is seeing a surfeit of savings and a shrinkage in investment opportunities. India could offer that market for long term investments, which the insurance fund managers are looking for.

Few countries present such investment opportunities as India presently. The Indian infrastructure sector needs investments worth $1 trillion. Where such humongous amount of money going to come from? While India itself generates substantial savings, there are multiple demands for investments. The government is withdrawing from direct investment on account of a number of reasons. The investments have to come from private sources.

Additionally, investments in the infrastructure sector would have to be locked in for long period. The banks cannot offer such funds as the funds at their disposal are short term. Insurance companies have long term funds, ranging upto thirty years. Hence, these are the financial sector intermediaries which are ideally placed for making such investments. Globally, large infrastructure projects are not coming in the advanced countries. These are coming up in the developing ones, and there is not another country which is offering such a vast number of mega infrastructure projects.

Secondly, the development of the insurance sector in India has been rather lukewarm. Since the partial opening up of the insurance sector, with foreign stakes up to 26 per cent in the first flush of reforms, 23 private life and 23 non-life insurance companies have been set up. Taking into account seven public sector insurance providers, there are just over 50 insurance companies in the country.

The limited opening up of insurance sector has not been a game changer. While prior to opening up the sector, life insurance business had grown annually by around 20 per cent a year, this grew by just around 19 per cent in the post opening up period. The public sector life insurer still dominates the market with roughly around 70 per cent share in the business.

In case of non-life insurance, annual growth has been just around 10 per cent in the period immediately before the partial opening up. This went up to 15 per cent, post opening up the sector to private investment. The market share of the public sector in comparison to the newly set up private units is roughly the same as in life insurance, but only slightly higher for the private companies.

Insurance penetration, which is the ratio of premium underwritten in a year to GDP in a year, continues to hover around abysmally low levels. It has increased from only around three per cent before the partial opening up to just about four per cent currently. Yet, the government has been encouraging and making effort to push insurance covers to the weakest sections through subsidy schemes. This year’s budget, for example, takes a number of steps to extend coverage of insurance to the poorest.

Nothing much has happened because insurance is a game of big money. The insurers should have deep pockets over a long period of time. They must have creditworthiness and they must offer increasingly attractive and effective insurance packages. They have to be dynamic and good investors. The global insurance industry has the financial engineering powers which are currently missing in Indian insurance industry. The latter continues to just extended departments of the union government.

Raising the foreign investment bar might even now not do the trick. The moves might not be able to transform the Indian insurance industry still.

The insurance game will not really hot up until government takes a view on allowing foreign investment in the public sector insurance giants. There has to be intense competition to tap the insurance market in the country. Ths might happen only after further opening the doors wide. (IPA Service)