Financial Daily from THE HINDU group of publications
Tuesday, Jul 13, 2004
Money & Banking
Foreign Direct Investment
New FDI norms to see more overseas players coming in
Bangalore , July 12
WITH the relaxation in the equity cap, foreign joint venture (JV) partners in domestic private insurance companies, both life and non-life, are now poised to assume full management control.
At present, management control is vested with the domestic JV partners, who are 74 per cent stakeholders. This was on account of the stiff solvency norms prescribed by the regulator, the Insurance Regulatory and Development Authority (IRDA).
Private sector life insurers initially made large investments in infrastructure for distribution in the form of bancassurance and agency force, but were unable to push up premium collections at the same pace. The low capital base also inhibited their ability to make large investments to maximise policyholders' returns, the sources said. In the case of non-life insurers, undercapitalisation prevented them from expanding business since it implied a large increase in liabilities.
As a result, the sources said, non-life insurers opted for reinsurance to cut their effective liabilities. This reduced the retention of premiums within the country, leading to foreign exchange outflows, the sources added.
The sources said that the new regime, prescribed by the Finance Ministry now allowed foreign JV partners to become the single largest block shareholders.
The sources said that though domestic holding would continue to be the largest, their holding would be in smaller lots and therefore substantially lower than the foreign bloc, they added.
With the impediments cleared, the sources said, insurance majors like AXA, who delayed their entry, were now expected to kick off their Indian operations.
The sources said that this was expected to be done by either buying out one of the domestic companies or starting a greenfield venture with multiple Indian partners to comply with the 51 per cent domestic holding stakes.
The sources said that the new norms would also intensify competition in the insurance sector, which in turn would allow for availability of larger number for products both in the life and non-life categories
More group savings schemes and pension schemes were also expected to be kicked off, offering higher returns to policyholders.
This competition was expected to push down premiums on some of the schemes further. This was particularly expected to happen in the non-life sector especially low claims portfolio.
As a result, the pressure to de-tariff and reform all lines of general insurance business was expected to mount, the sources added.
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