Union Budget 2021: Good News For InsurTech Startups; Insurance FDI Limit Raised To 74%

Finance minister Nirmala Sitharaman announced a proposal to amend the Insurance Act, 1938 to increase permissible foreign direct investment limit (FDI) from 49% to 74% in insurance companies at the Union Budget 2021.

This would allow foreign ownership and control of insurance companies in the country with certain safeguards.  However, majority of directors on the boards of such companies and key management persons will have to be resident Indians, with 50% directors being independent directors and a specified percentage of profits being retained as general income.

With apt support and investment by the private sector these measures will have a multiplier effect and take insurance to a large section of Indian population, the FM said.

Foreign direct investments in insurance companies is currently permitted under automatic route up to 49% with a rider that insurance companies should be Indian owned and controlled, i.e. more than 50% shall be beneficially owned by resident Indian citizens and control of the insurance company shall be in the hands of resident Indian citizens.

BimaPe founder Rahul Mathur says it is a positive move for the ecosystem as insurance companies are capital intensive and foreign investors continue to show strong appetite for participating in the Indian insurance story. “In India itself, Acko has Munich Re as a strategic investor and Digit has Prem Watsa. Allowing foreign entities to build up ownership is good since these businesses have long return cycles which traditional Indian investors may not be comfortable with,” he added.

Enhancing FDI limits in the insurance sector can help in bringing better technical know-how, innovation and improving insurance penetration.  Experts believe the move could well help increase penetration among the lower income segment. Moreover, enhancing FDI limits should help digital insurance companies scale up the business and ease hurdles in insurance acquisition.

“The proposed FDI change opens up insurance to long term investment. We would expect to see giants like AXA, MunichRe (via ERGO) and Allianz increasing their investments into existing Indian entities. These investments would directly impact the penetration of insurance via better products, better technologies and more affordable pricing. What remains to be seen is whether this change can also impact the insurtech startups. Currently, the insurtech startups are not just limited by capital but also by regulatory approvals,” said Abhishek Poddar, co-founder of InsurTech startup Plum.

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