Union Budget 2021: The Big FDI Push In Insurance And What It Means For InsurTech Startups

So, the Union Budget 2021 has been announced, and there are only a few startup sectors which will indeed directly benefit with the digital insurance segment clearly being one of them.

Delivering her third budget, Finance Minister Nirmala Sitharaman announced plans for an LIC public listing and divestiture of a general insurance company and two public sector banks. But private players and startups would have been most delighted with the increase in foreign direct investment (FDI) limit in the insurance sector from 49% to 74%. This demand has long been on the wishlist of fintech companies and insurance companies ever since the Narendra Modi government came into power in 2014.

Interestingly, in 2012, when the then Manmohan Singh government had increased the FDI limit in insurance from then 26% to 49%, the current ruling party — BJP — had stringently opposed the move during its time in the opposition.

Is FDI In Insurance Essential? 

Sitharaman proposed to amend the Insurance Act, 1938 to increase the permissible FDI limit and allow foreign ownership and control with safeguards.

“Under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50% of directors being independent directors, and specified percentage of profits being retained as general reserve.”

The insurance industry and insurtech startups have unanimously welcomed the move.

Explaining the need for capital infusion in insurance, Jitendra Nayyar, CFO of Bengaluru-based startup Acko Insurance said that like infrastructure, insurance sector needs lot of investment as break-even period ranging 7-10 years. Further due to solvency regulations for increasing business, regular flow of capital is required, so increase in this present cap from 49% to 74% will help insurtech & entire insurance space to great extent and will also help in tech spends to innovate products and increase digital presence. Insurance penetration in India is lowest among the large economies thus there is large headroom for growth.

The startup fraternity has also welcomed the move of increasing the representation from independent directors from the current 33% minimum limit to the new 50%. This will bring in more knowledge expertise on the table, said startup founders.

“There are 60 insurer players, 25 life insurance companies, 30 general insurance and 5 health insurance companies. Most of them have been struggling for money as Indian VC money is not easy to come by and a lot of international players have been waiting to come into India. This will bring the product expertise as well as capital,” added Nayyar.

BimaPe founder Rahul Mathur also believes that the capital intensive nature has deterred some foreign investors but more will now come in to play a bigger role in the ecosystem. “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 told Inc42.

Insurtech startup Plum founder Abhishek Poddar believes that India can 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 insurtech startups. Currently, the insurtech startups are not just limited by capital but also by regulatory approvals,” he added.

Earlier this year, Insurtech caught everyone’s attention after Bengaluru-based insurtech startup Digit Insurance became the first Indian startup to enter the unicorn club in 2021, after raising INR 135 Cr ($18 Mn) from existing investors at a valuation of $1.9 Bn.

The Mega LIC IPO Plan

This year is expected to be the beginning of the age of IPOs in Indian tech, with Reliance Jio, Flipkart and many other startups planning to go for IPO starting this year.

After the blockbuster IPO for IRCTC, the Indian government will next look at listing LIC this year by bringing an amendment to the LIC Act, 1958 as part of Finance Bill 2021. The amendment seeks to meet the requirements under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 made by the Securities and Exchange Board of India (SEBI).

“In 2021-22 we would also bring the IPO of LIC for which I am bringing the requisite amendments in this Session itself. Amendments to the Life Insurance Corporation Act, 1958.” – Nirmala Sitharaman

With LIC managing over INR 32 Lakh Cr of assets, the Indian government is counting on LIC IPO as part of its major revenue source this year.

How would it impact the insurance and thereby insurtech in the market?

Nayyar said that while there may not be any direct short term impact, but this will bring a lot of positivity into the setor and will create a ripple effect. There are a lot of insurance companies however only five-six companies in the last many years have gone public. And, there’s very less number of publicly stated insurer insurance company assets available. Unlike many others, LIC has been a profitable company and its IPO will certainly bring the much-needed positivity into the sector.

Tax-Related Demands Remain Unmet

Besides the FDI limit, one of the biggest expectations from the insurance sector was in the area of goods and services tax. Currently, the GST on health insurance products falls in the 12% tier. But with increased focus and awareness towards healthtech and insurance penetration, insurtech startups had expecting the government to reduce the GST to 5% for health insurance, in particular, said Nayyar.