Indian Insurance Sector – Turning a Corner

India started with the liberalisation of the insurance sector at the turn of this century with the foreign direct investment (FDI) with Indian Insurers (and intermediaries like insurance brokers) being opened up to 26%.  Foreign investors were assured that the next phase would follow soon and increase the FDI to 49%.  After a long (and rather frustrating) wait since the steps towards this were taken in 2008, the Government of India finally took action under  the Insurance Laws (Amendment) Act, 2015 (2015 Act) earlier this year raising the FDI cap to 49%. 
 
That said there are still uncertainties in the amended (Indian) insurance Act, 1938 which may raise concerns for investors – for instance, at present a key apprehension particularly for existing foreign investors is the requirement of Indian ownership and "control".  The term "control" has been defined to include the right to appoint the majority of directors or to control the management or policy decisions, including by virtue of shareholding or management rights or shareholder agreements or voting agreements.  At best, the decision on management control should have been left to the regulator, IRDAI, which already has inherent powers under the IRDA Act, 1999 and the Insurance Act, 1938 to deal with, and in fact did effectively deal with, the manner in which an Indian insurance company would be managed and controlled. This was whilst keeping in view the interests of the policyholders, the insurer and stakeholders. 
 
Currently, there is lack of conclusiveness on whether typical minority protection rights would be considered to give an investor "control".  While one would expect the IRDAI to take a sensible stand on this issue, in the event the IRDAI/Government takes the view that "negative rights" would constitute control then it is likely to lead to a situation where: (i) the existing investors may feel that they were better placed as 26% shareholders under the erstwhile regime; and (ii) the ability of prospective investors to have reasonable protection which was available as a 26% shareholder under the earlier regime may be impacted.
 
The short term consequences of the present reforms would be that the existing shareholding arrangements, and relationships between the partners, may be put to the test.  A gamut of issues will arise, mainly, concerning valuations and the methodology for increasing the equity whether through exercise of call options at a pre-determined price/formula or infusion of fresh capital. 
 
In the long run, the reforms are expected to give prospective investors greater access to the untapped Indian insurance market which is likely to translate into more scope for innovation i.e., developing unique products as opposed to offering tried and tested products.  Given the largely under-insured population of the country, the opportunities would also be expected to be greater specifically in terms of distribution of products. 
 
Furthermore, foreign reinsurers would now have the opportunity to set up branches in India to carry on reinsurance business.  At present, reinsurance is being solely undertaken by the GIC of India.  Notably, the Lloyd's has also been given statutory recognition under the amended (Indian) Insurance Act, 1938.  While reinsurers have always been able to do business in India from overseas, a more direct presence could positively impact the way they interact with cedents and bring a more robust underwriting and claims experience on the ground.
 
It is difficult to comment on the right time for a prospective investor to venture into the Indian insurance space.  FDI reforms are a key but by no means the only driver for that decision.  There are diverse target groups as far as opportunities are concerned as the reforms open up the sector not just for insurers but also for intermediaries such as brokers, surveyors, loss assessors and third party administrators.  Even within the insurance business there are different segments – life, non-life and miscellaneous insurance business and interestingly, health insurance companies have now been recognised as a standalone category. 
 
The first step provides that one would expect prospective investors to understand the market more holistically and identify the right partner.  Since the only way for an investor to invest in the insurance sector is through a joint venture, it would be sensible to understand the business culture and the manner in which Indian JV partners operate.  They should also take into account not only the numbers in terms of penetration of the market but also familiarise themselves with other key factors that impacts businesses such as the prevailing judicial/legal environment for resolution of claims which is core to their work.  The newer corporate laws under which they will need to function are, for example, the new Companies Act 2013, bodies such as the Securities Appellate Tribunal which although presently is devoid of much insurance expertise, is the body where the insurers’ appeals against the IRDA’s decisions will lie. 
 
Prospective players should also step back and look at the economy as a whole and see whether their goals fit in with what is happening in other sectors where the Indian Government is pushing for reform, such as in infrastructure, transport and more recently the nuclear energy sector. 
 
Given that the Indian insurance sector is at somewhat an adolescent stage, new players should take advantage of the existing business models and the modus operandi of other players who have been operating in India for the last 15 years.  In this regard; data from the IRDAI's repository should serve as a tool for tremendous learning for prospective investors. 
 
In the above background, the preparatory steps for an investor should broadly include approaching the IRDAI for informal guidance, diligence on the Indian insurance market and the legal/judicial environment particularly in the context of the associated risks and reviewing capital commitment requirements. 

Mrinal Ojha, a partner based in the firm’s Delhi office, focusses on the firm’s disputes practice.
 
Mrinal acts for insurers and reinsurers with a focus on liability insurance, including errors and omissions insurance, directors and officers insurance, employment practice liability insurance, commercial general liability insurance, and public liability insurance. He has handled matters concerning a variety of jurisdictions including Switzerland, United Kingdom, Greece, South Africa, Syria, Zambia, Singapore, and the United States.
 
Mrinal has previously been recognised by The Legal 500: Asia Pacific as an “exemplary and focused” lawyer and is mentioned in the 2015 edition of Who's Who Legal for insurance work.