Tweak to attract more investments in insurance sector

Insurance industry is one of the most lucrative avenues for investors to make investments in India. With an intent to encourage more investment in insurance sector, the Insurance Regulatory and Development Authority of India (IRDAI) has carried out some modifications to investment rules applicable to Private Equity (PE) investors.

The core agenda of these modifications is to make the process for establishment of insurance company simpler, by providing investors with better dilution and funding raising norms.

?Such modifications include:

?a)????Threshold of promoter: Threshold to classify individual PE as a promoter of an insurance company is set at 25% - Earlier it was more than 10%. The same for all promoters is extended to 50%, which was earlier 25%.

?b)???Preference shares: Preference shares can be issued for paid up capital and premium to a tune of upto 50% by the insurance companies. This will be one of ways for insurance companies to generate more capital without much hassle.

?c)????Lock-in terms: Age of insurer is the basis for announcing Lock-in terms for ‘promoters’ and ‘investors’.

?d)???Special purpose vehicle (SPA): Use of Indian SPV by the PE investors is made optional now, (which is mandatory earlier, provided PE investor with more than 10% threshold are classified as promoters) – This will permit PE investors to make direct investments in the insurance companies.

?e)????Dilution of stakes: Dilution of upto 26% stake by non-Promoter investors to collectively hold not more than 50% Promoters is permitted - The catch here is such dilution will be permitted only if insurer is a listed entity and with a status of solvent entity for a period of five (5) preceding years – This provides a window for investors to exit subject to applicable lock-in rules.

?f)????Tie-up: Tie up with 9 insurers by Corporate Agent and 6 insurers by Insurance Marketing Firm will be permitted – Earlier it was 3 insurers (Corporate Agent) and 2 insurers (Insurance Marketing Firm - IMF). ?This flexibility will provide them with the opportunity to diversify their portfolio by expanding their business – Especially for IMF, it is an opportunity to expand their business all over the territory in the state of its registration.

?g)???Fit and Proper: Separate announcement with respect to ‘Fit and Proper’ determination of ‘promoters’ and ‘investors’ to be made.

?h)????Capital: To provide the flexibility in raising capital, IRDAI has removed requirement of seeking IRDAI prior written consent with respect to generating capital through subordinated debt or preference shares. Interesting factor is that these modifications scaleup the ability of insurance companies to generate capital and the same can be done in a timely manner without any glitches.

?i)?????Solvency norms:

?a)????Tenure of existing 180 days is modified to 365 days for calculation of solvency position in crop insurance with respect to premium dues from central and state governments.

?b)???Solvency factors – Crop insurance (revised to 0.50% from existing 0.70%), Unit linked business (without guarantees) (revised to 0.60% from existing 0.80%) and Pradhan Mantri Jeevan Jyoti Bima Yojana (revised to 0.05% from existing 0.10%). These reduction will release a cumulative capital requirement to a tune of INR 3,460 crores. ?

?IRDAI’s vision behind these modifications is cleaning up the longstanding issues and:

?a)????Attract more investments into insurance sector

b)???Promote customer centric innovations

c)????Ease up distribution models

d)???Ultimately improve ease of doing business

?One can be optimistic that these rules will provide the PE investors much needed flexibility and advantage with respect to investments made in insurance industry. However, it will be interesting to see the impact of these rules on PE investors and insurance industry in real time.

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