This article has been written by Shivank Datta, pursuing a Diploma in Business Laws for In-House Counsels from LawSikho.
Table of Contents
Introduction
The technological revolution has transformed the way in which daily business activities are conducted and has boosted the growth rate of all the sectors at an unprecedented rate. The fintech industry is one of the leading beneficiaries of the digital revolution has integrated technology with financial services, making delivery and usage of product and services easier and transparent for the customers. The fintech market in India was valued at Rs 1,920 billion in 2019 and is expected to reach Rs 6,207 billion by 2025, expanding at a compound annual growth rate of 22.7 percent during the 2020-2025 period.
There has been a clear and visible shift of consumer preference towards the fintech industry due to changing consumer preferences. From services to deliveries of products to utilities, banking to insurance, the fintech space is catching up with the traditional businesses and is believed to soon achieve equivalence. Consumer trust and reliance on the fintech industry has intensified amidst the ongoing pandemic which will aid in the exponential growth of the fintech industry.
Indian insurance industry majorly relies on common one-size-fits-all insurance products in the market. However, customer needs have evolved over time which the traditional insurance companies and products are not able to adequately fulfil; thereby rapidly changing the dynamics of the market wherein innovative products like usage-based insurance, micro-insurance and on-demand insurance have taken over the Indian market more particularly in the general insurance space. The uninsured population is an ocean of opportunities for InsurTech startups which aim to penetrate the potential market. The insurance penetration (the ratio of insurance premium to GDP) in India for 2018-19 was 3.76 percent and insurance density (ratio of insurance premium to total population) in 2019 was 2.82 per cent.
The Finance Minister of India, Nirmala Sitharaman, in the Lok Sabha, stated that an amount almost equivalent to Rs 26,000 crore has arrived as FDI in the insurance sector since 2015 and the asset under management in this sector has also grown by 76% in five years. The move of increasing the FDI capping in the insurance sector has also received accolades from other countries and is expected to deepen bilateral trade and investment opportunities. Therefore, the numbers evidently showcase the potential FDI has in the insurance sector which may eventually steer the industry to an unprecedented growth trajectory.
Announcements pertaining to the insurance sector in the Union Budget 2021-22
The life insurance sector was opened up for FDI up to 26 percent for the first time in the year 2000. Later, in the year 2015, the FDI in the sector was increased to 49 percent. In 2021, it is the third time the Indian government has taken one step ahead and increased the FDI to 74 percent in the insurance sector.
The Union budget of 2021-22 announced several key measures for the insurance sector, which were aimed at easing the troubles faced by the sector such as deficiency of capital inflow, depressed insurance penetration and density rates and dominance of public sector insurers. The sluggish and undersized penetration and density of the Indian insurance sector made it necessary for the government to increase the capping on foreign investment to 74 per cent for insurance companies under the automatic route.
Another pertinent notification by the Ministry of Finance relating to the insurance industry before the Union budget was announced, notified the long-awaited Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules 2020 (NDI Amendment) permitting 100 per cent foreign direct investment in insurance intermediaries under the automatic route. Prior to the notification by the Ministry of Finance, the Insurance Regulatory Development Authority of India on 19 November 2019 issued a circular to notify that the Guidelines on ‘Indian Owned and Controlled‘ will be inapplicable to insurance intermediaries, thereby paving the path for massive foreign investment opportunities in InsurTech startup companies and wholly-owned subsidiaries of foreign entities to be set up in India.
Importance of FDI in insurance
The influx of FDI in India has the potential of infusing money into the domestic markets of the country which in turn results in its economic development. FDI in any sector has the potential to positively affect the sector’s capabilities, technology and skills in the industry and thereby making the industry competitive. India since 1991 is considered to be an attractive FDI destination becoming one of the top five host economies for FDI in the developing Asia region. The insurance sector with the increase in the FDI cap as announced in the Union Budget of 2021-22 is sure to benefit from the said move.
The increased FDI cap in the insurance sector is seen as a step to make the sector more competitive and efficient. The move has the potential to make the accessibility and affordability of insurance in the country. Further, like any sector having various competing players, the insurance sector with the move is likely to benefit from the resultant benefits like increased competencies, technical know-how and innovation to the advantage of the consumers.
Furthermore, the increased FDI cap has the potential of infusing capital to the insurance companies which are currently struggling for ensuring their survival and are failing to raise capital. The increase in fresh capital may result in the renewed financial health of the sector and may result in long term gain for the existing companies. In this day and age of digital revolution across all the sectors, the FDI infused in the sector might lead to the creation and incorporation of insurance startups with better technological capacities which can eventually augment and disrupt the insurance services sector and their traditional ways of operations.
Impact on InsurTech startups in the post-budget scenario
Increased Capital Flow
The most desirable impact of foreign investment for InsurTech companies is the massive potential of capital inflow. The increase in capping on foreign investments will bring relief to the InsurTech startups during their initial rounds of funding and raising investment.
The increase in foreign investment signifies that there will be an increased number of players who will eventually intensify the overall competition in the InsurTech market. The increase in the players will also affect the overall market by giving the InsurTech companies the level playing field as currently, government companies like the Life Insurance Corporation(LIC) dominate the life insurance market. Furthermore, increased FDI limits might result in a greater demand for the services by bringing in the best global practices in the Indian market.
An efficient taxation system and effective government initiatives relating to startups will in turn become one of the driving factors for foreign investors to enter the expanding Indian InsurTech market. The use of various devices such as Artificial Intelligence (AI), Machine Learning (ML) and Big Data Comparators with the help of increased capital flow is likely to reduce the operational costs for the InsurTech companies thereby becoming more lucrative and profitable for the companies and the foreign investors alike.
Moreover, increased capital inflow will reduce the issue of the probability of insolvency of InsurTech companies. In the post-budget scenario, the insurance companies have to maintain more than 50 per cent of their net profits as general reserves in case the foreign investment of more than 49 per cent is made. This change is brought about to solve the insolvency issues of early age startups and established insurance companies intending to take more risks in the market. An increase in the FDI limit will increase the likelihood of early-stage profitability for the InsurTech companies.
Innovative products
The increased capital inflow in the form of foreign investment will enable InsurTech startups and the established traditional companies to introduce innovative products focused on specific consumer preferences keeping in view the risk assessment, risk improvement, product design and product pricing.
Several types of innovations like Digital platforms, Internet of Things (IoT), Big Data Comparators, ML, AI, Blockchain, P2P (peer to peer), usage-based, need-based and so on fall within the scope of InsurTech. The new and innovative products based on these digital innovations have the potential to bring in new products catering to specific consumer needs and preferences. Numerous insurance companies now offer several consumer-friendly policies such as PoS (point of sale) policies offered at the purchase of any electronic item or on cab rides, policies insuring unauthorized access or theft of money stored in e-wallets, insurance against cycle theft, mosquito-related diseases.
These are a few examples of the innovative products that insurance companies offer presently in the Indian markets. InsurTech companies use AI, ML and other devices to collect data at various points that determine consumer behaviour and preferences. Thus, an increase in capital by way of foreign investment will act as a driving factor for the InsurTech companies to come up with other mechanisms of offering better services and products carefully modelled to meet specific end consumer needs.
Efficacious settlement of claims
One of the parameters that determine the performance of an insurance company is the efficacy with which claims are settled. Due to increased competition, the insurance companies will strive to introduce products that are more consumer-friendly offering better, expeditious and effective claims settlement ratio. Since insurance is a capital-intensive business, bringing in more capital by way of FDI will ensure early-stage profitability and resolve the issue of operational requirements and speedy settlement of claims.
Increased penetration and density
The current insurance penetration standing at 3.76 percent and density at 2.82 per cent point at the underachievement of the insurance sector and underutilization of insurance product by consumers due to lack of trust and knowledge. The LIC being a government company that dominates in the life insurance sector has managed to gather the trust of the masses by creating goodwill over a long period of time. Other insurance companies and especially InsurTech startups, in the life or general insurance space still face this challenge of consumer distrust or unawareness.
To give a fillip to insurance penetration, there is a need to facilitate innovations in the insurance sector, especially those triggered by technology. In furtherance of the same, IRDA created a Regulatory Sandbox with an objective to use innovative ideas that foster growth and augment the pace of most innovative companies, in a way that provides flexibility in dealing with regulatory requirements and at the same time focusing on policyholder protection. Therefore, bringing in more FDI will help in the overall growth of the insurance sector by way of increasing the insurance penetration and density thereby promoting financial inclusion.
Job creation
The increase in the FDI limit will drive more money in the InsurTech market due to which the InsurTech startups will be able to create more job opportunities for individuals having the specialized expertise in technology and finance to meet their target-oriented requirements with improved infrastructure and effective manpower.
Conclusion
The InsurTech space is evolving at a rapid pace and with the increase in demand and awareness of the products and has the potential to become one of the leading fintech sectors in the coming years. The government in the budget 2021 has taken a vital step towards opening the Indian insurance market to global players with a view to amplify the ease of doing business in India by increasing the FDI limit which will definitely steer the economy towards the trajectory of growth.
The increase in the FDI cap can be expected to provide a huge number of lucrative opportunities for investors and investors alike with increased levels of Private Equity and M&A transactions in the InsurTech industry. The advantage of the size of the Indian market and the dynamic shift in the post-pandemic world to the digital space holds tremendous prospects for the increased penetration and reliance on the InsurTech startups in the near future. However, what needs to be ensured is a strong regulatory framework wherein the inflow of FDI in the InsurTech startups does not lead to hampering the interests of the domestic promoters of such InsurTech startups.
The liberalization may facilitate the liquidity crunch of the InsurTech startups persisting to the ongoing pandemic or other external factors giving them the respite to raise capital. India with its high growth prospects for the startups along with the requisite capacities to turn around the declining economic growth affected by the pandemic, with the increased cap in the FDI limit may become a boon to the emergence of the new age for InsurTech startups eventually resulting in economic resilience of the country.
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