In November 2022, the Insurance Regulatory and Development Authority of India (IRDAI) announced several reforms and changes in products, distribution and capital requirements. The regulatory body undertook these steps as part of its ‘Insurance for All by 2047’ initiative, which is an extension of the Narendra Modi-led government’s vision of financial inclusion for the nation.
The move has received positive response from various quarters with many insurers and insurtech companies welcoming the regulator's steps to ease the compliance burden. Until recently, general insurers and standalone health insurance companies were mandated to submit 17 business returns in a year to the regulator, which was extremely time-consuming.
However, with the new reforms in play, the number of business returns has been reduced to half. They need to only file eight returns annually, which will give them a huge respite.
Talking about this, Rakesh Jain, chief executive officer of Reliance General Insurance, says, "This will not only lessen the compliance burden but also help us increase our focus on the business that will, in turn, ensure better product offerings and faster and convenient services to the customers. Such a move will augment the insurance penetration in the country in the long term."
Good Times For PE, VC Investors
A significant reform announced by IRDAI was allowing private equity (PE) funds to directly invest in insurance companies through Special Purpose Vehicles (SPVs). This gives insurance companies an option to make their own choices, rather than seeking regulatory approvals like earlier.
Many in the investor community are calling this a progressive reform, moving from rule-based to principle-based regulatory regime, which is apt to propel the growth and penetration in the sector to a new orbit. Nithya Easwaran, managing director of Multiples Alternate Asset Management, says that the revised guidelines, specifically the increase of threshold from 10 per cent to 25 per cent stake for being treated as investors and making SPV structure optional, will bring the sector on the roadmap of a wider base of institutional investors.
This is a significant change from over a decade ago when the insurance sector had opened up, which attracted foreign investors largely. PE and venture capital (VC) funds in India with deep pockets and right expertise were unable to participate in this sector wholeheartedly due to the prescribed investor limits in insurance companies.
The earlier 10 per cent limit did not allow them to get classified as a promoter, though it resulted in an increase in their compliance commitments. The doubling of the limits to 25 per cent allows investors to take a much higher stake as investors.
“The ‘fit and proper’ criteria will ensure that high quality, responsible and experienced institutional investors will become significant stakeholders and partner with the companies through the transition to a more open architecture and innovative industry structure," Easwaran elaborates.
Upper Limit = Higher Funding
The collective limit increase to 50 per cent would allow for a higher funding from PE-VC eco system with associate benefits of improved governance standards. According to Praveen Shridharan, partner at TVS Capital Fund, this change allowing funds to directly invest into insurers instead of through an SPV would allow for greater flexibility for funds in terms of structuring.
IRDAI’s announcements are expected to make the insurtech and fintech sector more viable. The expenses of management (EOM) regulations, which provide for 5 per cent relaxation for expenses, would see increased business and focus from insurers to synergise with insurtech players.
Shridharan says, “This is certain to enhance penetration and would provide a great boost for insurance space with increased digitisation by insurtechs resulting in process and cost efficiency. This will not only close the current protection gap but also ensure fully insured India by 2047.”
Allowing insurers to raise alternative sources of capital with light regulation and reducing solvency ratios shows the confidence of the regulator in the maturity cycle of the insurance sector. Karthik Reddy, chairperson of IVCA and co-founder and managing partner at Blume Ventures, believes this will free up half a billion dollars of capital and also attract investments into the space.
“Besides, bank assurance can thrive with a range of offerings and leveraging tech partners, creating a win-win for start-ups, insurers, and investors alike. These are all great confidence-imbibing moves by the regulator, paving the way for insurance penetration to keep accelerating to more corners of India,” he notes.
Ishaan Mittal, Managing Director of Sequoia India, congratulated IRDAI for bringing in these reforms towards realising the goal of insurance for all by 2047. He feels that the relaxation in investment criteria for venture capital funds will help attract a higher flow of capital to India’s insurance sector, resulting in greater innovation, deeper insurance penetration, and better offerings for consumers.