Budget 2025 | 100% FDI in insurance a positive for the sector but not for stocks

Also, the interest of foreign companies in Indian insurance has declined over the years. Standard Life (now known as ABRDN Plc.), New York Life Insurance Co., Old Mutual Ltd after partnering with HDFC Life Insurance Co. Ltd, Max Life and Kotak Life, respectively, have exited India.

There is also a need to distinguish between the government approved limit and company specific limit approved by the board of directors of a company. 

For instance, even with the foreign ownership limit at 74%, HDFC Life had capped it at 49%. The lack of interest of foreign investors in Indian life insurance companies is evident from the fact that not only is the existing limit of 49% underutilized, their shareholding has been gradually falling—from 31.4% in December 2023 to 25.3% in December 2024. 

The same is true for ICICI Prudential Life Insurance Co. Ltd, which has an approved limit of 74%, but actual utilization stands at just 36.8%. ICICI Lombard General Insurance Co. Ltd also has less than 25% foreign shareholding despite the limit of 74%.

This brings us to the moot question: why would established players like, say, SBI Life Insurance Co. Ltd be happy to let their shareholding drop below 26%? Effectively, this means that even if 100% FDI is permitted in the insurance sector, if companies don’t want to let go of their stake, there is little that foreign investors can do. 

Who gains then? 

For small or fringe insurers that are looking to exit completely, the Budget proposal presents an opportunity as foreign insurance giants do not have to worry about the nuisance of having to deal with minority shareholders interfering in management holding a 26% stake. 

A case in point is Kotak Mahindra General Insurance Co. Ltd, which had less than 1% market share in annual premium in the general insurance sector and sold 70% of its stake to Zurich Insurance Co. Ltd for ₹5,560 crore in June. It might be well-placed to exit completely if it wants after the latest Budget announcement.

New entrants have no foreign promoters

Before Acko Life Insurance, CreditAccess Life Insurance and Kshema General Insurance began operations in 2022-23, life and non-life insurers in India were registered in 2011 and 2017, respectively. None of these companies is promoted by foreigners. The promoters of these companies could have anyway raised funds by selling a 74% stake. 

Even if foreign companies want to set up shop in India, they would want to have a minority partner as it helps in having a distribution network. So, in any case, it is likely that they would have less than a 100% stake.

Sector implications

While it is assumed that the increase in FDI limit in insurance will enhance competition, the Indian insurance market already has too many players, with 26 life insurance companies and 34 general insurance companies, as per the data on Insurance Regulatory and Development Authority of India’s website. 

Also, most of the incremental growth for life insurance companies is from unit-linked insurance plan (Ulip) sales, indicating that insurance has become more of an investment. The government’s ambition to ensure ‘insurance for all by 2047’ could be met through extensive coverage of Ayushman Bharat (the government’s health insurance scheme) and that business is likely to be bagged by public sector general insurance companies.

What to watch out for

The most significant change for Indian non-life insurance companies or general insurance companies could happen if the goods and services tax (GST) is abolished as that would increase affordability. But that falls under the domain of the GST council. As and when it happens, it should see increased interest in general insurance from foreigners and domestic players alike.