M&A expected as Indian insurance market liberalises

M&As are expected to dominate the next phase of growth in the Indian insurance industry, according to a report by the Confederation of Indian Industry (CII) and professional services firm KPMG in India. In the report, titled Insurance for All — Potential for Insuring a Billion + People, CII and KPMG present the outlook on insurance M&As in the country, reports Asia Insurance Review (asiainsurancereview.com). According to the joint report, the major themes in the Indian insurance M&A arena are: Market consolidation and increased interest from foreign players Consolidation among smaller players: India’s insurance market remains relatively fragmented, with many smaller players. These smaller life and general insurers have struggled to generate positive returns for their investors. To compete with large, well-capitalised players, the smaller players should focus on achieving economies of scale and improved operational efficiencies. Therefore, smaller insurers are expected to merge or be acquired; Consolidation among mid-size insurers: Mid-size players, both in life and general insurance, have been unable to match the profitability levels and returns generated by large insurers. They may consolidate to form a new insurance giant that would operate at scale, address profitability challenges in certain segments such as motor and health insurance, and significantly improve profitability; Interest from global players: Owing to easing of regulatory requirements, foreign insurers are expected to increase their stakes in Indian joint ventures and new global players may enter the market through acquisitions or partnerships with domestic players. This trend is evident in the higher foreign investments in local joint ventures and potential market entries via acquisitions or partnerships. In 2024, global players such as Zurich (in partnership with Kotak) became the first foreign insurer to enter India after the amendment of foreign direct investment (FDI) norms. South Africa’s Sanlam increased its stake in Shriram GI and Shriram LI to approximately 51% and 54%, respectively. Easing of regulatory compliance With the focus on easing regulatory compliance and eliminating entry barriers, IRDAI, through its ‘Vision for 2047’ document and through recent regulatory amendments, has showcased its intent to clear roadblocks faced by these players. Higher FDI limits: FDI limits up to 74% will help increase traction in M&A activity; Alignment with international accounting standards: The implementation of Indian Accounting Standard 117 (IFRS 17) will bring harmonisation and comparability with global accounting, transparency and enhanced disclosures will result in easing decision making for global players; Restructured order of preference: IRDAI recently amended the order of preference for reinsurers to four categories from six categories previously. The revised order of preference primarily improved the placement of International Financial Services Centre Insurance Offices (IIOs) alongside foreign reinsurer branches, thus potentially encouraging IIOs to enter or operate in India; Minimum capital requirements: IRDAI reduced minimum capital requirements for foreign reinsurance business (FRBs) from INR1bn ($11.9m) to INR500m. This amendment is expected to encourage entry of global reinsurers who may acquire or partner with domestic firms to establish a stronger presence in the Indian market. Digital partnerships and InsurTech acquisitions The rise of digital insurance models and InsurTech startups will lead to increased M&A activity as traditional insurers seek to acquire digital capabilities. Insurers will focus on the following: Improving internal process: Insurance companies, especially mid-size companies with lower profitability, could significantly improve internal operational efficiencies by partnering with or acquiring InsurTech-SaaS startups focused on digital underwriting, customer engagement, AI-based claims management and data analytics; Ramping up product distribution: Mid-sized insurers, especially in the general insurance space, currently face challenges in product distribution due to limited product differentiation and low pricing power. These insurers could improve distribution by enhancing digital distribution through partnerships or acquisitions of technology-enabled platforms. For instance, this would include players focusing on penetrating the digital space by partnering with large e-commerce players through transaction-linked embedded product offerings. Product diversification and speciality insurance To drive the next leg of growth, Indian insurers may consider acquiring companies offering complementary products, expanding their portfolio beyond traditional products; Acquisitions to enter niche segments: Insurance companies, especially general insurers, are targeting startups focused on developing new device-driven products, such as telematics and health trackers, and customised and speciality products, such as cyber insurance, environmental risk, crop insurance, gig economy worker insurance, hyper-personalised, micro-insurance, bite-sized products and extended-warranty products. The demand for these products, now limited, is expected to increase significantly in the future due to a growing economy and maturing customer preferences; Acquiring companies offering complementary products: Given the proposed discussion around composite licences, life insurance players are keen on acquiring standalone health insurance operations, as health products complement life insurance well; Private equity and institutional investor involvement Participation of private equity (PE) players in the insurance space has been restricted owing to regulatory restrictions on ownership levels and structure. In addition to addressing challenges around the removal of the special purpose vehicle (SPV) structure and promoting participation, IRDAI is bringing several structural reforms. Increased interest from PE players: As the insurance sector matures, PE firms are increasingly looking for investment opportunities, especially in mid-sized and digital-first insurers. PE firms will support M&A activity to help insurers scale up, modernise operations and enter high-growth segments; Relaxation of lock-in rule under 2022 regulations: IRDAI relaxed the lock-in period for promoters and investors in insurance companies based on the date of certificate of registration of the insurer. IRDAI has further completely removed the lock-in for investors in insurers post 15 years of the date of certificate of registration of the insurer. This relaxation is expected to benefit investors, who may have been reluctant to invest in the insurance sector due to the lock-in requirements; and, Institutional investment: Pension funds and sovereign wealth funds may invest in or acquire stakes in insurance companies looking for stable, long-term returns, particularly in life insurers or general insurers with strong growth potential.

M&A expected as Indian insurance market liberalises

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