VZCZCXRO7414
RR RUEHAST RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHBI #0328/01 2191236
ZNR UUUUU ZZH
R 071236Z AUG 09
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC 7388
INFO RUEHBI/AMCONSUL MUMBAI 2613
RUEHNE/AMEMBASSY NEW DELHI 8615
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MUMBAI 000328 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PGOV IN
SUBJECT: INDUSTRY DEBATES NEED FOR INCREASED FDI LIMITS AS REFORM 
BILL FACES DELAYS 
 
MUMBAI 00000328  001.2 OF 003 
 
 
¶1.  (SBU) Summary:  After years of fast-paced growth, the Indian 
life insurance industry saw a seven percent decline in premiums 
collected in 2008-09.  Industry experts asserted that these 
declines were more the result of domestic factors such as the 
interest rate hikes in mid-2008 rather than the impact of the 
global financial crisis.  India's biggest player, the 
state-owned Life Insurance Corporation of India, continued to 
lose market share to India's 21 privately-owned life insurers, 
whose premiums grew.  While most industry insiders publicly 
support the Insurance Amendment Bill, which would raise the 
foreign direct investment cap from 26 to 49 percent, it has 
continued to take a back seat to other, more populist economic 
and social legislation in Parliament.  Many industry 
representatives believe that some domestic partners, especially 
the more established firms, no longer need the additional 
foreign capital, and some may be working against the lifting of 
the FDI cap behind the scenes.  However, the industry is united 
that other reforms introduced in the bill, including 
transforming the existing Insurance Regulatory and Development 
Authority (IRDA)into a full-fledged insurance regulator, are 
desirable.  End Summary. 
 
 
 
Growth in the life insurance industry impacted more by domestic 
conditions than the global crisis 
 
-------------------------------------- 
 
 
 
¶2. (SBU)  The insurance sector has been one of the success 
stories of India's economic reform process.  According to IRDA 
data, annual life insurance premiums collected during the year 
2008-09 fell to Rs.860 billion ($17.61 billion) from Rs.920 
billion ($19.17 billion) in the previous year, a seven percent 
decline from the 36 percent growth seen the year before. 
Nevertheless, Peter Akers, India Head of Munich Reinsurance, 
pointed to data indicating that premium collections for all 21 
privately owned life insurance companies grew; the lone 
exception was state-owned Life Insurance Corporation of India 
(LIC), the largest and the oldest life insurer.  Marking the 
shift from government to private insurers, LIC saw its market 
share fall to 41 percent in 2008-09 from 48 percent the previous 
year.  On the other hand, private life insurers increased their 
market share to 59 percent in 2008-09 from 52 percent in 
2007-08. 
 
 
 
¶3. (SBU) According to Prabhu, the decline in growth began before 
the onset of the global financial crisis, sparked by a series of 
interest rate hikes by the Reserve Bank of India (RBI) to 
control inflation in the summer of 2008.  He explained that as 
increased interest rates removed liquidity from the capital 
markets, investors stopped contributing funds to from the most 
popular insurance investment plan know as Unit-Linked Insurance 
Policies, or ULIPs, which are essentially mutual fund 
investments.  (Note:  In simple terms, the stock and bond 
markets were declining, so investors could get better returns in 
short term saving deposits sponsored by banks.  End Note.) 
After the RBI lowered interest rates to improve domestic 
liquidity conditions after the collapse of American investment 
bank Lehman Brothers, capital market conditions improved and 
investors returned to ULIPs .  Binay Kumar Agarwala, Senior Vice 
President, ICICI Prudential Life Insurance, admitted that the 
life insurance sector had been growing too fast, and some 
moderation was needed.  The crisis did not directly affect the 
balance sheets of insurance corporations, but hit growth, he 
added.  Contrary to expectations, Prabhu added that even at the 
height of the financial crisis, domestic insurance companies 
were able to raise incremental capital from their foreign 
partners to meet solvency margins.  (Note:  Life insurance 
companies are mandated to maintain capital for a solvency margin 
of 1.5 times insured liabilities.  End Note.) 
 
 
 
Insurance Amendment Bill: Do Domestic Partners Really Want a FDI 
Hike? 
 
----------------------------- 
 
 
 
¶4.  (SBU)  Insurance industry executives have publicly supported 
 
MUMBAI 00000328  002.2 OF 003 
 
 
the passage of the long-awaited Insurance Amendment Bill, which, 
among other things, would raise the sector's foreign equity cap 
from 26 to 49 percent.  Considered by conventional wisdom the 
easiest of the reform measures to pass, the Congress Party has 
still not introduced the bill to Parliament for a vote, sparking 
speculation about the Indian government's commitment to this and 
other reform objectives.  According to Akers, not all domestic 
players see the increase in FDI as advantageous at the moment. 
(Note:  Of India's 21 privately-owned insurance companies, only 
two, Sahara and Reliance, do not have foreign joint venture 
partners.  End Note.) He explained that in the initial stages of 
the insurance business, companies needed capital for marketing, 
infrastructure and personnel to build out their sales networks. 
As companies grew, so did steady streams of premiums and 
investment incomes, making major capital expenditures less 
important.  Accordingly, newer entrants need large capital 
infusions, but established players are less interested in - and 
in some cases, may oppose -seeing the FDI cap raised.  For 
example, Puneet Nanda, Executive Vice President of ICICI 
Prudential Life Insurance, the largest private life insurance 
company, noted that while 60 percent of total premiums came from 
new business two years ago, that figure is now only 45 percent. 
(Note:  While ICICI claims that the decrease in new premiums 
collected as a percentage of overall premiums is an indication 
of a maturing business model, it can also be taken as an 
indication that premium collection slowed because of external 
conditions, not market maturation. End note.) Nanda affirmed 
that raising the industry's FDI cap was still welcome, but no 
longer necessary.  Indeed, Akers insisted that the domestic 
partner of at least one major joint venture was currently 
lobbying against the hike in capital, while the foreign partners 
were lobbying for it. 
 
 
 
¶5. (SBU)  If they cannot block the bill as a whole, opponents 
may introduce amendments which dilute the FDI cap measure. The 
bill typically must go to the Finance Standing Committee for 
comments before Parliamentary consideration, providing an 
opportunity for edits.  Saibal Choudhury of MetLife Insurance 
suggested opponents want to include portfolio investment under 
the raised FDI cap.  Competition with Foreign Institutional 
Investors (FIIs) for additional shares would make it more 
difficult for the foreign partner to acquire the full 23 
percent. (Note:  Some joint venture contracts specify that the 
domestic partner is obliged to sell an additional 23 percent 
equity to the foreign partner when the cap is raised, and some 
contracts specify the price.  Because no insurance companies are 
publicly traded, an outside party like an accounting firm or an 
investment bank would otherwise be needed to value the firm 
before any stake sales take place.  End Note.) Even if the 
foreign partner acquires all 23 percent, the option to sell to 
FIIs may enable the domestic partner to bargain for a 
significantly higher price.  Choudhury stated that foreign 
players would interpret this as a broken promise on the part of 
the GOI, and implied that inability to raise their stake to 49 
percent may diminish interest in supplying more capital to the 
industry. 
 
 
 
¶6.  (SBU) Another key amendment in the bill proposes to increase 
the powers of the Insurance Regulatory and Development Authority 
(IRDA).  This move would enable the IRDA to become an 
independent and authoritative regulator similar to the 
Securities Exchange Board of India (SEBI).  Their current lack 
of regulatory discretion is considered problematic by most 
industry observers.  For instance, Reliance Life Insurance was 
planning to raise capital through an IPO.  However, IRDA 
rejected this proposal stating the rule that Indian promoters 
having more than a 26 percent stake in an insurance company 
could reduce their holdings only after a waiting period of 10 
years, or they would have to seek ask the government to reduce 
the waiting period.  Akers noted that once the Insurance 
Amendment Bill was passed, IRDA could make the decision to 
reduce the waiting period instead of the government. 
 
 
 
¶7.  (SBU)  At a recent seminar, IRDA chairman J. Hari Narayan 
said he expected the insurance bill to be passed this year, but 
admitted that the Bill lacked clarity on some issues.  Though 
the Bill would raise the foreign direct investment cap to 49 
percent, it is unclear which equity stake would be diluted 
should the joint venture list shares through an IPO.  Narayan 
said that experts assume that the foreign partner will have to 
 
MUMBAI 00000328  003.2 OF 003 
 
 
dilute its stake, or it will have a controlling stake in the 
venture which may not be amenable to the Indian law.  Agarwala 
of ICICI Prudential noted that this statement was taken by 
industry insiders as a sign that such a clause may be debated 
before the final bill is passed. 
 
 
 
Re-insurers to be allowed to set up branch offices to conduct 
business 
 
------------ 
 
 
 
¶8.  (SBU) Akers noted that one overlooked reform measure in the 
pending bill is that it allows reinsurance companies to 
establish branch offices in India.  He explained that 
reinsurance allows insurers to securitize the largest and 
riskiest contracts taken by insurance companies.  Under current 
legislation, domestic-foreign joint ventures in the reinsurance 
business were allowed, but none existed because Indian companies 
were not ready to commit the large amounts of capital needed to 
fund them.  Reinsurers wanted to set up branches so that the 
risk could be transferred to the balance sheet of the global 
parent company, but under current legislation it would be on the 
books of the Indian JV which would not be as well-capitalized as 
the foreign parent.  As a result, large foreign reinsurers like 
Swiss Re, Munich Re, and Berkshire Hathaway only have back 
offices in India.  All re-insurance business by the domestic 
insurance companies was done outside of India, leading to a 
capital outflow of reinsurance premiums.  He added that General 
Life Insurance, the only Indian re-insurer predominately in the 
non-life segment and Hannover Re had announced a tie up but no 
business had been conducted yet. 
 
 
 
¶9.  (SBU) Comment:  Over the past five years, insurance industry 
insiders have been stating publicly and privately that FDI caps 
needed to be raised to help accelerate growth, and have urged 
Parliament to pass this important reform legislation.  Today, 
with many of these JV partnerships well-capitalized through 
consistent growth, some of the domestic partners claim to no 
longer need the additional foreign capital and as some believe, 
may not want to sell further equity stakes.  Since some JV 
contracts require the Indian partner to sell equity to the 
foreign partner once the law changes, Indian partners may be 
reluctant to sell at the expected current valuation.  However, 
it is a good reminder that in India, as elsewhere, there are 
often unseen interests and influences on every side of an issue, 
even those that seem to be "low hanging fruit," as this 
legislation has been frequently characterized.  If the Congress 
continues to focus on populist - but inclusive - legislation and 
policies, such as additional rural spending, we should expect 
even the most sensible economic reform measures to take far 
longer to implement than expected.  End Comment. 
FOLMSBEE