September 2014 | Vol 2 | Issue 3
FDI 49%
Insurance
Defence
inside
1
FDI will impact 03 How India’s insurance sector
05 A paradigm shift In insurance?
07
of the Book 09 BackPublic A
India’s big move on defence
Round-up
Viewpoint The new new thing It seems like a time for new beginnings. After a bruising election fought in the heat and dust of the Indian summer, a new government headed by Narendra Modi was sworn in. The scale of victory was new too – a clear majority, which the lower house of Parliament has not witnessed for a generation. The huge number of first-time voters enrolled – 120 million – was a first too, and their new way of thinking and expectations played a role in the end result. It seems only right, then, for MSLGROUP’s Public Affairs Round-up (PAR) to evolve a new look and structure too. This edition onwards, PAR will be a quarterly. It will have more detailed analyses and content than its earlier avatar, and will incorporate commentary and data that is more relevant to you. In this edition, we look at the far-reaching implications of the change in foreign direct investment (FDI) norms for insurance and defence manufacturing. Both sectors have been touchy topics, with battlelines drawn between those for liberalised investment norms and those in favour of a more conservative approach. In both cases, critics have alleged a danger to India’s interests – especially in the defence sector. Those
who disagree with them point out that India’s massive defence imports are a drag on the economy and leave the country dependent on foreign players. There are enough safeguards, they say, built into the law to keep unscrupulous players at bay and to ensure national security. Whatever the merits of each argument, it’s clear that a long, hard road lies ahead on the economic front and these are the first steps of a fledgling government of which much is expected. There will be other, tougher decisions to make – reducing subsidies, a simpler tax regime that protects states’ interests and a land acquisition policy that will spur industrial growth while conserving land-owners’ interests, to name just a few. MSLGROUP’s insights team will play the role of an observer of the Indian economic and policy environment, and will provide analyses that we hope will benefit you and your business. As always, we look forward to your feedback. Ashraf Engineer, Vice-President – Content & Insights, MSLGROUP, India ashraf.engineer@mslgroup.com
MSLGROUP is Publicis Groupe’s strategic communications and engagement company. We advise clients on all aspects of their multistakeholder communication strategies. Our 100+ offices span 22 countries today. Add our affiliates into the equation, and our reach expands to 46 countries.
MSLGROUP India is the nation’s largest PR and Social Media network. Comprising two leading brands–MSL INDIA and 20:20 MSL–MSLGROUP India combined includes 14 offices across 8 key-cities, 550+ professionals partnering with 220+ clients, national and global.
2
Public A
Round-up
Focus
How FDI will impact India’s insurance sector Nirav Khatri, manager – research and insights, MSLGROUP in India One of the biggest challenges before the insurance sector is that it deals in products that rely on ‘push’ rather than ‘pull’. Insurers are engaged in a constant struggle to make products meaningful to customers. The sluggish economy and slow policy movement of the past few years haven’t helped matters and incremental asset creation has taken a backseat.
As per Insurance Regulatory and Development Authority (IRDA) figures, life insurance premium income for FY 2012-13 remained flat at Rs 2,87,202 crore ($52.78 billion) over FY 2011-12, whereas non-life insurance recorded 19.10% growth in premiums to Rs 62,972.8 ($11.57 billion) crore from Rs 52,875.80 crore ($10.33 billion) during the same period. India is a pricesensitive market and growing competition has pushed premium rates down, compelling insurance companies to work on marginal expense ratios. The extent of development – or the lack of it – in Indian insurance is clear from the measure of penetration and density. A study by Swiss Re, a reinsurance company based in Zurich, said the estimated Insurance penetration level (life and non-life) in India was 3.9% in 2013 – abysmally lower than most other Asian countries. Even the density level – at $52 (Rs 2,829) – is very low. (Insurance density level is measured as the ratio of insurance premium – in dollars – to total population. It indicates the average per capita spend on insurance.) Therefore, there was much at stake for insurance in the Union Budget 2014-15. To pump life into the sector, Finance Minister Arun Jaitley proposed to raise the foreign direct investment (FDI) limit in insurance to 49% from the current cap of 26%. It came with a predictable rider – management and control remaining with the Indian partner. Also, the additional Rs 50,000 rise in exemption limit for income-tax for individuals would channelise more household savings into life insurance premium.
Photo by veooz.com
As per Insurance Regulatory and Development Authority (IRDA) figures, life insurance premium income for FY 2012-13 remained flat at Rs 2,87,202 crore ($52.78 billion) over FY 2011-12, whereas non-life insurance recorded 19.10% growth in premiums to Rs 62,972.8 ($11.57 billion) crore from Rs 52,875.80 crore ($10.33 billion) during the same period. 3
Public A
Round-up
Welcome move The Insurance Laws (Amendment) Bill is in a state of logjam and needs to be passed by the Rajya Sabha. At the time of writing, it was approved by the Cabinet and is expected to be taken up soon. Indian insurance firms, strapped for capital, have applauded the move for incremental FDI. An additional benefit is that the insurance regulator will be empowered to set more rules and impose larger penalties – a strong deterrent to misselling. Deepak Mittal, MD and CEO of Edelweiss Tokio Life Insurance, told ‘Business Today’ magazine: “Increasing the limit promises immediate FDI inflow. However, for greater impact, the increase in the cap should not have had riders attached.” A ‘Times of India report’ said that as much as Rs 120,000 crore ($20 billion) in FDI for insurance could flow into India over the next three to five years. Scotland’s Standard Life, France’s AXA Group and Allianz, UK’s Lombard and Italy’s Generali are among the players eyeing India.
The global advantage The collaborative efforts of foreign partnerships will result in product innovation, improved distribution through the leveraging of technology and it will augment operational efficiency to improve penetration and density levels.
4
Foreign capital brings with it strategic expertise gained from global experiences. For Indian players, this is necessary to scale up the business through technology initiatives and client servicing tools. Product innovation is critical to improve customer acquisition by developing distinguishing and sustainable propositions. Differentiation is necessary to ensure effective customer value proposition. Globally, insurers have designed innovative products for different demographics, including ‘pay as you drive’ for motor insurance and ‘co-payment claim products’ for health insurance. ‘Pay-as you-drive’ premiums are aligned with driving behaviour using mobile-based telematics applications installed inside the car recording real-time data, and are a huge success abroad. Through their expertise, foreign players can design niche insurance products catering to an array of segments in India. One of the most significant aspects of raising the FDI limit is that it will facilitate fresh investment to leverage new technology to improve distribution through new delivery channels. The internet is changing buying patterns across the entire purchase cycle for policy holders. A joint study by global management consulting firm Boston Consulting Group (BCG) and Google India revealed that as many three-fourths of policies sold by 2020 would be influenced by digital channels.
Public A
Round-up
Speaking to ‘The Economic Times’, Alpesh Shah, senior partner and director at BCG India, said: “Digital adoption could result in potential savings of 15%-20% of total costs in the case of life insurance and 20%-30% in the case of non-life.” UK’s motor insurance industry is an example of how the internet can transform the sector as the share of premiums accounted for by online sales rise. Innovations in distribution also make insurance viable for the lowincome segment, which is currently under served. It’s a matter of time before breakthroughs in technology will enable buyers to access all their insurance requirements through remote digital devices.
Technology first It is absolutely necessary to optimise business operations to stay competitive and increase efficiency, especially when the macro environment is challenging. It’s important for the industry to invest not just in expansion and distribution, but also in client servicing and processing.
Markets like India need holistic and sustainable solutions that are customer-driven, end-to-end and support innovation. Automating insurance processing claims can result in substantial cost savings as it is labour-intensive. Insurers can also embrace the use of smart cards for enrollments, paperless insurance policies and straightthrough underwriting processes to streamline operations to serve low-income customers and improve bottomlines. Finally, these activities should be well supported by analytical tools that enable measurement of outcomes. According to a study by Gartner, Indian insurance companies will spend Rs 12,100 crore on IT products and services in 2014, an increase of 12% over 2013. Derry Finkeldey, principal analyst at Gartner, was quoted in its press release as saying: “Insurers in India are getting serious about their core insurance processes, especially where they help increase insurer penetration of the market.” With this major reform, the stage is set for a paradigm shift in insurance. It’s up to the industry now to respond.
Total premiums Year
Life (Rs crore)
Growth (%)
Non-life (Rs crore)
Growth (%)
2008-09
221,785.47
10.15
30,351.83
9.08
2009-10
265,447.25
19.69
34,620.45
14.06
2010-11
291,638.64
9.87
42,576.47
22.98
2011-12
287,072.11
-1.57%
52,875.80
24.19
2012-13
287,202.49
0.05
62,972.80
19.10 Source: IRDA Annual Report
Segmentation Category
Premiums (Rs crore)
Share (%)
Life
287,202.49
82.02
Fire
6,658.91
1.90
Marine
3,029.15
0.87
Health
13,974.67
3.99
Motor
29,629.80
8.46
Others
9,680.29
2.76
Total
350,175.31
100 Source: IRDA Annual Report
5
Public A
Round-up
eans is m h tt Rs 120,000 crore ha ($20 billion) may flow into the country as FDI in insurance over 3 to 5 years New technology paradigm that will change the way consumers are sold to and serviced
Management FDI cap hiked from control with 26% to 49% Indian partner
ay
Firms' premium incomes will rise
For
Implications of FDI
eig
d ia
le
Greater insurance penetration
ss
n
co
Insurance penetration
in
at th e n e w r u
Innovative, niche products for consumers
Low-income segments will be reached out to
Regulator to be more powerful; focus on mis-selling
Wh
Considerable political opposition to the move. That will take some dealing with
n pie
W
A paradigm shift In insurance?
se
y ein g la r g
Country
Total (%)
Life (%)
Taiwan
17.6
14.5
3.1
Hong Kong+
13.2
11.7
1.5
South Korea **
11.9
7.5
4.4
Non-life (%)
Japan**
11.1
8.8
2.3
Singapore **
5.9
4.4
1.6
Thailand **
5.5
3.8
1.7
Malaysia **
4.8
3.2
1.7
India *
3.9
3.1
0.8
China +
3
1.6
1.4 + provisional
Insurance Density
er
*Estimated **Estimated US value Source Swiss Re, Sigma 3/2014
Insurance Density (in US $) - Asia (2013) Country
Total
Life
Non-life
Taiwan
3,886
3,204
682
Hong Kong+
5,002
4,445
557
South Korea **
2,895
1,816
1,079
Japan**
4,207
3,346
861
Singapore **
3,251
2,388
863
Thailand **
310
214
96
Malaysia **
518
341
176
India *
52
41
11
China +
201
110
91
+ provisional
6
*Estimated **Estimated US value. (Insurance density level is measured as the ratio of insurance premium – in dollars – to total population. It indicates the average per capita spend on insurance.)
Public A
Round-up
Viewfinder
India’s big move on defence India – the world’s largest arms importer – spent close to $6 billion (Rs 36,000 crore) on weapons imports last year. Before the Union Budget 2014-15, The Narendra Modi government announced its intention to modernise the Soviet-era weaponry – Russia is a major supplier – by liberalising the defence sector through the foreign direct investment (FDI) route. The objective, clearly, is to scale up India’s domestic defence manufacturing base and increase preparedness, especially at a time when China has bolstered its military efforts by pursuing its ‘string of pearls strategy’ to encircle India. India has allowed 26% FDI in defence projects since 2001, without committing to technology transfer. This kept away many overseas investors. Since then, India has had negligible FDI in defence. In his maiden Budget speech, Finance Minister Arun Jaitley raised the composite cap from the earlier 26% to 49% with full Indian management and control through the Foreign Investment Promotion Board route. The new limit approved by the Cabinet provides a greater incentive for licensed manufacturing, but is not high enough for overseas investors to get managerial control over elements such as intellectual property.
Though the industry lauded the policy, there needs to be greater clarity on technology transfer. Critics said that no foreign investor would part with closely-guarded technology unless there is adequate control over the enterprise and an assurance of sufficient autonomy with regards to capacity enhancement and access to markets. Only then would the investment be viable. While the FDI limit would be automatically agreed to if it is within 49%, it is the government’s policy to allow a higher limit – even up to 100% – provided state-of-the-art technology transfer is offered. The proposals would be considered on a case-to-case basis. Security analysts have raised concerns over managerial control by overseas partners if their investment exceeds 49%. Some have demanded that India reserve the right to take over a facility during operational emergencies. Most nations include such an enabling provision. Further, India can incorporate security clauses in the licence to ensure against unscrupulous entrepreneurs. Rakesh Sood, a former ambassador and the prime minister’s special envoy for disarmament and nonproliferation till May 2014, told ‘The Hindu’ newspaper: “Merely liberalising FDI will not help. What is needed is an
Photo by plus.google.com
7
Public A
Round-up
appreciation of the characteristics of the defence industry and coordination among the multiple stakeholders who drive, and have often distorted the decision-making process.”
Besides, indigenous facilities provide self-reliance and a degree of assurance that imports don’t. Additionally, indigenous manufacturing provides better life-cycle support – including, critically, supply of spares.
Speaking to ‘The Economic Times’, Baba Kalyani, CMD of Bharat Forge, said: “The finance minister’s intent to reduce reliance on imports and streamline defence procurement systems is very positive.”
It is important too that the armed forces, the ultimate consumers of these goods, be allowed to share their views during policy-making.
FDI in defence: pros and cons Without managerial control, investors would be wary
Less reliance on foreign suppliers Savings on foreign exchange
Cons
Unclear guarantees on intellectual property safeguards
Pros
Boost for Indian industry, economy Tremendous political opposition
Significant foreign investment
Risk of unscrupulous players and damage to India's security set-up
Greater self-reliance makes geo-strategic sense
Defence allocation
Budgetary Allocation
2014-15
Capital outlay
2014-15
2013-14
(Interim Budget)
(Union Budget)
2014-15
2013-14
(Interim Budget)
(Union Budget)
2014-15
203,672
224,000
229,000
86,740
89,587.95
94,587
All figures in Rs crore. Source: India Today
Defence budgets (2013) Outlay (in $ billion)
613.9
119.5
69.5
56.9
39.2
US
China
Russia
Japan
India Source: India Today
8
Public A
Round-up
Back of the Book
Twitter board
Rs 39,00,000 crore ($650 billion) Targeted size of the textile and apparel industry by 2024-25 as per a draft policy termed ‘Vision, Strategy and Action Plan’ for textiles and apparels
7.5 crore Number of new bank accounts the Indian government hopes to enable by August 15, 2018, according to a draft financial inclusion plan
200 Number of low-cost airports India plans to build in the next 20 years to connect tiers 2 and 3 cities
The Bad Doctor @doctoratlarge In what way will FDI in defense constitute a security risk, when all our weapons are made abroad, anyway? View Summary
Sanjay Jha @JhaSanjay This BJP government is funny; they want FDI in strategic Indian assets like Railways and Defense, but want to skip multi-brand retail. View Summary
65 Percentage of freight volume in India that moves on roads at an average speed of 30-40 kmh
8,500 km Extensions of national highways proposed to be completed by 2014-15
22% Statutory liquidity ratio for banks after it was lowered by half a percentage point. The reduction in SLR will free up about Rs 40,000 crore ($6.5 billion) in the banking system
SonaliRanade @sonaliranade Paradox is that those who don’t wanna give us technology want 100% FDI in Defense. & we are offering 100% FDI b/c we want the technology. View Summary
Manish Tewari @ManishTewari Opposed to raising the FDI in insurance for ten long years BJP does the mother of U turns & declares black money can not be brought back! View Summary
Rs 12,000 crore ($2 billion) Proposed investment by American e-commerce giant Amazon in India
Shahnawaz Hussain @ShahnawazBJP
100%
Union cabinet proposes to raise FDI cap in Insurance frm 26% to 49%. Good decision that will provide a boost to overall financial sector.
Foreign direct investment in railway infrastructure projects permitted by the Union Cabinet
View Summary
43,00,000 Number of claims settled by retirement fund manager Employees Provident Fund Organisation since April 2014. It also updated 92% of the annual accounts due for 2013-14. This has happened for the first time in the past 30 years
Rs 297,000 crore ($49.5 billion) India’s fiscal deficit for the first quarter of 2014-15 – that is, 56.1% of the full-year target
34.35% Improvement in total employment during the last eight years to 12.77 crore, as per the Sixth Economic Census-2013
9
Public A
Round-up
For more information on What MSLGROUP in INDIA has to offer your company, please contact our India CEO JAIDEEP SHERGILL jaideep.shergill@mslgroup.com