Welcome scrutiny

It has been a rocky road for India’s private sector insurers seeking to make their public market debut. But with foreign investment and ownership norms for the sector finally clear, it is good to see mortgage major HDFC preparing to divest a 10 per cent stake in its insurance subsidiary, HDFC Standard Life, through an IPO. Indian insurance players, both in the life and non-life segments, require prodigious amounts of capital to bankroll their growth over the next decade. With FDI rules capping foreign participation at 49 per cent and domestic sponsors of these firms — mostly banks or corporate groups — hard-pressed to infuse funds, tapping the primary market seems to be the only way out. For some banks, a listing of their insurance arm may also unlock substantial capital to redeploy in their core business.

While players in the sector may rue it, the delay in listing has actually worked to the benefit of prospective investors in India’s first insurance IPOs. In the last seven years, the insurance sector has witnessed considerable turbulence which has forced players to streamline costs and restructure operations. Life insurers have witnessed a shakeout triggered by tightening regulations on costs in market-linked plans, low persistency ratios and changing market conditions which have forced them to shuffle between traditional and market-linked plans. After sizeable shrinkage in new business premiums between 2009 and 2014, life insurers returned to double-digit growth only in FY16. General insurers, too, have only lately managed to stem their large losses in the motor insurance business (with de-tariffing), and capitalise on opportunities in health and other segments. This hiatus has allowed SEBI and IRDA to work on customised IPO norms for insurers, which should help investors better assess this new breed of financial institutions in the listed space. While SEBI’s regulations require insurers to disclose unique risk factors — risks to cash flows arising from catastrophes, erroneous actuarial assumptions, reinsurer default — IRDA has standardised its accounting and valuation norms, now requiring each player to disclose a certified embedded value which can serve as the basis for valuation in IPOs.

While going public will bring in additional capital, Indian insurance firms should brace for greater public scrutiny of both their investment performance and market actions, once they make their public debut. Currently, disclosure standards of the insurance industry on both counts are inferior to those of other vehicles such as mutual funds. In fact, for this reason alone, it would be good to see India’s largest institutional investor — the Life Insurance Corporation — exploring a public offer. LIC’s actions over the last few years in bailing out public sector divestment offers, infusing capital into public sector banks and funding entities such as Indian Railways have been widely criticised even as it has been insisting that these are well thought-out commercial decisions. Listing the public sector behemoth, apart from raising significant funds for the disinvestment kitty, would be the best way to convince sceptics that India’s largest institutional investor is indeed professionally managed.

COMMENT NOW