Insurance industry to continue to see merger and acquisitions deals, new entrants

Merger and acquisitions will continue to be a part and parcel of the insurance sector, which is a highly capital intensive sector and can accommodate new entrants with specialised skill sets having long-term vision.

The past developments in this sector and recent decision of the Mumbai National Company Law Tribunal (NCLT) allowing merger of Exide Life Insurance with HDFC Life is an indication that entities without requisite expertise may quit the sector.

In order to equip itself with the complexities of merger and acquisitions, the Insurance Regulatory and Development Authority of India (IRDAI) has started looking for consultants who can undertake valuation of state-owned and private sector insurers, and train its officials about valuation methodology and processes.

Market players and analysts are of the view that the sector has significant potential for development and there will be new entrants in the insurance industry and also Merger and acquisition (M&A) deals.

"The sector, like others, has witnessed some merger and acquisitions in the past and will continue to witness them and newer opportunities will emerge in the future.

"Players with sound underwriting practices, strong financials and right management practices will continue to grow in the long-run," said Anand Pejawar, Deputy Managing Director, SBI General Insurance.

Pejawar further said India's insurance landscape is vast and there is immense scope and enough volume for players to co-exist. Given the scope for growth in the sector, both large and niche players can continue to operate in the market.

Currently there are 24 life insurance companies and 31 non-life or general insurance firms, including specialised players like the Agriculture Insurance Company of India Ltd and ECGC Limited.

There have been consolidation in the insurance space in the recent past -- Bharti AXA General Insurance merger with ICICI Lombard General Insurance was completed in September 2021 and HDFC Ergo acquired Apollo Munich Health Insurance Company in 2020. In 2016, HDFC Ergo General Insurance acquired a 49 per cent stake from L&T in L&T General Insurance.

Avinash Singh, analyst with Emkay Global Financial Services said "... Given the advantage from economies of scale, in all possibility, the top 10 players in life and general will command 90 per cent or more of the profit pool".

Experts were of the view that the main requirement in both life and general insurance is to bring in more capital and invest the capital into developing the business.

"M&A, while useful in building scale does not necessarily bring more capital to the business. So, I think there is the opportunity for many more insurers to enter, as opposed to a consolidation that is implied in an M&A," said Kapil Mehta, Co-founder, SecureNow.

Economies of scale are important but that can also be achieved by business growth rather than just M&A, Mehta added.

Pavanjit Singh Dhingra, Joint Managing Director, Prudent Insurance Brokers said "there will be new entrants and there will be M&A - it is a natural process."

Insurance companies are also collaborating with insurtechs to provide innovative solutions and deliver a unified experience throughout the customer journey from distribution, service, to claims.

Shailaja Lall, Partner, Shardul Amarchand Managladas & Co said the insurance sector is highly capital intensive and there is going to be continued investment activity in the insurance sector, especially with respect to insurtech companies, led by private equity funds.

"In the recent past, several promoters of insurers have completely or partially exited their insurance ventures to focus on their core business, including the recent exit of Exide Life Insurance's promoters from its insurance business, and the subsequent merger of Exide Life with HDFC Life Insurance which recently received approval from the NCLT," Lall said.

Insurance penetration in India increased from 3.76 per cent in 2019-20 to 4.20 per cent in 2020-21, registering a growth of 11.70 per cent.

Last year, the government brought an amendment in the Insurance Act to allow increasing foreign holdings in insurers from 49 per cent to 74 per cent.

Besides, Parliament passed the General Insurance Business (Nationalisation) Amendment Bill, 2021, allowing the central government to pare stake to less than 51 per cent of the equity capital in a specified insurer, paving the way for privatisation.

According to a study, India is likely to become the sixth largest insurance market in the world in the next 10 years, supported by regulatory push and rapid economic expansion.