Insurance companies - sunny days ahead

With ICICI bank’s FPO (bigger than DLF’s IPO) slated to open on June 18, the valuation of its subsidiaries would be a hot topic of discussion among corporate circles. And the major rider in its subsidiary is the valuation of ICICI Holdings.

India’s economy is growing at over 8%, Indians are getting prosperous leading to higher disposable incomes. This is where the insurance growth comes as people would insure themselves as well as the assets they buy from the higher incomes.

India has high potential for insurance growth as India’s ratio of insurance to GDP is just 3% as compared to 10% for developed nations. With better distribution and entry of private players (having 37% share of market), this ratio may certainly rise.

Life insurance registered a growth of 95% last year while the non-life segment grew by 22% in terms of new business premium. The industry is experiencing a growth which was earlier seen in telecom, housing finance and retail banking, and in coming years, new business may surpass the renewal business.

Just as companies with huge real estate saw spurt in share prices due to unlocking value, similarly banks and non-finance companies with a significant insurance presence may see higher valuations. Recent increase in prices of ICICI Bank and Reliance Capital was a testimony to this effect.

Thus insurance companies may unlock huge value from their parent’s business, but there are certain issues facing the industry as the cap for raising money through IPO is after 10 years of operations and maximum FDI allowed is 26%. Also, since there is absence of any listed insurance company, fair valuations are debatable.

For the industry to really achieve high growth, it is necessary that the sector becomes highly deregulated, FDI is raised for higher capital infusion, the companies launch innovative products (like ICICI Prudential’s policy for diabetics) and lay more focus on Tier II and Tier III cities.