Increase in FDI limit in insurance sector to woo more foreign players: Moody's

Increasing foreign investment limit in the insurance sector to 100 per cent from 74 per cent is likely to attract more global players in the growing Indian insurance market, Moody's Ratings said on Tuesday.

Additionally, strong premium growth is expected to boost profitability of the sector.

Currently, many foreign insurers are present in the country through joint ventures and could seek to increase their ownership stakes in their Indian affiliates following this change in regulation.

"We view foreign investment as credit positive because it increases product innovation. The presence of foreign stakeholders also brings benefits in the areas of capital adequacy, financial flexibility and governance standards," Moody's Ratings said in a statement.

Presenting Budget 2025-26, Finance Minister Nirmala Sitharaman proposed to raise the foreign investment limit to 100 per cent from 74 per cent in the insurance sector as part of new-generation financial sector reforms.

Moreover, Moody's believes that the reduction in personal income tax will have positive trickle-down effects for the insurance sector.

"Increased levels of disposable income in the middle-class segment, the insurance sector's largest target market, bodes particularly well for health insurance, given increasing awareness around well-being and protection in the post-COVID era," it added.

These changes will further boost the Indian insurance industry's growth prospects, which are already favourable.

In the budget, Sitharaman announced an increase in the personal income tax threshold below which taxpayers owe no tax to Rs 12 lakh, from Rs 7 lakh, as well as a rejig in tax brackets that would help those earning higher than that save up to Rs 1.1 lakh.

Moody's said that strong economic growth supports average household incomes and increasing demand as a result of consumers' increasing risk awareness and the steady digitalization of the Indian economy, which facilitates the distribution and sale of insurance products.

Indian insurers' total premium revenue rose 16 per cent to Rs 9.2 lakh crore in the first eight months of fiscal 2024-25, driven by a 21 per cent increase in health insurance and an 18 per cent increase in new business written in the life sector. This marked an acceleration from fiscal 2023-24, when premiums were up 8 per cent year-on-year to Rs 11.2 lakh crore.

On fiscal consolidation, Moody's said the budget signalled "a slowing pace of fiscal consolidation as focus shifts to reinforcing growth".

The planned cuts to personal income tax rates will bolster middle-class spending power and consumption, which is credit positive for many corporates and the financial sector.

However, the resulting foregone revenue will slow the pace of the country's fiscal consolidation even as total spending declines as a share of GDP. Moreover, the proportion of spending allocated to debt servicing continues to increase.

The Finance Minister pegged the fiscal deficit for FY25 at 4.8 per cent of GDP and 4.4 per cent for FY26.