Insurance Brokers Association of India projects insurance broking sector to capture a 45 per cent market share by 2030 following increased insurance penetration and the demand for insurance productsOver the past couple of years, the Indian insurance industry has seen a series of significant transformations and new developments. Modified regulations, liberalisation of commission regimes, and proposals for amendment of regulatory architecture have opened new avenues of growth for the insurance broking industry.
This, along with the liberalisation in the foreign direct investment limits for insurance intermediaries (detailed discussion on this can be found in our blog post dated May 8, 2020), have resulted in the M&A deals in the sector gaining momentum. Specifically, for the insurance brokerage industry, convergence of various factors (such as need for increased capital to invest in digital technologies, all-time high valuation of the insurance brokers and the challenging and competitive insurance industry) has created a perfect environment for consolidation.
Implications
The Indian insurance market has evolved significantly during the last decade. There are presently 708 insurance brokers registered with the insurance regulator. Since this makes the insurance broking industry far too fragmented, and a significant market share is captured only by a small percentage of these insurance brokers, consolidation has now become the driving theme.
Consolidation gives an opportunity for insurance brokers to boost market share inorganically. This will enable insurance brokers who are better capitalised to implement new technologies and platforms and invest in digitisation, thereby providing better customer experience. With consolidation bringing more cross-selling and up-selling opportunities (due to a wider customer pool), insurance brokers can gain higher bargaining power with insurers, improve brand and market share, and expand and diversify services and product lines. The resultant insurance broking entity can also leverage the combined resources to offer a wider range of products and services to the customers, offering greater value to the customers.
Large insurance broking entities, born through such consolidation, will also have the resources and the wherewithal to increase the insurance penetration, which has reduced to 4 per cent in 2022-23 from the level of 4.2 per cent in 2021-22.[1]
Recent Consolidations
Well-planned M&A can eventually facilitate the listing of the insurance broking entities and unlocking of valuation in the market. Very recently, a NYSE-listed leading global professional services firm completed the transaction to acquire an Indian insurance broker registered with the Insurance Regulatory and Development Authority of India (“IRDAI”). This Indian insurance broker is now currently a wholly owned subsidiary of the global services firm and will formally merge with another Indian insurance broker, a wholly owned subsidiary of the aforementioned global services firm, following the completion of the merger process with the National Company Law Tribunal (“NCLT”). This consolidation is expected strengthen the existing broking capabilities of this merged entity to offer sophisticated products to its customer base and expand its existing customer and insurer network.
The acquisition of an insurance broker is also an attractive proposition for technology companies. Very recently, an Indian artificial intelligence-based financial wellness platform forayed into the insurance broking space by acquiring 100 per cent shares of a Hyderabad-based insurance broking entity through its parent entity.
Challenges for M&A
While M&A opportunities offer significant benefits to all the stakeholders involved, several legal and regulatory considerations must be considered before opting for a desired transaction structure for such consolidation.
M&A can take place in different forms. However, pursuant to the IRDAI (Insurance Brokers) Regulations, 2018 (“Brokers Regulations”), any kind of corporate restructuring of the insurance broker (implementation of a scheme of merger or amalgamation, business transfer/demerger, takeover/acquisition, joint venture, etc.) requires a prior IRDAI approval.[2] From a regulatory perspective, it is necessary to submit several documents, such as draft agreements, financial statements, synopsis of the proposed transaction, to the regulator, who may seek further information or documents during the examination of such documents.
Scheme of Merger
One of the most straightforward ways of merger between two insurance broking entities is undertaking a scheme of merger as per the process laid down under the Indian Companies Act, 2013. Schedule II-Form Y of the Brokers Regulations mandates that every scheme of amalgamation or merger and acquisition be implemented only after prior IRDAI approval. Undertaking a scheme of merger/amalgamation is efficient from a tax perspective; however, in the event the parties concerned are wary of the timelines, this restructuring option is generally avoided, given the burdensome requirements to seek no objections, filing a scheme with NCLT, seeking consent from NCLT, etc. The NCLT may take up to 9 (nine) months to 1 (one) year to approve a scheme of merger.
Business transfer
From a timeline perspective, parties also consider undertaking an arrangement for business transfer. Typically, a merger between two insurance broking entities, by way of business transfer, consists of the following three steps:
- An insurance broking entity seeks prior approval from the IRDAI for business transfer.
- A business transfer agreement (“BTA”) helps transfer the business of the Transferor Broking Entity (“Transferor”) to the resultant insurance broking entity (“Resultant Entity”).
- The Transferor voluntarily surrenders the insurance broking registration.
The Brokers Regulations defines “scheme of transfer of business” as “the scheme for transfer of the whole or part of business/assets of the insurance broker.” Regulation 2(1)(u) defines “transferor” as a “registered insurance broker that transfers the business to another registered insurance intermediary”. Typically implemented in the form of a BTA, the “scheme of transfer of business” is negotiated and executed (subject to relevant corporate authorisations as per the Indian Companies Act, 2013) between the Transferor and the Resultant Entity.
In terms of business transfer, the entity transferring the business to the other insurance broking entity, is required to surrender the insurance broking license. It is, however, relevant to note here that an insurance broker surrendering the certificate of registration is required to stop onboarding any fresh business from the date of making such application with the IRDAI for voluntary surrender of registration. Pursuant to this provision and to help prevent any disruption of the insurance broking business of the Transferor until receipt of the IRDAI’s approval for business transfer, the Transferor can seek an exemption from the IRDAI to continue onboarding fresh business in the interim period between the date of application for voluntary surrender of registration and date of grant of the approval for the business transfer.
Temporary Subsidiarisation
Another way to navigate through this could be not applying for surrender of the certificate of registration (while seeking the approval from the IRDAI for business transfer) and seeking exemption from the IRDAI for the temporary subsidiarisation of the Resultant Entity, from the period from receipt of the IRDAI approval for business transfer until the surrender of the insurance broking license.
The Brokers Regulations do not permit insurance brokers to have subsidiaries and there have been no precedents in this regard. However, one can consider, seeking an exemption from the IRDAI for the temporary subsidiarisation of the Resultant Entity vis-à-vis the Transferor in the event it involves issuance of equity shares to the Transferor by the Resultant Entity (as consideration for the business transfer), as then the Resultant Entity shall become a subsidiary of the Transferor (without the Transferor having surrendered the certificate of registration at this point). However, in the event the Resultant Entity is a “foreign owned and controlled” entity, as per Rule 23(4)(b) of the Non-Debt Instrument Rules, 2019, it can only make investment through funds received from abroad or internal accruals for making downstream investments. Accordingly, there can be no issuance of shares to the Transferor in lieu of consideration for business transfer.
Conclusion
As with any M&A transaction, besides the consolidation of the broking businesses, there are also post-transaction exit opportunities, such as listing of shares of an insurance broker. While the current law does not explicitly provide for the listing of an insurance broker and there have been no precedents in this regard, the regulations applicable to insurers prescribe that an insurer may approach the financial sector regulator for the listing of its equity shares by way of an offer for sale or further issuance of shares, or both, subject to certain conditions. The insurance regulator may apply similar principles to the insurance brokers as well.
Given the time-critical nature of such M&A deals, it becomes imperative to ensure dealing with and appropriately discussing in advance, the legal and structural considerations to facilitate a smooth transaction and integration of businesses.
[1] Annual report of the Insurance Regulatory and Development Authority of India 2022-23.
[2] As per Regulation 41 of Broker Regulations, prior written approval of the IRDAI is required for the implementation of any scheme of amalgamation by an insurance broker. No scheme of transfer of business (including transfer resulting in voluntary surrender of registration) can be done by an insurance broker without prior of the IRDAI.
