India's proposal to allow more foreign investment in its $41 billion insurance business provides a lifeline for an industry starved of capital and squeezed by regulation - but it may not pass parliament and it may not be enough.
India's insurance business was full of promise when it was thrown open to competition in 2000, but has instead been brought to its knees by losses, regulatory change, uncertainty and a sharp slowdown in economic growth.
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Many firms are fed up and looking for the exit.
"What is required is some stability in the regulatory regime, for companies to really focus on business rather than deal with the onslaught of regulatory change," said Rajesh Sud, CEO of Max Life, owned by Max India and Japan's MS&AD Insurance Group.
Last week, the government sought to remove a key barrier to bringing in much-needed capital by proposing to raise the cap on foreign ownership of insurance firms to 49 percent from 26 percent.
But the measure, part of a series of sweeping economic reforms, requires parliamentary approval, which will not be easy given that the ruling coalition is technically in a minority and other recent reforms have inflamed populist opposition.
Workers at former state monopoly Life Insurance Corp of India, which has a 70 percent market share and about 1.3 million agents - as many as those employed by the 23 private sector firms - have held street protests against the proposal.
The life insurance industry, which makes up about three-quarters of the sector, has lost a combined $4 billion in the past decade and was battered by a 2010 clampdown on the sale of lucrative equity-linked products.
Life insurance companies say a revival will depend on faster approval for new products and regulatory changes to allow banks to sell products of more than one insurer to cut distribution costs.
In the non-life segment, where six of the 27 firms operating are state-run, 13 private sector insurers including units of Canada's Fairfax Financial and Japan's Tokio Marine reported losses in the year ended March 2011.
The cumulative underwriting losses for non-life insurers were nearly $6 billion in the year to March 2010, the Boston Consulting Group said in a report last year, and industry officials said the figure may have since touched $7.5 billion.
The life insurance industry, where many smaller firms have lost interest in pumping in fresh capital is also ripe for consolidation, though buyers may be scarce, banking sources said.
Max Life's former partner, New York Life, this year became the first foreign insurer to exit India, citing international business "repositioning" when it sold to MS&AD.
It is unlikely to be the last.
ING is looking to sell its stake in its India insurance joint venture as part of the planned sale of its Asia business. Local media have reported that HSBC was also looking to sell its stake in its local insurance venture. A company spokesman declined to comment.
"It's all nice talk, but I just don't think it will get through," said Gary Bennett, who runs New York Life's Asia business, referring to the need for parliamentary approval of the foreign investment proposal. "It would be good for the industry. It needs something to give it another shot in the arm because it was really savaged by regulation over the last couple of years, and a slowing and sort of plateau in the middle class," he said.
Nine of the 23 private sector life insurers, including units of HSBC, Italy's Generali and Dutch life insurer Aegon, lost money in the year ended in March.
Many operators have been shutting branches and shedding staff to manage their costs. Some, including ING's tie-up with Indian car battery maker Exide as well as the joint venture between France's Axa and Bharti Enterprises, owner of India's biggest cellular carrier, have never made money.
Some Indian companies rushed into insurance hoping the cap on foreign ownership would be quickly raised, enabling fresh funding from overseas partners and through initial public offerings. Some now want out so they can focus on their core businesses.
Future Group, India's biggest retailer, has been looking to exit its venture with Generali, while DLF, India's largest listed property company, wants to leave a joint venture with Pramerica as part of its efforts to pare its debt, bankers have said.
"If you look at the local shareholders in India who own 74 percent, you have companies whose core businesses can be banking, telecoms, all kinds of sectors," said Fran��ois-Val��ry Lecomte, regional chief financial officer of AXA Asia.
"Every penny they inject in insurance is diverted away from their sector," said Lecomte, who believes an increase in the foreign ownership cap to 49 percent will help bring in funds. "If the balance was 49-51, there would be much more capital flowing into the market because international insurers are willing to invest in India."
India's insurance industry needs an estimated $12 billion in capital to be adequately funded.
Life insurance penetration in India is about 4.4 percent of the country's gross domestic product in terms of total premiums underwritten in a year. That compares with 8 percent in Japan and 9.5 percent in Britain.
Tough competition and little product differentiation means companies generate low margins. India's new business margin for insurers, a key gauge of profitability, is around 10-15 percent against 20-25 percent in China and 30 percent-plus in Hong Kong, industry officials said.
Standard & Poor's said in a report in July the absence of progress in raising foreign ownership could result in "continued volatility" in the life insurance market.
That could change if New Delhi finds the political support to turn its proposal to raise the ownership cap into law. Recent moves to increase foreign ownership in supermarkets and airlines met fierce opposition, but did not need parliamentary approval.
"We are approaching it with optimism, but I won't say that we have declared any kind of victory or success on this because it's still a long way to go," said Max Life's Sud.
(Additional reporting by Archana Narayanan in MUMBAI; Editing by Tony Munroe and Raju Gopalakrishnan)