To begin with, companies seeking a licence are required to liquidate any holding company structures and instead accept investor funding directly in the entity that is submitting the application, they added.
Irdai also wants applicants to be backed by a large domestic investor, preferably. And, for the promoter and company founder to have considerable net worth in order to qualify for a licence to manufacture insurance products, according to a person cited above.
Around 19 companies had applied to Irdai for an insurance manufacturing licence at the end of 2023.
ETtechOn March 23, Irdai granted a licence to Galaxy Health and Allied Insurance Company to offer health insurance. Prior to that, Narayana Health had also secured the regulator’s nod.
Discover the stories of your interest
However, startups such as Onsurity, Loop Health and Kenko that had also applied for a licence between 2022 and 2023 have been unable to secure approval as yet.
Emailed queries to the Irdai remained unanswered till press time.
“Typically, founders bring in venture investors who hold convertible options in the company, the regulator is not very happy with such corporate structures,” a source said.
Early-stage venture investors pick up options, which can be converted into shares later in the life of an investee company. This helps them retain their original stake in the startup and not have it diluted during subsequent rounds of funding.
Industry experts attribute the regulator’s tough stance to the recent governance and compliance issues faced by companies such as BharatPe and Paytm.
“The regulator perhaps believes that tech companies are better suited as distributors, not creators of financial products,” said one senior executive.
New-age firms Digit and Acko received the general insurance licence in 2017. Last year, both companies were awarded the life insurance licence. Digit is backed by Prem Watsa-led Fairfax as well as insurance industry veteran Kamesh Goyal.
Varun Dua-led Acko is currently the only venture-funded startup to have secured the regulatory nod.
In industry parlance, the likes of Acko, HDFC Ergo, Bajaj Allianz are called insurance manufacturers. While firms Policybazaar, Plum, Onsurity are different forms of brokers and distributors.
Also read | With Irdai opening doors, insurtech firms look to transform into general insurers
Hoops to cross
Unlike promoter-driven entities which might enter into a joint venture with a large industrial house to shore up the Rs 100 crore capital required to start the business, startups are founder-led.
A founder puts in a small amount of his or her personal wealth, brings in risk investors who invest in lieu of CCPS or compulsorily convertible preference shares.
“Founders have to raise venture money which takes time, there are challenges regarding managing the source of the venture money, all this has made the regulator wary of such entities getting the coveted licence,” said the first person quoted above.
Also read | Insurtech startups make hay as embedded insurance gets the spotlight
Initial euphoria
After Acko and Digit snagged regulatory approval, there was optimism in the startup world about opportunities in the insurance sector. Risk investors started evaluating startups on the basis of their potential to eventually become manufacturers of insurance products.
But the initial euphoria has not played out according to the industry expectations.
“The regulatory tightening is happening across wealth management, banking and insurance, so the fintech world will need to give it time and wait longer to show profitable sustainable businesses to secure licences,” said a third person, who is a senior industry executive.