Overview

The union cabinet on Wednesday cleared a proposal in the Union budget 2021-2022 cheering up Insurance companies with the increase of Foreign Direct Investment (FDI) limit to 74% as opposed to 49% in 2020-21. The decision is seen to be a booster shot to improve capital availability for the insurance industry and will be implemented by amending the Insurance Act of 1938.

Insurance is a capital intensive business and increase in FDI will provide opportunity to foreign promoters to buy additional stake from their cash-strapped Indian partners by infusing much needed cash and capital. Furthermore, to safeguard the interests of Indian partners; majority of the board directors, members, and key management people will continue to be residents of India. The minimum number of independent directors is also set to be 50% and specified percentage of profits will being retained as general reserve.

Last year, in the union budget of 2019-20, the government permitted 100 FDI in the insurance intermediaries. These intermediaries include brokers (insurance and reinsurance), consultants and corporate agents (insurance sector), surveyors, loss assessing professionals, and 3rd party administrations.

The landscape of Insurance Sector in India

Currently, the Insurance market in India has 57 companies, amongst which 24 companies are life insurers and 33 are non-life insurers. In the life insurer category, 23 out of 24 insurance companies are private sector companies with a foreign shareholder. The only public sector company plying in this segment is Life Insurance Corporation (LIC). Non-life insurance segment is comprised of 27 private sector companies and 6 public sector companies.

 

When the insurance sector was privatized in 2000, the FDI limit was set to 26%. In 2015, the government increased the FDI limit in the insurance sector from 26% to 49% with the condition that insurance companies will remain “Indian owned and controlled”. This restricted many foreign companies from setting up their business in India.

The current change in FDI is expected to impact over 80% of insurers across both segments.

Why was the increase in FDI necessary?

A change in the FDI cap was important because:

  1. The insurance companies are currently capital-starved and are in high need of investors to infuse money in the sector.
  1. The insurance penetration in the country is still around 4% which is below the global average of 7.2% that makes India a major market for Insurance investors.

Insurance companies were waiting for the FDI limit to reach 100% since last few years. In 2018, a proposal was submitted to IRDAI (Insurance Regulatory and Development Authority of India), stating the demand of insurers to increase the FDI cap to 100% in the insurance sector. However, IRDAI proposed to increase the FDI limit to 74% during the current budget.

Currently, there are only 3 business sectors that allow FDI more than 75% through the government route and 35 sectors allowing more than 75?I through automatic route.

What will be the benefits of this change?

The pandemic has left Indian Insurers in no position to infuse additional capital in the market; hence this increase in FDI is expected to provide more benefits to the sector and country.

  • The increase in FDI is expected to bring technological innovation that will result in improved quality of products and increased efficiency in the overall system.
  • Generate multiple employment and business opportunities within insurance sector and companies working in technology space.
  • Insurers will be able to offer more competitive product offerings resulting in increased penetration of services in the country.
  • With the increase in competition, customers can expect better products at a low cost.
  • The digital insurance sector will get a push with infusion of fresh capital as well as boost technology adoption rate.

To summarize, a more liberal FDI policy is expected to attract higher amount of foreign capital will for sure create enormous opportunities for employment, growth, money penetration, new technologies, and businesses for the Indian organizations and their residents. It will also provide an impetus to the insurance industry to scale up and build more digital and infrastructure capabilities in the post-pandemic era. However, it will now be important to see how foreign companies will strategize the safeguarding clause that centers around Indian resident directors of insurance companies.