Applications for foreign direct investment in an insurance company promoted by a private bank would be cleared by the RBI and IRDAI to ensure that the 74% limit of overseas investment is not breached.

What does one mean by Insurance?

• Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.
• The company pools clients’ risks to make payments more affordable for the insured.
• Insurance is a capital-intensive business so has to maintain a solvency ratio. The solvency ratio is the excess of assets over liabilities.
• Simply put, as an insurance company sells more policies and collects premiums from policyholders, it needs higher capital to ensure that it is able to meet future claims.
• In addition, insurance is a long gestation business. It takes companies 7-10 years to break even and start becoming profitable.

Types of Insurance

Insurance sector of India

• The insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), mandates that insurers should maintain a solvency ratio of at least 150 percent.
• The insurance industry of India has 57 insurance companies 24 are in the life insurance business, while 34 are non-life insurers.
• Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.
• In addition to these, there is a sole national re-insurer, namely the General Insurance Corporation of India (GIC Re).
• Other stakeholders in the Indian Insurance market include agents (individual and corporate), brokers, surveyors, and third-party administrators servicing health insurance claims.
• In India, the overall market size of the insurance sector is expected to be $280 billion in 2020.

Recent developments

The chronological order of events:

1. Nationalization of life (LIC Act 1956) and non-life sectors (GIC Act 1972)
2. Constitution of the Insurance Regulatory and Development Authority of India (IRDAI) in 1999
3. Opening up of the sector to both private and foreign players in 2000
4. Increase in the foreign investment cap to 26% from 49% in 2015
5. Increase in FDI limit from 49% to 74% in March 2020

Issues with India’s insurance sector

Insurance is considered a sensitive sector as it holds the long-term money of people. Various attempts were made in the past to open up the sector but without much success.

• Lower insurance penetration due to various economic reasons such as poverty, etc.
• Domination of the Public Sector ex. LIC
• Trust issues in private insurances due to insolvency of private players
• Saving habits of the public

Significance of the recent amendment

• The current amendment is an enabling amendment that gives companies access to foreign capital if they need it.
• It is an important shift instance as the increase in the FDI cap means insurance companies can now be foreign-owned and -controlled as against the current situation wherein they are only Indian-owned and -controlled.
• The move is expected to increase India’s insurance penetration or premiums as a percentage of GDP, which is currently only 3.76 percent, as against a global average of more than 7 percent.

What does this mean for Indian insurance companies?

• India has more than 60 insurance companies specializing in life insurance, non-life insurance, and health insurance.
• The number of state-owned firms is only six and the remaining are in the private sector.
• A higher FDI limit will help insurance companies access foreign capital to meet their growth requirements.

How does this impact Indian promoters of insurance companies?

• Most of the Indian promoters of insurance companies are either Indian business houses or financial institutions like banks.
• Many entered into the insurance space when they were financially strong but are now struggling to cater to the constant need to infuse capital into their insurance joint ventures.
• Over the years, the sector has seen large-scale consolidation and exits of many promoters.
• A higher FDI cap will mean that more promoters could now completely exit or bring down their stakes in their insurance joint ventures.

What higher does FDI mean for policyholders?

• Higher FDI limits could see more global insurance firms and their best practices entering India.
• This could mean higher competition and better pricing of insurance products.
• Policyholders will get a wide choice, access to more innovative products, and a better customer service and claims settlement experience.

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Back2Basics: Foreign Direct Investment

• An FDI is an investment in the form of controlling ownership in a business in one country by an entity based in another country.
• It is thus distinguished from a foreign portfolio investment by a notion of direct control.
• FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
• Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
• In a narrow sense, it refers just to building a new facility, and lasting management interest.

FDI in India

• Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
• There are two routes by which India gets FDI.

1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

2) Government route: Prior approval by the government is needed via this route. The application needs to be made through the Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of the FDI application under the Approval Route.

• India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
• In 2015 India overtook China and the US as the top destination for Foreign Direct Investment.

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