The Union Cabinet has given its permission to amend the Insurance Act, 1938 with an intention of allowing foreign ownership and control in the Indian insurance sector, The Union Cabinet has favoured a proposition to increase the foreign direct investment (FDI) threshold in Indian insurance companies from the existing 49 to 74 per cent by clearing the Insurance Amendment Bill, 2021 recently. The Bill is in sync with the proposal made in the Union Budget 2021-22.

On March 15, the Union Finance Minister introduced the Bill in the Rajya Sabha to raise the FDI limit in insurance companies. The Indian insurance sector was opened up for foreign investment in 2000 by allowing 26 per cent FDI in Indian insurers. The government raised the FDI limit from 26 to 49 per cent in 2015. Earlier, the government had permitted 100 per cent FDI in insurance intermediaries, such as insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third-party administrators, surveyors and loss assessors.

The deadly epidemic has uncovered the delicate condition of the insurance sector in India. The pandemic-linked claims are mounting tremendously and a twister of high-amount medical and death claims may eliminate the fortunes of minor insurance companies. These business entities lack the ability to invest funds during these testing times. Therefore, it is important to enhance the FDI limit.

Besides announcing a rise in the FDI, the Budget also indicated that overseas ownership and control of Indian insurers will be allowed with safeguards. The proposal also mandated that a majority of directors on the board of the insurer and its key management persons should be inhabitant Indians and at least 50 per cent of the directors of insurer should be independent directors. Further, to guarantee that adequate capital is held in the books of the insurance company, foreign-owned insurers will be required to retain a specified percentage of profits as general reserves.

Lesson from the past

The increase of FDI limit in the insurance sector is aimed at improving penetration of life insurance services throughout the country. The relaxing of limitations on foreign ownership of insurers will also offer new avenues of funding. It will also provide access to external know-how that can support insurers’ underwriting performance and unchain fresh functioning efficacies.

However, history has taught us that increasing the FDI limit alone may not draw global investors into the sector. Both life and general insurance sectors experienced a series of governing changes after the insurance segment opened up for FDI in 2000, and till 2014-2015, only limited insurance players were profitable.

Even after around five years after the level of FDI was raised to 49 per cent in 2015, the sector has not witnessed huge foreign flows. Only eight life insurance players out of 23 private players and four out of the 21 private general insurers have overseas promoters’ holding of 49 per cent. According to the data available, several companies still have foreign holding of 26 per cent, while Indian promoters still retain 100 per cent stake in companies such as Exide Life, Kotak Mahindra Life, Reliance General, Bajaj Allianz Life, Canara HSBC Oriental Bank of Commerce Life, IDBI Federal Life, Future Generali India Life, Bajaj Allianz General Insurance, SBI General and Tata AIG.

Thus, the big picture across both life and general insurance companies shows that raising the FDI level alone may not ensure easy access to capital. The present foreign institutional investors’ (FII) shareholding in insurance companies reveals that even the existing levels have not been fully utilised. Average foreign investment in insurance entities, both life and non-life, remains well below the current limits. Although the inflow of capital was pegged at Rs 25,000 crore after the FDI limit was eased, real infusion into the sector has been just around Rs 5,400 crore.

Furthermore, after the hike in the FDI level, no new foreign company has moved into the Indian market. This was not only because an additional relaxation in the FDI limit was predicted but also because the Indian management control clause confirmed to be a thorn in the side of foreign investors. According to the clause, even though a foreign company were to buy a 49 per cent share in an Indian insurance company, any board-level decision or a change in business strategy would need consent from a majority of Indian shareholders. This has proved to be a discomforting point for foreign entities who sought identical privileges with their Indian joint venture associates.

Way to go

According to industry sources, Indian insurance companies need at least Rs 15,000 crore over the next 36 months. Therefore, allowing foreign business units to raise their shares to 74 per cent is a welcome move and timely for the capital-starved country. The present ambiguity and anxiety of the sector is not encouraging Indian shareholders to make investments, and many are heading for exit. For instance, the Rajan Raheja Group recently announced sale of its complete 51 per cent holding in Raheja QBE General Insurance to Paytm’s Vijay Shekhar Sharma, and Wadhawan Global Capital decided to sell DHFL General Insurance to Sachin Bansal, a co-founder of Flipkart. So, the government’s strategy of FDI hike will definitely motivate domestic players to focus on the game.

Moreover, apart from bringing more foreign players into the game, a relaxation in FDI limits will create employment opportunities and enhance penetration of insurance. The hike may lift India’s insurance penetration or premiums as a percentage of the GDP that is currently at a sluggish 3.76 per cent compared to the world average of 7.23 per cent. Insurance penetration for other BRICS (a grouping of Brazil, Russia, India, China and South Africa) countries is: South Africa 12.89 per cent, China 4.22 per cent, Brazil 3.9 per cent and Russia 1.3 per cent,. This indicates that India lags behind other BRICS nations, excluding Russia.

To conclude, the insurance industry occupies a significant place in the evolution and progress of an economy. Besides, the importance of the segment has been clearly understood during the pandemic. The Indian insurance industry has always been an attractive market for global insurers to magnify their business in the country, mainly due to its demographic profile and unexploited business prospects. Hence, raising the FDI limit will surely change the face of insurance in India.

However, the key will lie in the details contained in the executing guidelines. Quick timelines and clarity on implementation from the government will make the proposal highly worthwhile. The government has beckoned a vibrant change in the policy that has previously been debated and disputed over a lengthy period. Meanwhile, stakeholders now wish that the changes will be initiated within a reasonable time.