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Budget 2021: Government Proposes Raising the FDI Limit for Insurance Industry in India to 74%

Editor, TRANSFIN.
Feb 3, 2021 10:26 AM 5 min read
Editorial

India’s insurance sector is staring at a historic overhaul.

In her Budget Speech yesterday, Finance Minister Nirmala Sitharaman announced the Government’s intention of increasing the FDI limit on the insurance sector to 74% from the current 49%.

The move would allow for foreign ownership and control of insurance companies “with safeguards”, and has the potential of modernising the sector in a major way.

This could mean an uptick in foreign capital inflows, increased penetration of insurance products, more competition, and better offerings at lower prices for consumers. It could also enable insurance companies to create long-term assets in the economy by becoming effective vehicles for household savings.

A Project in Progress

The announcement didn’t take the industry by surprise. The announcement was a long time coming.

  • In December 2019, the Insurance Regulatory and Development Authority of India (IRDAI) had sent a letter to insurance companies and related stakeholders seeking their views on raising the FDI limit, as per an Economic Times report.
  • In February 2020, 100% FDI for insurance intermediaries was permitted.
  • And in the FY21 Budget, the Government announced that it would divest its stakes in LIC, whose IPO is expected to take place in the upcoming fiscal year.

As it turns out, the liberalisation of the insurance sector has been a gradually evolving process. Let’s begin at the beginning…

 

A Brief History

The first instances of the life insurance business in India can be traced back to the colonial period in the early 19th century. However, for a long time these plans were meant exclusively for Europeans.

The first insurance company for Indians - a product of the efforts of many social reformers - was the Bombay Life Insurance Society, which started offering life insurance plans in 1870.

The maiden attempt at regulating the sector was through the Life Insurance Companies Act of 1912. Post-Independence, the Government nationalised the industry, absorbing 245 companies into one - and that was how LIC was born.

Following the economic reforms of the 1990s, the insurance sector was liberalised in 2000 to enable private sector competition and thus LIC's monopoly collapsed. New players such as HDFC Life, SBI Life and ICICI Lombard began to encroach upon the public insurer’s market share. However, LIC remains the largest player in the sector today and is set to be listed on the bourses.

In 2015, the decision to raise FDI limits under the automatic route to 49% from 26% further reinvigorated the sector, enabling many companies to go for IPOs.

 

India’s Insurance Sector Today

Overall, the industry is divided into two categories - life insurance and non-life insurance, which is also known as general insurance.

Today, India has 24 life insurance firms, 34 general insurance companies, and a bunch of standalone health insurers and re-insurance agents. IRDAI serves as the primary regulator for all these entities.

Gross premium collected by life insurance companies in India stood at ₹7.31trn ($94.7bn) in FY20. During FY12-FY20, premium from new business of life insurance companies in India increased at a CAGR of 15% to reach ₹2.13trn ($37bn) in FY20.

As for private sector participation, their share in the non-life insurance market has risen from 15% to 56% between FY04 and FY21. Their share in the life insurance market was 31.3% as of FY20.

 

Challenges and Opportunities

In recent years, thanks to more disposable income in the hands of consumers and increased internet usage and awareness, the insurance sector has been steadily expanding. But much of this growth is on account of a low base - India’s insurance penetration is a measly 3.71% of GDP (for context, it was 2.71% in FY02).

FYI: Insurance penetration is the ratio of total insurance premiums to GDP in a given year. A higher number indicates a larger amount of premiums underwritten, which implies more penetration of insurance products amongst the populace.

 

 

More than 75% of Indians are still not covered by any form of life insurance. As for health insurance, very few Indians - 14.1% in rural areas and 19.1% in urban areas - have the luxury of health coverage. These numbers are all the more startling when you consider how decentralised the healthcare sector in India is, with the bulk of bill payments being made out-of-pocket by consumers.

To be fair, there have been attempts to increase insurance coverage, especially among poorer sections of society. Examples of Government schemes include the National Health Protection Scheme and the Pradhan Mantri Fasal Bima Yojana (PMFBY).

FYI: The COVID-19 pandemic has given insurance coverage a boost. In April-December 2020, gross direct premium underwritten (GDPU) rose by 9.5% YoY for standalone health insurance companies even as the first-year premium for private sector life insurance companies grew by 6.54% YoY (the latter possibly a result of pandemic-induced stress). During the same period, IRDAI launched two coronavirus-specific health insurance plans - Corona Rakshak and Corona Kavach.

 

The (Difficult) Road Ahead

All in all, perusing the basic statistics about the insurance industry, we can see how its biggest lure is possibly its vast and untapped potential. Only about 20% of Indians have sufficient health or life coverage and the country’s share in the global insurance market was merely 1.92% as of 2018 - both criminally low figures for the world’s second-most populous nation and sixth-largest economy.

The reforms to liberalise the sector by raising FDI limits and attracting foreign investments is a step in the right direction. But that doesn’t mean glory days are knocking.

The 2015 FDI limit upgrade to 49% mentioned above? That amendment took seven gruelling years to pass. The current reform would also require a tweak to the Insurance Act 1938, which is no mean task considering the reservations legislators across the political spectrum have about the same.

The biggest concern is that permitting foreign ownership of Indian insurers could make them exploit the latter for short-term motives and vested interests.

Possibly to alleviate these fears, Ms Sitharaman said yesterday that under the new structure “the majority of directors on the boards and key management positions will be resident Indians” and a specified percentage of profit “will be retained as general reserve”.

But addressing apprehensions is a tricky slope to tread on. Give too much leeway for foreign firms and you lose domestic support. But leave too much control in the hands of Indians and foreign investors will lose the incentive to invest.

The reform now heads to the Cabinet and then IRDAI for approval, post which it would be tabled in both Houses of Parliament. It could either pass smoothly and swiftly if the critics’ anxieties are addressed...or it could go the way of the 2015 amendment and take years to see the light of day.

FIN.

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