From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : FDI in insurance
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.
The chronological order of events:
- Nationalization of life (LIC Act 1956) and non-life sectors (GIC Act 1972)
- Constitution of the Insurance Regulatory and Development Authority of India (IRDAI) in 1999
- Opening up of the sector to both private and foreign players in 2000
- Increase in the foreign investment cap to 26% from 49% in 2015
- 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.
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.