Insured to rise: FDI limit hike in insurance will help Indian cos raise funds, upgrade tech

The Indian Parliament has approved the bill to raise the foreign investment limit in the insurance sector from 49 per cent to 74 per cent. This will help the sector raise long-term capital, enhance insurance penetration and ensure greater social protection

The Modi government has taken another step towards redeeming its pledge of making India a more attractive place to do business in. On Monday, the Lok Sabha, India’s lower house of Parliament cleared a Bill to raise the foreign direct investment (FDI) limit in the insurance sector to 74 per cent.

The upper house, Rajya Sabha, had passed the Insurance (Amendment) Bill, 2021 last week. It will become the law of the land once President Ram Nath Kovind gives his assent to it. This is considered a formality.

More funds for the insurance sector

This move will enable the insurance sector to raise additional funds and help them tackle various solvency-related issues they are facing, Indian Finance Minister Nirmala Sitharaman told the House, while piloting the Bill, adding that the government will fund the public sector insurers.

The Statement of Object attached to the Bill says: “In order to achieve the objectives of the government Foreign Direct Investment policy of supplementing domestic long-term capital, technology and skills for the growth of the economy and the insurance sector, and thereby enhance insurance penetration and social protection, it has been decided to raise the limit of foreign investment in Indian insurance companies from 49 per cent to 74 per cent.”

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India has 24 life insurance companies, including the state-owned Life Insurance Corporation (LIC), which is, by far, the largest among them. It also has 34 general insurance companies, of which four are in the public sector.

“If growth capital is hard to come by, there will be a stress situation. In order that the stress situation is not left unattended, we need to raise the FDI limit,” she said.

India has 24 life insurance companies, including the state-owned Life Insurance Corporation (LIC), which is, by far, the largest among them. It also has 34 general insurance companies, of which four are in the public sector.

Government to list LIC soon

Incidentally, the government is planning to list LIC in face of the stiff opposition from some Opposition parties and trade unions. Addressing the media at an event unrelated to the passage of the Bill to raise the FDI limit in insurance, Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management (of DIPAM), said the LIC IPO would take place third or final quarter of the coming financial year.

The insurance sector had been clamouring for an increase in the FDI limit as it needs additional funds to expand. The financial condition of the sector has been impacted badly because of the Covid-19 outbreak, which brought economic activity to a halt in the country for more than three months last year.

IRDAI held extensive consultations with stakeholders

During this time, the countries insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI) has held extensive consultations with all stakeholders and recommended the increase in FDI limit, Sitharaman said.

This is the second time the Modi government is liberalising the FDI limit in the insurance sector. In 2015, shortly after coming to power in New Delhi, it had increased the foreign ownership limit from 26 per cent to 49 per cent.

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Global best practices, new technologies, improved processes

Experts said the move to allow foreign investors to hold up to 74 per cent equity in Indian insurance companies will allow them to plan their long-term strategies better and also improve the functioning of the Indian insurance sector by bringing in global best practices, technology and processes.

India’s insurance penetration still very low

It will also help these companies expand and help make insurance products available to more Indians. According to the Economic Survey for 2020-21, India has an insurance penetration of 3.76 per cent in 2019.

“Globally insurance penetration was 3.35 per cent for the life segment and 3.88 per cent for the non-life segment in 2019. Although the penetration is lower in India for both, it is particularly low for non-life insurance as compared to other countries," the Economic Survey said.

A comparison with its peers will put the Indian figure in perspective. Other Asian nations such as Malaysia, Thailand and China had insurance penetration rates of 4.72 per cent, 4.99 per cent and 4.30 per cent, respectively in 2019.

Thus, the easing of FDI norms for the sector will make additional funds available to insurance companies, help increase insurance penetration and also make long-term funds available for building infrastructure in the country.