10_Mishra.pdf Eco Pjt Insu

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MqJBL (2009) Vol 6 203

FOREIGN DIRECT INVESTMENT IN INSURANCE SECTOR IN INDIA

VINAY V. MISHRA AND HARSHITA BHATNAGAR

I INTRODUCTION

There is hardly a facet of the Indian psyche that the concept of foreign has not

permeated. This term, connoting modernization, international brands andacquisitions by MNCs in popular imagination, has acquired renewed significanceafter the reforms initiated by the Indian Government in 1991.

Generally speaking FDI refers to capital inflows from abroad that invest in theproduction capacity of the economy and are usually preferred over other forms ofexternal finance because they are non-debt creating, non-volatile and their returnsdepend on the performance of the projects financed by the investors. FDI alsofacilitates international trade and transfer of knowledge, skills and technology.1

India's foreign investment policy is fairly liberal, allowing up to 100% foreigninvestment in most sectors. However, some sectors have caps on FDI. The

government also imposes caps on portfolio investments, within the FDI caps orseparately, to cap total foreign equity in certain sectors. These caps apply mainly inareas considered strategic or sensitive, as well as to any investments considered tohave national-security implications. In most sectors, investment up to the caps ispermitted on the "automatic route", meaning that companies need only file paperswith the central bank after investing. In areas that the government wants to monitormore closely, prior approval is necessary from the Foreign Investment PromotionBoard.2

* Gujarat National Law University, Gandhinagar, India.1 Planning Commission of India.2002. Report of the Steering Group on Foreign Direct

Investment: Foreign Investment India.[Government Report]. p 11. New Delhi: Planning

Commission, Government of India. Accessed fromhttp://planningcommission.nic.in.aboutus/committee/strgrp/stgp_fdi.pdf. on 5thSeptember, 2008 at 10:34 pm.

2 Foreign Investment Promotion Board (FIPB) has been set up by the government of India inorder to increase the flow of foreign direct investments into the country. FIPB is the onlyagency in the country that deals with foreign direct investments and investments into India.The main objective of Foreign Investment Promotion Board (FIPB) is to encourage foreign


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Foreign Direct Investment in India is allowed through four basic routes namely,financial collaborations, technical collaborations and joint ventures, capital marketsvia Euro issues, and private placements or preferential allotments. FDI inflow helpsthe developing countries to develop a transparent, broad, and effective policy

environment for investment issues as well as, builds human and institutionalcapacities to execute the same. 3

The insurance sector is of considerable importance to every developing economy; itinculcates the savings habit, which in turn generates long-term investible funds forinfrastructure building. The nature of insurance business ensures constant inflow offunds - the payout is staggered and contingency related - thereby making it readilyavailable for investment on infrastructure building. Its contribution to GDP is quitesignificant.

The Union government had opened up the insurance sector for private participationin 1999, also allowing the private companies to have foreign equity up to 26 per

cent. Following the opening up of the insurance sector, many private sectorcompanies have entered the insurance business.

II HISTORY OF INSURANCE

A contract of insurance may be defined as a contract whereby, one person, calledthe insurer, undertakes, in return for the agreed consideration, called thepremium to pay to another person, called assured, a sum of money or itsequivalent on the happening of a specified event.4

The aim of all insurance is to make provisions against dangers which beset human

life and dealings. Those who seek it endeavor to avert disasters from themselves byshifting possible losses on the shoulders of others who are willing for pecuniaryconsideration, to take risk thereof, and in the case of life assurance, they endeavorto assure to those dependant on them a certain provision in case of their death, or toprovide a fund out of which their creditors can be satisfied.5

direct investment into the country by taking up activities that promote investment.Accessed from the Official Website of Ministry of Finance, Government of India.Available at http://finmin.nic.in/ . Last accessed on 6th September, 2008 at 1:13 pm.

3 Report of the Steering Committee for the Tenth Five Year Plan(2002-07) on ForeignDirect Investment. Available at

http://planningcommission.nic.in/aboutus/committee/strgrp/stgp_fdi.pdf. Last Accessed on6th September, 2008 at 7:35 pm.4 Srinivasan, M.N.; Principles of Insurance Law, 8 th Edition, 2006; Wadhwa & Co. ,

Nagpur. See Also Gopalam, M.B.; Raghavan, M.B.; Fire Insurance: Law and Practice;First Edition, 2002; Snow White Publications Pvt. Ltd., Mumbai, India.

5 Birds, John; Modern Insurance Law; Fourth Edition, Sweet and Maxwell, London(1997)


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Foreign Direct Investment in Insurance Sector in India 205

A Ancient India

In India, insurance has a deep-rooted history. It finds mention in the writings ofManu (Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ).The writings talk in terms of pooling of resources that could be re-distributed intimes of calamities such as fire, floods, epidemics and famine. This was probably a

pre-cursor to modern day insurance. Ancient Indian history has preserved theearliest traces of insurance in the form of marine trade loans and carriers contracts.Insurance in India has evolved over time heavily drawing from other countries,England in particular. 6

B The British Period

1818 saw the advent of life insurance business in India with the establishment of theOriental Life Insurance Company in Calcutta. This Company however failed in1834. 1870 saw the enactment of the British Insurance Act. This era, however, wasdominated by foreign insurance offices which did good business in India. TheIndian Life Assurance Companies Act, 1912 was the first statutory measure toregulate life business. In 1928, the Indian Insurance Companies Act was enacted toenable the Government to collect statistical information about both life and non-lifebusiness transacted in India by Indian and foreign insurers including providentinsurance societies. In 1938, with a view to protecting the interest of the Insurancepublic, the earlier legislation was consolidated and amended by the Insurance Act,1938 with comprehensive provisions for effective control over the activities ofinsurers.7

C The Nationalized Era

The Insurance Amendment Act of 1950 abolished Principal Agencies. However,

there were a large number of insurance companies and the level of competition washigh. There were also allegations of unfair trade practices. The Government ofIndia, therefore, decided to nationalize insurance business.

An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurancesector and Life Insurance Corporation came into existence in the same year. TheLIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s whenthe Insurance sector was reopened to the private sector.8

6 Available in the Official Website of Insurance Regulatory and developmental Authority.

Accessed from http://www.irdaindia.org/ on 6th September, 2008 at 4:40pm.7 Veena, Raman; Regulatory Dissonance and Challenges to Globalization: A ComparativeStudy of the United States and Indian Non-life Insurance Regulatory Frameworks;Geneva Papers on Risk and Insurance: Issues and Practice, Vol. 29, No. 3, pp. 582-595,

July 20048 Murthy, K.S.N; Modern Law of Insurance; 4 th Edition. LexisNexis Butterworths, New

Delhi, 2002.


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D The Liberalized Era

This millennium has seen insurance come a full circle in a journey extending tonearly 200 years. The process of re-opening of the sector had begun in the early1990s and the last decade and more has seen it been opened up substantially. In1993, the Government set up a committee under the chairmanship of RN Malhotra,

former Governor of RBI, to propose recommendations for reforms in the insurancesector. The committee submitted its report in 1994 wherein, among other things, itrecommended that the private sector be permitted to enter the insurance industry.They stated that foreign companies be allowed to enter by floating Indiancompanies, preferably a joint venture with Indian partners.9

Following the recommendations of the Malhotra Committee report, in 1999, theInsurance Regulatory and Development Authority10 was constituted as anautonomous body to regulate and develop the insurance industry. The IRDA openedup the market in August 2000 with the invitation for application for registrations.Foreign companies were allowed ownership of up to 26%. In December, 2000, thesubsidiaries of the General Insurance Corporation of India were restructured asindependent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July,2002. 11

Today there are a number of private sector insurance companies. The table belowshows the breakup of insurance companies:-

Type of Business No of Public Sector

Companies

No of Private Sector

Companies

Total Companies

Life Insurance 01 20 21

General Insurance 06 14 20Re insurance 01 0 01

Total 08 34 42

Source: Insurance Regulatory & Development Authority Official Websitewww.irda.org

9 Available in the Official Website of Insurance Regulatory and developmental Authority.

Accessed from http://www.irdaindia.org/ on 6th September, 2008 at 4:40pm.10 Hereinafter Referred to as IRDA.11 Bhattacharya, Raka; Opening Up Of Insurance Sector 1999 The Insurance Regulatory

And Development Authority Accessed fromhttp://www.indiainsuranceresearch.com/Liberalisation.php on 27th August, 2008 at3:31am.


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III REGISTRATION OF INSURANCE COMPANIES

Section 14(2) of the Insurance Regulatory and Development Authority Act, 1999states that the authority shall have the power and function to issue to the applicant acertificate of registration, renew, modify, withdraw, suspend or cancel suchregistration.

A Procedure for registration

An insurance company must be first incorporated under the Companies act 1956and must also be registered with the Insurance Regulatory and DevelopmentAuthority (IRDA) which is governed by both the Companies Act 1956 and theInsurance Regulatory and Development Authority Act 1999.

Section 3 of the Insurance Act provides that every application for registration shallbe made in such a manner as may be determined by the irda and shall beaccompanied by the documents mentioned therein. Separate Regulations are passed

by IRDA called the IRDA Registration of Indian Insurance Companies Regulations2000. As per that a new entrant Indian Insurance Company desiring to carry oninsurance business in India shall make an application for registration in formIRDA/R1.12 This form requires the applicant to give his details prescribed thereinwith which the Insurance Regulatory and Development Authority will screen hisstatus and if it is satisfied that he can carry on all functions in respect of theinsurance business including management of investments with his own organizationand is a bona fide applicant, and that his previous application has not been rejectedin the previous five financial years, and his [previous certificate has not beenwithdrawn or cancelled and his name contains the words insurance company orassurance company13, the authority gives him an application for registration in formIRDA/R2; otherwise it will reject his application after giving him a reasonable

opportunity for hearing as to why his application shall not be rejected. The orderrejecting the application must be communicated to him by the Authority within 30days of such rejection.14

The applicant on receipt of the rejection order may apply to the Authority within 30days for reconsideration of its decision. An applicant whose application has beenfinally rejected may make a fresh application after a period of two years with a newset of promoters or for a new type of insurance business.15

If his application in form IRDA/R2 is accepted, the Authority will furnish him withan application in Form IRDA/R2. On receipt of application in form IRDA/R2, theauthority makes an inquiry as it deems fit and if it is satisfied in that inquiry then

12 Regulation 3(1) of Insurance Regulatory and Development Authority (Registration ofIndian Insurance Companies) Regulations, 2000

13 Regulation 5(1)14 Regulation 815 Regulation 9


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may register the applicant as an insurer for the class of business for which theapplicant is found suitable and grants him a certificate in form IRDA/R3. Thecertificate issued in the beginning will be valid for a year. Thereafter, there shall bean annual renewal. 16

B Renewal of Registration

An insurer, who has been granted a certificate under s. 3 of the Act, shall make anapplication in form IRDA/R5 for the renewal of the certificate17, to the authoritybefore 31 December each year, and such an application shall be accompanied byevidence of the payment of the fee which shall be the higher of:

Fifty thousand rupees for each class of insurance business, and One-fifth of one per cent of total gross premium written direct by

an insurer in India during the financial year preceding the year inwhich the application for renewal of certificate is required to bemade, or Rs. 5 crores, whichever is less; and in the case of aninsurer solely carrying on reinsurance business, instead of the totalgross premium written direct in India, the total premium in respectof facultative reinsurance accepted by him in India shall be takeninto account.

C Cancellation or Suspension of Certificate

The registration of an Indian Insurance Company or insurer who:

Conducts its business in a manner prejudicial to the interests of thepolicy holders;

Fails to furnish any information as required by the authorityrelating to its insurance business;

Does not submit periodical returns as required under the Act or bythe Authority.

Does not cooperate in any inquiry conducted by the Authority; Indulges in manipulating the insurance business; Indulges in unfair trade practices; Fails to make investment in the infrastructure or social sector

specified under sub-s1 (a) of s. 27(d) of the Insurance Act.

may be suspended for a class or classes of insurance business for such period asmay be specified by the Authority by an order. 18

16 Regulation 1617 Regulation 2018 See Chapter V of Insurance Regulatory and Development Authority (Registration of

Indian Insurance Companies) Regulations, 2000


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IV MANNER OF CALCULATION OF TWENTY SIX PERCENT EQUITY CAPITAL HELD BY

A FOREIGN COMPANY

Regulation 11 of Insurance Regulatory and Development Authority (Registration ofIndian Insurance Companies) Regulations, 2000 states that calculation of theholding of equity shares by a foreign company either by itself or through its

subsidiary companies or its nominees referred to as foreign investor) in theapplicant company, shall be made as under and shall be aggregate of:

the quantum of paid up equity share capital held by the foreign companyeither by itself or through its subsidiary companies or nominees in theapplicant company;

the quantum of paid up equity share capital held by other foreign investors,non-resident Indians, overseas corporate bodies and multinational agenciesin the applicant company; and

the quantum represented by that proportion of the paid up equity sharecapital to the total issued equity capital of an Indian promoter companymentioned in sub-clause (i) of clause (g) of regulation 2 held or controlledby the category of persons mentioned in the two clauses above.19

For purposes of calculation referred to above, account need not be taken of theholdings of equity in an Indian promoter company held by foreign institutionalinvestors, other than the foreign promoters of the applicant and their subsidiariesand nominees, and Indian mutual funds to the extent the investment of foreigninstitutional investors and Indian mutual funds are within the approved limits laiddown by the Securities and Exchange Board of India under its rules, regulations orguidelines issued from time to time.

V FDI IN INSURANCE: HOW MUCH TO CAP A CRITICAL APPRAISAL

In India, FDI in insurance sector is allowed up to 26 % at the present. But comparedto other sectors like call centers, BPOs, pharmaceuticals, power, hotel and tourismwhere FDI up to 100% is allowed, this is much lower.

19 See Regulation 11 of Insurance Regulatory and Development Authority (Registration ofIndian Insurance Companies) Regulations, 2000. See Also Murthy, K.S.N; Modern Lawof Insurance; 4th Edition. LexisNexis Butterworths, New Delhi, 2002.


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A General Overview of the Problem

There are sub-plots within the main story, as the insurance industry considerswhether or not the FDI cap in the insurance sector will actually be raised. Thecommon man's picture of the fight for FDI was seen solely as a political one --where the Left is acting spoilsport in raising the FDI cap from the current 26 per

cent to 49 per cent.

The reality, however, is that the industry is as divided as the political parties. Indiancorporate chiefs like Deepak Parekh and Rahul Bajaj are keen to dilute their holdingin their respective insurance joint ventures. At the same time, they want to maintaintheir majority stakes. 20

It is the smaller players who are eager for a hike in the FDI cap. The current FDIlimit will restrict the growth of private insurance players because a sizeable workingcapital is required, points out Philip G Scott, group executive director, Aviva Plc.He admits that growth at Aviva could suffer. "We have contingency plans in place

but in a worst-case scenario, business will need to grow much more slowly if FDI isnot raised," he adds. Aviva is a 26:74 joint venture with the Dabur group. 21

Foreign partners are equally keen to increase their share in insurance joint venturesto make current investments worthwhile. "Raising the FDI cap will give confidenceto foreign investors to do business on a scale that is not restrictive," says SunilMehta, country head, AIG. His view is shared by a number of global chiefs whohave of late visited India and met the regulator. There is some hesitancy amonginternational investors who have a limited appetite to invest in equity capital, bringin the necessary IT and expertise, when they can have only 26 per cent stake."There are many more choices for us globally to deploy capital where we can bestachieve the interest of shareholders," says Aviva's Scott.22

Another development, which is adding to the discomfort to foreign players, is theacute shortage of domestic partners which can invest 74% of the initial capital of$22.7 million. This shortage of domestic players has increased the valuation of thestakes to be hold by domestic players. The overseas partners are prepared to payhigh premium from the day one to the domestic partner and if it is ready to pull outof the existing partner the valuation stake is still higher.

20 Says Bajaj: "I do not support FDI beyond 49 per cent as I want control." Bajaj Auto hastwo insurance joint ventures in partnership with Allianz. Parekh shares a similar view,stating that Housing Development Finance Corporation is bound to its foreign partners to

sell up to 49 per cent. HDFC has signed MoUs with Standard Life for the life insuranceventure, and Chubb for the non-life entity. See Patel, Freny Insurance and the fight forFDI Accessed from http://www.rediff.com/money/2004/dec/02spec1.htm on 7thSeptember, 2008 at 2:45am.

21 Ibid. See Also Transformation of Insurance in India; Accessed fromhttp://www.icai.org/resource_file/11210p1343-47.pdf on September 3rd, 2008 at 4:32 pm.

22 Ibid.


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This is also luring the domestic players to look for a new partner.

B Problems of Raising the Capt to 49%.

At the moment, Indian promoters are apprehensive that should FDI be raised,

foreign partners will have an upper hand in the 10th year of operation. Theirconcern follows the Insurance Act dictating the dilution of Indian promoters' stakein favor of the general public. This means that while Indian promoters would endup holding 26 per cent according to the IRDA Act, their foreign counterpart couldhave a higher stake of 49 per cent. Describing all the impacts of a potential lifting ofthe cap is rather tricky, as the main problem with this policy decision is that it isdifficult to separate the costs and benefits of FDI versus those of increasedFDI.23

There is a "tipping-point" where the domestic industry loses economic control ofthe sector and that is where the cap should be placed. The Indian government hasestimated this point to be 51%, thus placing the cap at 49%.C S Rao, chairman of Insurance Regulatory and Development Authority, says inresponse to industry's apprehensions that the clause would necessarily be amended,"else both the shareholders will need to bring down their respective holding to 26per cent." The IRDA Act had not visualized foreign holding rising from the current26 per cent to 49 per cent.24

At the same time, India Inc hopes to make a killing when it sells its stakes toforeign partners. "Dilution of shareholding will be at a premium. I cannot see Indianpromoters diluting at par after having put in the majority of funds in the beginningwhen the venture was taking off," says Shikha Sharma, managing director, ICICIPrudential Life Insurance Company. Foreign partners have already indicated theirkeenness to raise their stakes, even if it is at a premium. Prudential Plc, the foreign

joint venture partner of ICICI, has beefed up plans to hike its stake in ICICIPrudential Life Insurance Company.25

C Issue of Penetration of Insurance Markets to All Regions

The insurers of India address issues of poor insurance penetration, low insurancedensity with hardly any insurance protection against natural calamities likedroughts, floods, hurricanes and earthquakes. The insurance market is developingin the region only now and it has to be nurtured carefully. The nationalizedcompanies did contribute to the spread of insurance beyond the metropolitan areas

23

Pai, Dr. Uday Lal, Insurance Sector- India lures major investors.; Accessed fromhttp://www.investorideas.com/IiI/News/062106.asp on 1st September, 2008 at 3:06am.24 Patel, Freny Insurance and the fight for FDI Accessed from

http://www.rediff.com/money/2004/dec/02spec1.htm on 7th September, 2008 at 2:45am.25 ICICIs plan on FDI; Accessed from

http://economictimes.indiatimes.com/ICICIs_FDI_plan_on_firmer_wicket/articleshow/2172123.cms on 3rd September, 2008 at 2:45 am.


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and succeeded in popularizing the concept in rural and semi-urban areas. There was,however, a huge gap between the potential available and its exploitation. The publicsector companies had numerous problems such as over-staffing, inadequateinfrastructure, and antiquated procedures. In the absence of competition theconsumer didnt benefit in terms of wider choice, lower price for insurance coverand adequate level of service. With the adoption of the Insurance Regulatory and

Development Authority (IRDA) Act in April, 2000, the insurance market wasopened up to the private sector with limited exposure to foreign equity.

The insurance premium in India accounted for a mere 2 per cent of GDP as againstthe world average of 7.8% and G-7 average of 9.2% during 90s. The insurancepremium as a percentage of savings in India is 5.95% as compared to 52.5% in UK.The nationalized insurance companies could barely unearth the vast potential of theIndian population since the policies lacked flexibility and the Indian life insuranceproducts were not linked to the contemporary investment avenues.26

I am of the firm belief that it is possible to sustain a high level of growth in the

insurance market in view of the large untapped potential. India is a nation of abillion people and is one of the fastest growing economies. It has a large middleclass with high household savings rates and disposable incomes. The size of thefamily is shrinking and this section of the population is looking at opportunities forobtaining appropriate risk cover coupled with maximization of returns on theirinvestments. Indian economy, predominantly an agrarian economy, offers enormousgrowth opportunities for the insurance sector. As per experts, rural sector canbecome a prominent contributor in the overall growth of the insurance industry inIndia, provided the needs & occupational structure of people living in villages isunderstood.27

D Problem of Investment of the Funds collected by the Insurance Companies

The insurance sector has been an important source of low cost funds of long-termmaturities all over the world. In the Indian context, however, the insurancecompanies, particularly in life insurance, apart from covering risk are alsocommitted to repayment of the principal with interest although with long maturitiesand thereby tend to act as investment funds. One of the reasons that this hashappened is that the average premium charged by the insurance companies in Indiatends to be relatively high due to obsolete and rigid actuarial practices and

26 IRDA Annual Reports 2006-07. Accessed from the official website of InsuranceRegulatory and Development Authority. http://www.irdaindia.org/ on 6th September, 2008

at 9:26 pm.(The last annual report prepared by IRDA is of 2006-07 which has been used inthe project and the regulatory body is yet to come out with the annual reports of 2007-08)27 For instance, various crops that are comparatively expensive need to be covered under crop

insurance schemes. Also, there are various other requirements of the farmers that need tobe looked after by the insurance companies. See Pai, Dr. Uday Lal, Insurance Sector-India lures major investors.; Accessed fromhttp://www.investorideas.com/IiI/News/062106.asp on 1st September, 2008 at 3:06am.


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inefficient operations. There is pressing need to reorient the insurance sector in amanner that it fulfills its principal mandate of providing risk cover. The opening upof the insurance sector to private participation, including banks in August 2000 hasbeen able to instill an element of competition which in turn is promoting efficiencyand professionalism and enhancing consumer choice through product innovation. 28

In my opinion India is hungry for Long term capital needs to fund the building ofinfrastructures, which is the need of the hour. Infrastructure or the lack of it hasbeen the brake, which have hindered the leap of the Indian Economy. Despiteshortcomings, Indian Economy has come a long way, but every industry leaderwould crib at the infrastructure bottlenecks that they have face everyday in theireffort for growth.

E Should the FDI Limit be Increased

The opening up of the cap on FDI investment in India from 26 to 49% has beendiscussed and re-discussed. The main concerns with this liberalization are political

rather than purely economic in nature, although there are distributional impacts tobe considered.

In my opinion increasing the FDI limit would be an appropriate measure whichwould be in the interest of the country. We already have a strong regulatory bodyand there are big Insurance companies already knocking at our doors. Also, LIC isalready big enough that it shouldn't be scared of competition. With the kind ofbrand recognition, penetration and trust that LIC commands in India, it shouldn'treally be a big deal.

Growing steadily, the insurance sector in India is one of the most talked of sectorsamongst the foreign investors. Numerous opportunities are available in this sector

for both domestic as well as international players. Traversing a full circle, from aliberal competitive market to nationalization and then back to liberalization, theinsurance sector in India has shown rapid expansion over the past few years.Increasing demand of consumer and industrial products and services pluselimination of a few of the trade and investment barriers have been the main driversbehind the exponential growth of the insurance sector in India.

By only Increasing the FDI in Insurance, we could even wait out a little longer onthe FDI caps in other sectors. By increasing the FDI in Insurance, that would takecare of the year's FDI target of the country in one go. But that is not the reason whyI say that increasing the FDI in insurance only would affect a lot of other Industries

in a positive way, and that we could even do without the FDI in many other sectorsfor sometime, Real estate for one. FDI in insurance wouldincrease the penetration

28 Sarkar, Rohit; Planning Commission Report on Vision 2020 for India for the FinancialSector; Accessed from http://planningcommission.nic.in/reports/genrep/bkpap2020/20_bg2020.doc on 29th August, 2008 at 2:20 am.


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of Insurance in India, where the penetration of Insurance is abysmally low withinsurance premium at about 3% of GDP against about 8% global average. Thiswould be through better marketing effort by MNCs, better product innovation,consumer education and so on.

By more investment in the investment sector, India would get adequate supply oflong term capitals, which India currently needs very badly. It is to be rememberedthat people generally invest for long term in insurance policies, say for around 30years. From the perspective of the domestic private players, FDI is instrumental infilling the savings-investment gap in developing countries, and facilitates mobilityof long-term capital flows into the destination economy. Thus, a higher FDI capwould lower the entry-level barriers to insurance as well as allow domestic playersto recapitalize their firms. Also, private sector players in the insurance markets arenow beginning to look at savings-linked and pure risk policies in order to diversifytheir markets. These are capital intensive ventures, and most firms are relying onFDI to provide the required capital.

The impact on the LIC and GIC is again, very controversial. Since 1999, these twocompanies have seen a turn-around in their levels of product diversification, servicepackages and customer service. They still retain the largest market share in thesector, and many consumers view this turn-around as positive. Product range anddiversity has increased substantially since the opening up of the insurance sector.The advent of competition has ensured that consumer needs are catered to, and nowthere are specific packages that are tailored to targeted consumer groups. The hikingof the cap will introduce more players into the market and this would increaseconsumer surplus significantly.

FDI has been seen to be beneficial to the recipient nation because of the positivetechnology spillovers generated. This is particularly applicable in the Indian context

as since the industry has been opened up, the perception of insurance has changedfrom just a practice of "risk reduction" to a method of short term profit-orientedinvestment. There are huge varieties of both life and non-life insurance policies andpackages, and measures like banccassurance, unit linked insurance, savings linkedinsurance and the like are being introduced to great success. The entry of a largenumber of Indian and Foreign private companies in life insurance business has tolead greater choice in terms of products and services. In the years since the IRDAAct initiated market reforms, the insurance sector has experienced some remarkablechanges.

The premium underwritten in India and abroad by life insurers in 2006-07 hasgrown by 47.38 per cent as against 27.78 per cent in 2005-06. First year premiumincluding single premium accounted for 48.45 per cent of the total life premium,whereas renewal premium accounted for the remaining. First year premiumincluding single premium recorded a growth of 94.96 per cent in 2006-07 comparedto 47.94 per cent in 2005-06, driven by a significant jump in the unit-linkedbusiness. The private life insurers have increased their market share from 14.25 per


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cent in 2005-06 to 18.08 per cent in 2006-07. This has not affected the growth ofLIC, as the premium collected by LIC in 2006-07 has increased by 40.79 per centover the premium collected in 2005-06. In the case of general insurers the growthwas 21.51 per cent as against 15.62 per cent in the previous year. In 2006-07, thefour public sector general insurers had reported a growth of 8.18 per cent (6.87 percent in the previous year) in underwriting of premium within and outside India

whereas eight private sector insurers reported a growth of 61.24 per cent. Themarket share of private insurers had increased to 34.72 per cent compared to 26.34per cent in 2005-06 implying a decline in the market share of the public sectorinsurers. The number of policies underwritten by the private insurers increased by51.48 per cent whereas it declined by 2.25 per cent for public insurers.29 Theposition has now gradually changed after the opening of the insurance sectormarkets, where in the first 2 years most of the private companies suffered losses andhad a very small share of the insurance market. Now slowly the private companiesby offering better products in a competitive environment have established theirmarket share and even though LIC still is the market leader, but its share isgradually decreasing and private insurers are gaining the confidence of theconsumers.

In the light of these facts, I feel that it is now high time that cap on FDI in theinsurance sector should be increased to 49%.

F Effects of Opening of Insurance Sector to Foreign Investors

More job opportunities.

Inflow of foreign capital Indigenous reinsurance30 Facilitate technology transfer

Wide distribution channel

VI CONCLUSION

Having analyzed in brief the history of insurance sector and the performance of theprivate insurance companies, it becomes pretty evident that the Government isacting as a roadblock to the economic development of the country by not increasingthe cap on FDI in the insurance sector to 49%.

29 Figures taken from the IRDA Annual Reports 2006-07. Accessed from the official websiteof Insurance Regulatory and Development Authority. http://www.irdaindia.org/ on 6thSeptember, 2008 at 9:26 pm.

30 Even the reinsurance sector looks for opulence with global players like Swiss andMunich Re keen on entering into insurance in India.


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While it is recognized that the macroeconomic backdrop remains favourable togrowth, there still remain a few hurdles that we have to cross. The need for a higherlevel of foreign equity participation is recognised and the government hasannounced its intention to raise the FDI cap to 49 percent from the present level of26 percent. There has to be a greater flexibility given to the insurers in takinginvestment decisions and this issue is proposed to be addressed when

comprehensive amendments are taken up to revamp the antiquated Insurance Act of1938. This exercise of amending the legal framework is already on the anvil. Thegeneral insurance business is predominantly a tariff controlled market. There is ademand for abolition of tariffs on the ground that such a step would promoteefficiency and better service to the public at a lower cost. While the Authority is inbroad agreement with this proposition it would like to exercise caution to ensurethat there is no large scale destabilisation of the market in its transition from a tariffto a non-tariff regime. The Authority has prepared a schedule for moving to a de-tariffed regime. The schedule envisages distinct actions to be taken by the insurerswith specific cut off dates for each action so that Authority could review the actiontaken by insurers before moving from tariff to a de-tariffed scenario. In the area ofreinsurance, the Authority is conscious of developing local market capacity towithstand the adverse impact of catastrophic perils and would welcome the idea ofhaving more than one reinsurer. At the present time, none of the insurancecompanies are publicly listed and this calls for further strengthening of corporategovernance in terms of reporting and disclosure practices in a consistent andtransparent manner. Also proper guidelines need to be brought out to sanction therole of SEBI when insurance companies list in the stock markets so as to avoid anydirect conflicts of SEBI and IRDA, which though by the present provisions ofIRDA does not seem to be happening because SEBI would only have control in thelisting in the stock markets.

Insurance today has moved to the center stage of World economy. The growth of

insurance worldwide and its influence on the government action provides a clearindication of the relevance and importance of this sector in the Indian economy.With the opening up of the insurance sector, policyholders and investors will beexposed to a wide range of products. However, in India, insurance is far from beingconsidered with due importance. Actually, in India, nobody takes up insuranceunless and until he has had a bad experience. In a liberalized market, the countrycan gather enormous investment for infrastructure growth. Competition can bring ina healthy insurance industry. The only deterrent in India is that it has only a singledigit billion foreign investment and lags behind other developing countries.

Documents

10_Mishra.pdf Eco Pjt Insu