74% FDI In Insurance What This Means For Policy Holders

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What has happened?

The Lok Sabha has passed the Insurance Amendment Bill 2021 leading to a hike in foreign direct investment (FDI) limit in the sector to 74 percent.
Rajya Sabha had passed the Bill on March 18.
This came as a stark contrast to the previous FDI hike that took seven years to be passed in 2015 hiking the limit from 26% to 49%.

Insurance Act, 1938, provides the framework for functioning of insurance businesses and regulates the relationship between an insurer, its policyholders, its shareholders and the regulator (IRDAI).
The Bill seeks to increase the maximum foreign investment allowed in an Indian insurance company.

Foreign investment

The Bill increases the limit on foreign investment in an Indian insurance company from 49% to 74%, and removes restrictions on ownership and control.
However, such foreign investment may be subject to additional conditions as prescribed by the central government.

Opposition on the bill

During the debate on this bill in the Lok Sabha on March 22, opposition leaders including INC’s Manish Tiwari raised questions on why the government was keen to pass a bill that it was against earlier.
He said the decision to hike the FDI limit was like a somersault by the BJP.
Tewari said though the bill is small it has large implications.

Why it’s significant?

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.
India first opened up the insurance sector in the year 2000 under the Atal Bihari Vajpayee government when it allowed private sector firms to set up insurance companies and allowed FDI of 26%.
After that, for a long time, there were demands from the industry to further increase this cap to 49%.
During the Congress-led UPA government, then finance minister P. Chidambaram proposed raising the cap to 49%.
However, the proposal was dropped after it was opposed by political parties including the BJP.
The cap was eventually raised to 49% in 2015 by the Narendra Modi government in its first term.
The current amendment is an enabling amendment that gives companies access to foreign capital if they need
It is an important shift in stance 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.

Insurance penetration in India

The move is expected to increase India’s insurance penetration or premiums as a percentage of GDP, which is currently only 3.76%, As against a global average of more than 7%.

Why its important for Indian companies?

India has more than 60 insurance companies specialising in life insurance, non-life insurance and health insurance.
The number of state-owned firms are 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.
Insurance is a capital intensive business.
Simply put, as an insurance company sells more policies and collects premiums from policy holders, it needs higher capital to ensure that it is able to meet the future claims.
The IRDAI, mandates that insurers should maintain a solvency ratio of at least 150%.
Solvency ratio is the excess of assets over liabilities.
In addition, insurance is a long gestation business.
It takes companies 7-10 years to breakeven and start becoming profitable.
Allowing FDI upto 74% could see more interest from foreign insurance companies who specialise in this business and who bring the so-called ‘patient’ capital.

Higher FDI means for policy holders?

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.
Policy holders will get a wide choice, access to more innovative products and a better customer service and claims settlement

Safeguards in place

Under the new structure of 74% FDI limit, the majority of directors on the boards and key management positions will be resident Indians,
With at least 50% directors will be independent directors.
A specified percentage of profit will be retained as general reserve.
This means that Indian promoters in an insurance joint venture would have the right to accept or reject any board decision related to company matters.
This is termed as Indian management control.

Q) Which of the following statements regarding International Association of Insurance Supervisors are correct?
1- It was established in 1994 and works as a non-profit organisation.
2- It is headquartered at New York, USA.
3- 97% of the world’s insurance premiums comes under its jurisdiction.