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 and acquisitions by MNCs in popular imagination, has acquired renewed significance after the reforms initiated by the Indian Government in 1991. Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are “usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology.”1 India's foreign investment policy is fairly liberal, allowing up to 100% foreign investment in most sectors. However, some sectors have caps on FDI. The government also imposes caps on portfolio investments, within the FDI caps or separately, to cap total foreign equity in certain sectors. These caps apply mainly in areas considered strategic or sensitive, as well as to any investments considered to have national-security implications. In most sectors, investment up to the caps is permitted on the "automatic route", meaning that companies need only file papers with the central bank after investing. In areas that the government wants to monitor more closely, prior approval is necessary from the Foreign Investment Promotion Board.2
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Gujarat National Law University, Gandhinagar, India. 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 from http://planningcommission.nic.in.aboutus/committee/strgrp/stgp_fdi.pdf. on 5th September, 2008 at 10:34 pm. Foreign Investment Promotion Board (FIPB) has been set up by the government of India in order to increase the flow of foreign direct investments into the country. FIPB is the only agency 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

and private placements or preferential allotments. or to provide a fund out of which their creditors can be satisfied. and effective policy environment for investment issues as well as. in return for the agreed consideration. M. Snow White Publications Pvt. 3 The insurance sector is of considerable importance to every developing economy. Raghavan.pdf. 2002.B. Ltd. which in turn generates long-term investible funds for infrastructure building. Wadhwa & Co. Available at http://finmin. FDI inflow helps the developing countries to develop a transparent. Nagpur.5 3 4 5 direct investment into the country by taking up activities that promote investment. Government of India. called the ‘premium’ to pay to another person. “Modern Insurance Law”.in/ .thereby making it readily available for investment on infrastructure building. Available at http://planningcommission.. technical collaborations and joint ventures. financial collaborations. to take risk thereof. called ‘assured’. First Edition. M.4 The aim of all insurance is to make provisions against dangers which beset human life and dealings. Srinivasan. 2008 at 1:13 pm. it inculcates the savings habit. undertakes. and in the case of life assurance. they endeavor to assure to those dependant on them a certain provision in case of their death. Following the opening up of the insurance sector. Accessed from the Official Website of Ministry of Finance. II HISTORY OF INSURANCE A contract of insurance may be defined as a contract whereby..nic. Birds. “Principles of Insurance Law”.in/aboutus/committee/strgrp/stgp_fdi. Last accessed on 6th September. The nature of insurance business ensures constant inflow of funds . . also allowing the private companies to have foreign equity up to 26 per cent. Fourth Edition. See Also Gopalam. capital markets via Euro issues. broad. called the ‘insurer’.N. Report of the Steering Committee for the Tenth Five Year Plan(2002-07) on Foreign Direct Investment. M. a sum of money or its equivalent on the happening of a specified event. Sweet and Maxwell. 2006. one person. many private sector companies have entered the insurance business. 2008 at 7:35 pm.B. Those who seek it endeavor to avert disasters from themselves by shifting possible losses on the shoulders of others who are willing for pecuniary consideration.. The Union government had opened up the insurance sector for private participation in 1999. 8th Edition. Last Accessed on 6th September. India. “Fire Insurance: Law and Practice”. John.204 MqJBL (2009) Vol 6 Foreign Direct Investment in India is allowed through four basic routes namely. Mumbai.nic.the payout is staggered and contingency related .. London (1997) . builds human and institutional capacities to execute the same. Its contribution to GDP is quite significant.

there were a large number of insurance companies and the level of competition was high. Insurance in India has evolved over time heavily drawing from other countries. The Government of India. This Company however failed in 1834. 3. Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). epidemics and famine.irdaindia. No. In 1938. 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. 2002. Vol. The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire. was dominated by foreign insurance offices which did good business in India. It finds mention in the writings of Manu (Manusmrithi ). 2008 at 4:40pm. 4th Edition. pp. 1938 with comprehensive provisions for effective control over the activities of insurers. however.N. insurance has a deep-rooted history. 1912 was the first statutory measure to regulate life business. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.8 6 7 8 Available in the Official Website of Insurance Regulatory and developmental Authority. “Modern Law of Insurance”. This era. Raman. the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. However.org/ on 6th September. There were also allegations of unfair trade practices. The Indian Life Assurance Companies Act. . 29. with a view to protecting the interest of the Insurance public. Geneva Papers on Risk and Insurance: Issues and Practice. decided to nationalize insurance business. England in particular. floods. K. “Regulatory Dissonance and Challenges to Globalization: A Comparative Study of the United States and Indian Non-life Insurance Regulatory Frameworks”.Foreign Direct Investment in Insurance Sector in India 205 A Ancient India In India. Veena. therefore. 16 non-Indian insurers as also 75 provident societies— 245 Indian and foreign insurers in all. 6 B The British Period 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta.S. 582-595. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. 1870 saw the enactment of the British Insurance Act. New Delhi.7 C The Nationalized Era The Insurance Amendment Act of 1950 abolished Principal Agencies. the earlier legislation was consolidated and amended by the Insurance Act. In 1928. The LIC absorbed 154 Indian. An Ordinance was issued on 19th January. July 2004 Murthy. Accessed from http://www. LexisNexis Butterworths. This was probably a pre-cursor to modern day insurance.

Foreign companies were allowed ownership of up to 26%. They stated that foreign companies be allowed to enter by floating Indian companies. The committee submitted its report in 1994 wherein. In 1993.9 Following the recommendations of the Malhotra Committee report. 2002.irda. the Insurance Regulatory and Development Authority10 was constituted as an autonomous body to regulate and develop the insurance industry. . The IRDA opened up the market in August 2000 with the invitation for application for registrations. among other things.indiainsuranceresearch. The table below shows the breakup of insurance companies:Type of Business No of Public Sector Companies Life Insurance General Insurance Re insurance Total No of Private Sector Companies Total Companies 01 06 01 08 20 14 0 34 21 20 01 42 Source: Insurance Regulatory & Development Authority Official Website www. the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national reinsurer. In December. Hereinafter Referred to as IRDA. to propose recommendations for reforms in the insurance sector. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. Raka. in 1999. it recommended that the private sector be permitted to enter the insurance industry.206 MqJBL (2009) Vol 6 D The Liberalized Era This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. Bhattacharya.” Opening Up Of Insurance Sector – 1999 The Insurance Regulatory And Development Authority” Accessed from http://www. preferably a joint venture with Indian partners.org/ on 6th September. 2008 at 3:31am. 11 Today there are a number of private sector insurance companies.com/Liberalisation. Accessed from http://www. 2000.php on 27th August.org 9 10 11 Available in the Official Website of Insurance Regulatory and developmental Authority.irdaindia. Parliament passed a bill de-linking the four subsidiaries from GIC in July. former Governor of RBI. the Government set up a committee under the chairmanship of RN Malhotra. 2008 at 4:40pm.

modify. and his [previous certificate has not been withdrawn or cancelled and his name contains the words insurance company or assurance company13. the Authority will furnish him with an application in Form IRDA/R2. the authority gives him an application for registration in form IRDA/R2. On receipt of application in form IRDA/R2. The order rejecting the application must be communicated to him by the Authority within 30 days of such rejection. Separate Regulations are passed by IRDA called the IRDA Registration of Indian Insurance Companies Regulations 2000. A Procedure for registration An insurance company must be first incorporated under the Companies act 1956 and must also be registered with the Insurance Regulatory and Development Authority (IRDA) which is governed by both the Companies Act 1956 and the Insurance Regulatory and Development Authority Act 1999. Section 3 of the Insurance Act provides that every application for registration shall be made in such a manner as may be determined by the irda and shall be accompanied by the documents mentioned therein.14 The applicant on receipt of the rejection order may apply to the Authority within 30 days for reconsideration of its decision. the authority makes an inquiry as it deems fit and if it is satisfied in that inquiry then 12 13 14 15 Regulation 3(1) of Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations. 2000 Regulation 5(1) Regulation 8 Regulation 9 . An applicant whose application has been finally rejected may make a fresh application after a period of two years with a new set of promoters or for a new type of insurance business. As per that a new entrant Indian Insurance Company desiring to carry on insurance business in India shall make an application for registration in form IRDA/R1. otherwise it will reject his application after giving him a reasonable opportunity for hearing as to why his application shall not be rejected. renew.Foreign Direct Investment in Insurance Sector in India III REGISTRATION OF INSURANCE COMPANIES 207 Section 14(2) of the Insurance Regulatory and Development Authority Act. withdraw.15 If his application in form IRDA/R2 is accepted. 1999 states that the authority shall have the power and function to issue to the applicant a certificate of registration. suspend or cancel such registration.12 This form requires the applicant to give his details prescribed therein with which the Insurance Regulatory and Development Authority will screen his status and if it is satisfied that he can carry on all functions in respect of the insurance business including management of investments with his own organization and is a bona fide applicant. and that his previous application has not been rejected in the previous five financial years.

C Cancellation or Suspension of Certificate The registration of an Indian Insurance Company or insurer who: ƒ ƒ ƒ ƒ ƒ ƒ ƒ Conducts its business in a manner prejudicial to the interests of the policy holders. Fails to furnish any information as required by the authority relating to its insurance business. may be suspended for a class or classes of insurance business for such period as may be specified by the Authority by an order. there shall be an annual renewal. 18 16 17 18 Regulation 16 Regulation 20 See Chapter V of Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations. The certificate issued in the beginning will be valid for a year. 5 crores. 2000 . Does not submit periodical returns as required under the Act or by the Authority. shall make an application in form IRDA/R5 for the renewal of the certificate17. Indulges in manipulating the insurance business. who has been granted a certificate under s. instead of the total gross premium written direct in India. to the authority before 31 December each year. Fails to make investment in the infrastructure or social sector specified under sub-s1 (a) of s. 3 of the Act. and in the case of an insurer solely carrying on reinsurance business. whichever is less. 27(d) of the Insurance Act. Thereafter. the total premium in respect of facultative reinsurance accepted by him in India shall be taken into account.208 MqJBL (2009) Vol 6 may register the applicant as an insurer for the class of business for which the applicant is found suitable and grants him a certificate in form IRDA/R3. and such an application shall be accompanied by evidence of the payment of the fee which shall be the higher of: ƒ ƒ Fifty thousand rupees for each class of insurance business. Indulges in unfair trade practices. 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 in which the application for renewal of certificate is required to be made. Does not cooperate in any inquiry conducted by the Authority. or Rs. 16 B Renewal of Registration An insurer.

BPOs. power. New Delhi.Foreign Direct Investment in Insurance Sector in India 209 IV MANNER OF CALCULATION OF TWENTY SIX PERCENT EQUITY CAPITAL HELD BY A FOREIGN COMPANY Regulation 11 of Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations. 2000 states that calculation of the holding of equity shares by a foreign company either by itself or through its subsidiary companies or its nominees referred to as foreign investor) in the applicant company. K. this is much lower. 19 See Regulation 11 of Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations. 2002.S. other than the foreign promoters of the applicant and their subsidiaries and nominees. pharmaceuticals. overseas corporate bodies and multinational agencies in the applicant company. the quantum of paid up equity share capital held by other foreign investors.N. hotel and tourism where FDI up to 100% is allowed. account need not be taken of the holdings of equity in an Indian promoter company held by foreign institutional investors. But compared to other sectors like call centers. 2000. V FDI IN INSURANCE: HOW MUCH TO CAP A CRITICAL APPRAISAL In India. non-resident Indians. . FDI in insurance sector is allowed up to 26 % at the present.19 For purposes of calculation referred to above. 4th Edition. See Also Murthy. and the quantum represented by that proportion of the paid up equity share capital to the total issued equity capital of an Indian promoter company mentioned in sub-clause (i) of clause (g) of regulation 2 held or controlled by the category of persons mentioned in the two clauses above. shall be made as under and shall be aggregate of: ƒ ƒ ƒ the quantum of paid up equity share capital held by the foreign company either by itself or through its subsidiary companies or nominees in the applicant company. regulations or guidelines issued from time to time. “Modern Law of Insurance”. LexisNexis Butterworths. and Indian mutual funds to the extent the investment of foreign institutional investors and Indian mutual funds are within the approved limits laid down by the Securities and Exchange Board of India under its rules.

22 Another development. Ibid. "Raising the FDI cap will give confidence to foreign investors to do business on a scale that is not restrictive. The common 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. "We have contingency plans in place but in a worst-case scenario. as the insurance industry considers whether or not the FDI cap in the insurance sector will actually be raised. is the acute shortage of domestic partners which can invest 74% of the initial capital of $22. He admits that growth at Aviva could suffer. His view is shared by a number of global chiefs who have of late visited India and met the regulator. .com/money/2004/dec/02spec1. bring in the necessary IT and expertise.org/resource_file/11210p1343-47. which is adding to the discomfort to foreign players. 2008 at 4:32 pm.7 million. country head." says Aviva's Scott. 20 It is the smaller players who are eager for a hike in the FDI cap. Indian corporate chiefs like Deepak Parekh and Rahul Bajaj are keen to dilute their holding in their respective insurance joint ventures. 2008 at 2:45am.rediff. "There are many more choices for us globally to deploy capital where we can best achieve the interest of shareholders.icai. Aviva is a 26:74 joint venture with the Dabur group.pdf on September 3rd. The overseas partners are prepared to pay high premium from the day one to the domestic partner and if it is ready to pull out of the existing partner the valuation stake is still higher. 20 21 22 Says Bajaj: "I do not support FDI beyond 49 per cent as I want control." says Sunil Mehta. At the same time. group executive director. stating that Housing Development Finance Corporation is bound to its foreign partners to sell up to 49 per cent. Ibid.210 MqJBL (2009) Vol 6 A General Overview of the Problem There are sub-plots within the main story. and Chubb for the non-life entity. See Also Transformation of Insurance in India." Bajaj Auto has two insurance joint ventures in partnership with Allianz. Freny “Insurance and the fight for FDI” Accessed from http://www. This shortage of domestic players has increased the valuation of the stakes to be hold by domestic players. Aviva Plc. when they can have only 26 per cent stake. points out Philip G Scott. There is some hesitancy among international investors who have a limited appetite to invest in equity capital. they want to maintain their majority stakes." he adds. Accessed from http://www. is that the industry is as divided as the political parties.htm on 7th September. The reality. HDFC has signed MoUs with Standard Life for the life insurance venture. The current FDI limit will restrict the growth of private insurance players because a sizeable working capital is required. AIG. Parekh shares a similar view. See Patel. 21 Foreign partners are equally keen to increase their share in insurance joint ventures to make current investments worthwhile. however. business will need to grow much more slowly if FDI is not raised.

ICICI’s plan on FDI." says Shikha Sharma.investorideas. Dr. "else both the shareholders will need to bring down their respective holding to 26 per cent.India lures major investors.htm on 7th September. The Indian government has estimated this point to be 51%.com/IiI/News/062106. chairman of Insurance Regulatory and Development Authority. Patel. C S Rao. 2008 at 2:45 am. floods. . Prudential Plc. The nationalized companies did contribute to the spread of insurance beyond the metropolitan areas 23 24 25 Pai. 2008 at 3:06am. as the main problem with this policy decision is that it is difficult to separate the costs and benefits of FDI versus those of increased FDI. Accessed from http://economictimes.com/money/2004/dec/02spec1. 2008 at 2:45am. I cannot see Indian promoters diluting at par after having put in the majority of funds in the beginning when the venture was taking off. thus placing the cap at 49%. Uday Lal.asp on 1st September. has beefed up plans to hike its stake in ICICI Prudential Life Insurance Company.Foreign Direct Investment in Insurance Sector in India 211 This is also luring the domestic players to look for a new partner. Describing all the impacts of a potential lifting of the cap is rather tricky. “Insurance Sector." The IRDA Act had not visualized foreign holding rising from the current 26 per cent to 49 per cent.rediff. the foreign joint venture partner of ICICI. managing director. At the moment. India Inc hopes to make a killing when it sells its stakes to foreign partners. even if it is at a premium.24 At the same time. ICICI Prudential Life Insurance Company. The insurance market is developing in the region only now and it has to be nurtured carefully. low insurance density with hardly any insurance protection against natural calamities like droughts. Foreign partners have already indicated their keenness to raise their stakes. B Problems of Raising the Capt to 49%. "Dilution of shareholding will be at a premium. Accessed from http://www.cms on 3rd September. This means that while Indian promoters would end up holding 26 per cent according to the IRDA Act. Freny “Insurance and the fight for FDI” Accessed from http://www. Their concern follows the Insurance Act dictating the dilution of Indian promoters' stake in favor of the general public.25 C Issue of Penetration of Insurance Markets to All Regions The insurers of India address issues of poor insurance penetration.com/ICICIs_FDI_plan_on_firmer_wicket/articleshow/217 2123.23 There is a "tipping-point" where the domestic industry loses economic control of the sector and that is where the cap should be placed.”. foreign partners will have an upper hand in the 10th year of operation. their foreign counterpart could have a higher stake of 49 per cent.indiatimes. hurricanes and earthquakes. Indian promoters are apprehensive that should FDI be raised. says in response to industry's apprehensions that the clause would necessarily be amended.

org/ on 6th September. The nationalized insurance companies could barely unearth the vast potential of the Indian population since the policies lacked flexibility and the Indian life insurance products were not linked to the contemporary investment avenues. It has a large middle class with high household savings rates and disposable incomes. 2008 at 3:06am.2% during 90s.”. http://www. a huge gap between the potential available and its exploitation. As per experts. Dr. rural sector can become a prominent contributor in the overall growth of the insurance industry in India. 2000.5% in UK. the insurance market was opened up to the private sector with limited exposure to foreign equity. . provided the needs & occupational structure of people living in villages is understood.8% and G-7 average of 9. lower price for insurance cover and adequate level of service. the insurance companies.asp on 1st September.(The last annual report prepared by IRDA is of 2006-07 which has been used in the project and the regulatory body is yet to come out with the annual reports of 2007-08) For instance. The size of the family is shrinking and this section of the population is looking at opportunities for obtaining appropriate risk cover coupled with maximization of returns on their investments. In the Indian context.irdaindia.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. “Insurance SectorIndia lures major investors. and antiquated procedures. there are various other requirements of the farmers that need to be looked after by the insurance companies. however. apart from covering risk are also committed to repayment of the principal with interest although with long maturities and thereby tend to act as investment funds.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-term maturities all over the world. The insurance premium as a percentage of savings in India is 5. particularly in life insurance. There was.investorideas. In the absence of competition the consumer didn’t benefit in terms of wider choice. Accessed from http://www. Accessed from the official website of Insurance Regulatory and Development Authority. One of the reasons that this has happened is that the average premium charged by the insurance companies in India tends to be relatively high due to obsolete and rigid actuarial practices and 26 27 IRDA Annual Reports 2006-07. Indian economy. however. The insurance premium in India accounted for a mere 2 per cent of GDP as against the world average of 7. India is a nation of a billion people and is one of the fastest growing economies. See Pai. inadequate infrastructure.com/IiI/News/062106. offers enormous growth opportunities for the insurance sector. various crops that are comparatively expensive need to be covered under crop insurance schemes. Uday Lal. The public sector companies had numerous problems such as over-staffing. 2008 at 9:26 pm.95% as compared to 52. predominantly an agrarian economy. With the adoption of the Insurance Regulatory and Development Authority (IRDA) Act in April.212 MqJBL (2009) Vol 6 and succeeded in popularizing the concept in rural and semi-urban areas. Also.

Also. which is the need of the hour. 2008 at 2:20 am. Real estate for one. FDI in insurance would increase the penetration 28 Sarkar. With the kind of brand recognition.Foreign Direct Investment in Insurance Sector in India 213 inefficient operations. But that is not the reason why I say that increasing the FDI in insurance only would affect a lot of other Industries in a positive way.doc on 29th August. we could even wait out a little longer on the FDI caps in other sectors. LIC is already big enough that it shouldn't be scared of competition. the insurance sector in India has shown rapid expansion over the past few years. Infrastructure or the lack of it has been the brake. it shouldn't really be a big deal. . although there are distributional impacts to be considered. Accessed from http://planningcommission. and that we could even do without the FDI in many other sectors for sometime. The main concerns with this liberalization are political rather than purely economic in nature. By increasing the FDI in Insurance. Growing steadily. “Planning Commission Report on Vision 2020 for India for the Financial Sector”. E Should the FDI Limit be Increased The opening up of the cap on FDI investment in India from 26 to 49% has been discussed and re-discussed. the insurance sector in India is one of the most talked of sectors amongst the foreign investors. that would take care of the year's FDI target of the country in one go. There is pressing need to reorient the insurance sector in a manner that it fulfills its principal mandate of providing risk cover. We already have a strong regulatory body and there are big Insurance companies already knocking at our doors. which have hindered the leap of the Indian Economy. The opening up of the insurance sector to private participation. but every industry leader would crib at the infrastructure bottlenecks that they have face everyday in their effort for growth. Indian Economy has come a long way. By only Increasing the FDI in Insurance.nic. including banks in August 2000 has been able to instill an element of competition which in turn is promoting efficiency and professionalism and enhancing consumer choice through product innovation. In my opinion increasing the FDI limit would be an appropriate measure which would be in the interest of the country. penetration and trust that LIC commands in India. Increasing demand of consumer and industrial products and services plus elimination of a few of the trade and investment barriers have been the main drivers behind the exponential growth of the insurance sector in India. Traversing a full circle.in/reports/genrep /bkpap2020/20_bg2020. from a liberal competitive market to nationalization and then back to liberalization. Rohit. Despite shortcomings. 28 In my opinion India is hungry for Long term capital needs to fund the building of infrastructures. Numerous opportunities are available in this sector for both domestic as well as international players.

The hiking of the cap will introduce more players into the market and this would increase consumer surplus significantly. The advent of competition has ensured that consumer needs are catered to. and most firms are relying on FDI to provide the required capital. better product innovation. whereas renewal premium accounted for the remaining. First year premium including single premium recorded a growth of 94. driven by a significant jump in the unit-linked business. private sector players in the insurance markets are now beginning to look at savings-linked and pure risk policies in order to diversify their markets.78 per cent in 2005-06. say for around 30 years. and facilitates mobility of long-term capital flows into the destination economy. where the penetration of Insurance is abysmally low with insurance premium at about 3% of GDP against about 8% global average. First year premium including single premium accounted for 48. unit linked insurance. The premium underwritten in India and abroad by life insurers in 2006-07 has grown by 47. and measures like banccassurance. very controversial. These are capital intensive ventures. By more investment in the investment sector. Thus. the perception of insurance has changed from just a practice of "risk reduction" to a method of short term profit-oriented investment. It is to be remembered that people generally invest for long term in insurance policies. Since 1999. and many consumers view this turn-around as positive. service packages and customer service. Also. Product range and diversity has increased substantially since the opening up of the insurance sector. The entry of a large number of Indian and Foreign private companies in life insurance business has to lead greater choice in terms of products and services. This would be through better marketing effort by MNCs. The impact on the LIC and GIC is again.25 per . which India currently needs very badly.96 per cent in 2006-07 compared to 47. The private life insurers have increased their market share from 14. these two companies have seen a turn-around in their levels of product diversification. a higher FDI cap would lower the entry-level barriers to insurance as well as allow domestic players to recapitalize their firms. India would get adequate supply of long term capitals. FDI has been seen to be beneficial to the recipient nation because of the positive technology spillovers generated. They still retain the largest market share in the sector. From the perspective of the domestic private players. There are huge varieties of both life and non-life insurance policies and packages. consumer education and so on. savings linked insurance and the like are being introduced to great success.94 per cent in 2005-06. the insurance sector has experienced some remarkable changes.214 MqJBL (2009) Vol 6 of Insurance in India. This is particularly applicable in the Indian context as since the industry has been opened up.45 per cent of the total life premium. In the years since the IRDA Act initiated market reforms.38 per cent as against 27. FDI is instrumental in filling the savings-investment gap in developing countries. and now there are specific packages that are tailored to targeted consumer groups.

http://www.79 per cent over the premium collected in 2005-06.48 per cent whereas it declined by 2. Now slowly the private companies by offering better products in a competitive environment have established their market share and even though LIC still is the market leader.87 per cent in the previous year) in underwriting of premium within and outside India whereas eight private sector insurers reported a growth of 61. 30 Even the reinsurance sector looks for opulence with global players like Swiss and Munich Re keen on entering into insurance in India.34 per cent in 2005-06 implying a decline in the market share of the public sector insurers. In 2006-07.72 per cent compared to 26. where in the first 2 years most of the private companies suffered losses and had a very small share of the insurance market.24 per cent. Accessed from the official website of Insurance Regulatory and Development Authority. ƒ ƒ ƒ ƒ 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 the private insurance companies. as the premium collected by LIC in 2006-07 has increased by 40.08 per cent in 2006-07. 2008 at 9:26 pm.51 per cent as against 15.Foreign Direct Investment in Insurance Sector in India 215 cent in 2005-06 to 18.29 The position has now gradually changed after the opening of the insurance sector markets. The market share of private insurers had increased to 34.25 per cent for public insurers.irdaindia.62 per cent in the previous year. it becomes pretty evident that the Government is acting as a roadblock to the economic development of the country by not increasing the cap on FDI in the insurance sector to 49%. This has not affected the growth of LIC. 29 Figures taken from the IRDA Annual Reports 2006-07. In the light of these facts. F Effects of Opening of Insurance Sector to Foreign Investors More job opportunities. the four public sector general insurers had reported a growth of 8. I feel that it is now high time that cap on FDI in the insurance sector should be increased to 49%.18 per cent (6.org/ on 6th September. The number of policies underwritten by the private insurers increased by 51. In the case of general insurers the growth was 21. . but its share is gradually decreasing and private insurers are gaining the confidence of the consumers.

the country can gather enormous investment for infrastructure growth. The general insurance business is predominantly a tariff controlled market. which though by the present provisions of IRDA does not seem to be happening because SEBI would only have control in the listing in the stock markets. With the opening up of the insurance sector. The only deterrent in India is that it has only a single digit billion foreign investment and lags behind other developing countries. While the Authority is in broad agreement with this proposition it would like to exercise caution to ensure that there is no large scale destabilisation of the market in its transition from a tariff to a non-tariff regime. This exercise of amending the legal framework is already on the anvil. The Authority has prepared a schedule for moving to a detariffed regime. nobody takes up insurance unless and until he has had a bad experience. policyholders and investors will be exposed to a wide range of products.216 MqJBL (2009) Vol 6 While it is recognized that the macroeconomic backdrop remains favourable to growth. The need for a higher level of foreign equity participation is recognised and the government has announced its intention to raise the FDI cap to 49 percent from the present level of 26 percent. There has to be a greater flexibility given to the insurers in taking investment decisions and this issue is proposed to be addressed when comprehensive amendments are taken up to revamp the antiquated Insurance Act of 1938. Actually. in India. In a liberalized market. there still remain a few hurdles that we have to cross. The growth of insurance worldwide and its influence on the government action provides a clear indication of the relevance and importance of this sector in the Indian economy. The schedule envisages distinct actions to be taken by the insurers with specific cut off dates for each action so that Authority could review the action taken by insurers before moving from tariff to a de-tariffed scenario. the Authority is conscious of developing local market capacity to withstand the adverse impact of catastrophic perils and would welcome the idea of having more than one reinsurer. There is a demand for abolition of tariffs on the ground that such a step would promote efficiency and better service to the public at a lower cost. Insurance today has moved to the center stage of World economy. Competition can bring in a healthy insurance industry. Also proper guidelines need to be brought out to sanction the role of SEBI when insurance companies list in the stock markets so as to avoid any direct conflicts of SEBI and IRDA. none of the insurance companies are publicly listed and this calls for further strengthening of corporate governance in terms of reporting and disclosure practices in a consistent and transparent manner. . In the area of reinsurance. insurance is far from being considered with due importance. At the present time. However. in India.

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