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

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

insurance has a deep-rooted history. In 1938. This was probably a pre-cursor to modern day insurance. Insurance in India has evolved over time heavily drawing from other countries. 4th Edition. There were also allegations of unfair trade practices. 16 non-Indian insurers as also 75 provident societies— 245 Indian and foreign insurers in all. however. The Government of India.8 6 7 8 Available in the Official Website of Insurance Regulatory and developmental Authority. The LIC absorbed 154 Indian. 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. In 1928.7 C The Nationalized Era The Insurance Amendment Act of 1950 abolished Principal Agencies. “Regulatory Dissonance and Challenges to Globalization: A Comparative Study of the United States and Indian Non-life Insurance Regulatory Frameworks”. 2002. 582-595. 1938 with comprehensive provisions for effective control over the activities of insurers. 1870 saw the enactment of the British Insurance Act. The Indian Life Assurance Companies Act. “Modern Law of Insurance”. This era. was dominated by foreign insurance offices which did good business in India. Vol. epidemics and famine. the earlier legislation was consolidated and amended by the Insurance Act. 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.Foreign Direct Investment in Insurance Sector in India 205 A Ancient India In India. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. 2008 at 4:40pm. K.org/ on 6th September. there were a large number of insurance companies and the level of competition was high. Accessed from http://www. New Delhi.S. floods. Raman. The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire. This Company however failed in 1834. Veena. with a view to protecting the interest of the Insurance public. 1912 was the first statutory measure to regulate life business. pp. Geneva Papers on Risk and Insurance: Issues and Practice.N. England in particular. 29. No. 3. therefore. It finds mention in the writings of Manu (Manusmrithi ). LexisNexis Butterworths. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. decided to nationalize insurance business. 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. . July 2004 Murthy. Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ).irdaindia. An Ordinance was issued on 19th January. However.

In 1993. Raka. Hereinafter Referred to as IRDA. the Government set up a committee under the chairmanship of RN Malhotra.org/ on 6th September. 2008 at 3:31am. The IRDA opened up the market in August 2000 with the invitation for application for registrations.com/Liberalisation. Bhattacharya. In December. among other things. They stated that foreign companies be allowed to enter by floating Indian companies.irda.irdaindia. 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. 11 Today there are a number of private sector insurance companies. 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. . 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. it recommended that the private sector be permitted to enter the insurance industry. Parliament passed a bill de-linking the four subsidiaries from GIC in July. in 1999.” Opening Up Of Insurance Sector – 1999 The Insurance Regulatory And Development Authority” Accessed from http://www. 2000. 2008 at 4:40pm. the Insurance Regulatory and Development Authority10 was constituted as an autonomous body to regulate and develop the insurance industry.9 Following the recommendations of the Malhotra Committee report. Foreign companies were allowed ownership of up to 26%. 2002. The committee submitted its report in 1994 wherein. to propose recommendations for reforms in the insurance sector.indiainsuranceresearch.php on 27th August.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. preferably a joint venture with Indian partners. Accessed from http://www. former Governor of RBI.org 9 10 11 Available in the Official Website of Insurance Regulatory and developmental Authority.

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. and that his previous application has not been rejected in the previous five financial years. 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. The order rejecting the application must be communicated to him by the Authority within 30 days of such rejection. 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. modify. Separate Regulations are passed by IRDA called the IRDA Registration of Indian Insurance Companies Regulations 2000. 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. and his [previous certificate has not been withdrawn or cancelled and his name contains the words insurance company or assurance company13. the authority gives him an application for registration in form IRDA/R2. 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 1999.14 The applicant on receipt of the rejection order may apply to the Authority within 30 days for reconsideration of its decision. On receipt of application in form IRDA/R2.15 If his application in form IRDA/R2 is accepted. 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. withdraw. 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. 2000 Regulation 5(1) Regulation 8 Regulation 9 . the Authority will furnish him with an application in Form IRDA/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 certificate issued in the beginning will be valid for a year. Indulges in unfair trade practices. 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. the total premium in respect of facultative reinsurance accepted by him in India shall be taken into account. 5 crores. Does not submit periodical returns as required under the Act or by the Authority. 3 of the Act. 27(d) of the Insurance Act. 2000 . instead of the total gross premium written direct in India. to the authority before 31 December each year. and in the case of an insurer solely carrying on reinsurance business.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. shall make an application in form IRDA/R5 for the renewal of the certificate17. 16 B Renewal of Registration An insurer. there shall be an annual renewal. or Rs. 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. Thereafter. who has been granted a certificate under s. 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. 18 16 17 18 Regulation 16 Regulation 20 See Chapter V of Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations. whichever is less. Does not cooperate in any inquiry conducted by the Authority. Indulges in manipulating the 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. Fails to make investment in the infrastructure or social sector specified under sub-s1 (a) of s.

See Also Murthy. pharmaceuticals.N. 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. FDI in insurance sector is allowed up to 26 % at the present. 2002. . 2000.19 For purposes of calculation referred to above. this is much lower.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. other than the foreign promoters of the applicant and their subsidiaries and nominees. “Modern Law of Insurance”. overseas corporate bodies and multinational agencies in the applicant company. regulations or guidelines issued from time to time. 19 See Regulation 11 of Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations. 4th Edition.S. LexisNexis Butterworths. account need not be taken of the holdings of equity in an Indian promoter company held by foreign institutional investors. non-resident Indians. BPOs. K. But compared to other sectors like call centers. V FDI IN INSURANCE: HOW MUCH TO CAP A CRITICAL APPRAISAL In India. 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. power. 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. hotel and tourism where FDI up to 100% is allowed. 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. New Delhi. the quantum of paid up equity share capital held by other foreign investors.

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

indiatimes. chairman of Insurance Regulatory and Development Authority. ICICI’s plan on FDI.India lures major investors. says in response to industry's apprehensions that the clause would necessarily be amended. Accessed from http://economictimes. "Dilution of shareholding will be at a premium. low insurance density with hardly any insurance protection against natural calamities like droughts. Freny “Insurance and the fight for FDI” Accessed from http://www. 2008 at 2:45 am. Accessed from http://www. even if it is at a premium. At the moment. B Problems of Raising the Capt to 49%. 2008 at 3:06am." The IRDA Act had not visualized foreign holding rising from the current 26 per cent to 49 per cent. India Inc hopes to make a killing when it sells its stakes to foreign partners. ICICI Prudential Life Insurance Company. This means that while Indian promoters would end up holding 26 per cent according to the IRDA Act. .com/IiI/News/062106.24 At the same time.htm on 7th September. Prudential Plc.investorideas. managing director. thus placing the cap at 49%.com/money/2004/dec/02spec1. The nationalized companies did contribute to the spread of insurance beyond the metropolitan areas 23 24 25 Pai. The insurance market is developing in the region only now and it has to be nurtured carefully. 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. Uday Lal. "else both the shareholders will need to bring down their respective holding to 26 per cent.asp on 1st September.25 C Issue of Penetration of Insurance Markets to All Regions The insurers of India address issues of poor insurance penetration. Dr. foreign partners will have an upper hand in the 10th year of operation. floods. Indian promoters are apprehensive that should FDI be raised. 2008 at 2:45am. Foreign partners have already indicated their keenness to raise their stakes. C S Rao. Describing all the impacts of a potential lifting of the cap is rather tricky. The Indian government has estimated this point to be 51%. has beefed up plans to hike its stake in ICICI Prudential Life Insurance Company. 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.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. “Insurance Sector.rediff. Their concern follows the Insurance Act dictating the dilution of Indian promoters' stake in favor of the general public. the foreign joint venture partner of ICICI.”." says Shikha Sharma. Patel. hurricanes and earthquakes.cms on 3rd September. their foreign counterpart could have a higher stake of 49 per cent.Foreign Direct Investment in Insurance Sector in India 211 This is also luring the domestic players to look for a new partner.

Also.irdaindia. . various crops that are comparatively expensive need to be covered under crop insurance schemes. the insurance market was opened 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 against the world average of 7. The public sector companies had numerous problems such as over-staffing. 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. a huge gap between the potential available and its exploitation.2% during 90s. 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. Uday Lal.org/ on 6th September. With the adoption of the Insurance Regulatory and Development Authority (IRDA) Act in April.5% in UK. the insurance companies. Dr. however. 2000. As per experts.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. provided the needs & occupational structure of people living in villages is understood. Accessed from http://www. predominantly an agrarian economy.(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. however. Indian economy.95% as compared to 52. there are various other requirements of the farmers that need to be looked after by the insurance companies. offers enormous growth opportunities for the insurance sector. Accessed from the official website of Insurance Regulatory and Development Authority. 2008 at 9:26 pm. and antiquated procedures.212 MqJBL (2009) Vol 6 and succeeded in popularizing the concept in rural and semi-urban areas. 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. particularly in life insurance.”. “Insurance SectorIndia lures major investors.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.investorideas. 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. There was. inadequate infrastructure. See Pai.asp on 1st September. India is a nation of a billion people and is one of the fastest growing economies. The insurance premium as a percentage of savings in India is 5. In the absence of competition the consumer didn’t benefit in terms of wider choice. It has a large middle class with high household savings rates and disposable incomes. http://www. In the Indian context.com/IiI/News/062106. 2008 at 3:06am. lower price for insurance cover and adequate level of service. rural sector can become a prominent contributor in the overall growth of the insurance industry in India.8% and G-7 average of 9.

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

and many consumers view this turn-around as positive.94 per cent in 2005-06. and most firms are relying on FDI to provide the required capital. The impact on the LIC and GIC is again. savings linked insurance and the like are being introduced to great success. Thus. Since 1999. They still retain the largest market share in the sector. There are huge varieties of both life and non-life insurance policies and packages.78 per cent in 2005-06. 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. The private life insurers have increased their market share from 14.38 per cent as against 27. FDI is instrumental in filling the savings-investment gap in developing countries. The hiking of the cap will introduce more players into the market and this would increase consumer surplus significantly. First year premium including single premium recorded a growth of 94. consumer education and so on. The premium underwritten in India and abroad by life insurers in 2006-07 has grown by 47. It is to be remembered that people generally invest for long term in insurance policies. This would be through better marketing effort by MNCs. service packages and customer service. the insurance sector has experienced some remarkable changes. In the years since the IRDA Act initiated market reforms. 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. whereas renewal premium accounted for the remaining. From the perspective of the domestic private players. FDI has been seen to be beneficial to the recipient nation because of the positive technology spillovers generated. very controversial. these two companies have seen a turn-around in their levels of product diversification. driven by a significant jump in the unit-linked business. These are capital intensive ventures. By more investment in the investment sector.25 per . say for around 30 years. better product innovation. a higher FDI cap would lower the entry-level barriers to insurance as well as allow domestic players to recapitalize their firms. Product range and diversity has increased substantially since the opening up of the insurance sector. and measures like banccassurance.96 per cent in 2006-07 compared to 47. Also. and now there are specific packages that are tailored to targeted consumer groups. and facilitates mobility of long-term capital flows into the destination economy. unit linked insurance. This is particularly applicable in the Indian context as since the industry has been opened up. India would get adequate supply of long term capitals.45 per cent of the total life premium. The advent of competition has ensured that consumer needs are catered to.214 MqJBL (2009) Vol 6 of Insurance in India. the perception of insurance has changed from just a practice of "risk reduction" to a method of short term profit-oriented investment. where the penetration of Insurance is abysmally low with insurance premium at about 3% of GDP against about 8% global average. which India currently needs very badly. First year premium including single premium accounted for 48.

29 Figures taken from the IRDA Annual Reports 2006-07.79 per cent over the premium collected in 2005-06.62 per cent in the previous year. 30 Even the reinsurance sector looks for opulence with global players like Swiss and Munich Re keen on entering into insurance in India. http://www. 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.irdaindia. In the light of these facts. The number of policies underwritten by the private insurers increased by 51. 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 61.08 per cent in 2006-07.48 per cent whereas it declined by 2.25 per cent for public insurers. I feel that it is now high time that cap on FDI in the insurance sector should be increased to 49%. . Accessed from the official website of Insurance Regulatory and Development Authority.org/ on 6th September. The market share of private insurers had increased to 34. as the premium collected by LIC in 2006-07 has increased by 40.51 per cent as against 15. 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.24 per cent. where in the first 2 years most of the private companies suffered losses and had a very small share of the insurance market.29 The position has now gradually changed after the opening of the insurance sector markets.72 per cent compared to 26. the four public sector general insurers had reported a growth of 8.34 per cent in 2005-06 implying a decline in the market share of the public sector insurers.Foreign Direct Investment in Insurance Sector in India 215 cent in 2005-06 to 18. F Effects of Opening of Insurance Sector to Foreign Investors More job opportunities. 2008 at 9:26 pm. In 2006-07.18 per cent (6. but its share is gradually decreasing and private insurers are gaining the confidence of the consumers. In the case of general insurers the growth was 21.

the country can gather enormous investment for infrastructure growth. 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. The Authority has prepared a schedule for moving to a detariffed regime. Insurance today has moved to the center stage of World economy.216 MqJBL (2009) Vol 6 While it is recognized that the macroeconomic backdrop remains favourable to growth. 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. With the opening up of the insurance sector. At the present time. 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. in India. in India. 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. The general insurance business is predominantly a tariff controlled market. Actually. This exercise of amending the legal framework is already on the anvil. . In a liberalized market. 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. However. policyholders and investors will be exposed to a wide range of products. The only deterrent in India is that it has only a single digit billion foreign investment and lags behind other developing countries. 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. insurance is far from being considered with due importance. there still remain a few hurdles that we have to cross. 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. Competition can bring in a healthy insurance industry. 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. nobody takes up insurance unless and until he has had a bad experience. In the area of reinsurance. 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.

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