New Delhi: Paving the way for higher foreign direct investment (FDI) in the insurance industry, the Rajya Sabha Thursday passed the insurance amendment bill to permit 74 per cent FDI in insurance companies as against the existing cap of 49 per cent.
ThePrint explains what the significance of such a move is and what it means for insurance companies, Indian promoters and the policy holders.
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 per cent. After that, for a long time, there were demands from the industry to further increase this cap to 49 per cent. During the Congress-led United Progressive Alliance government, then finance minister P. Chidambaram proposed raising the cap to 49 per cent. However, the proposal was dropped after it was opposed by political parties including the BJP. The cap was eventually raised to 49 per cent 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. 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.
This will give a foreign company the right to appoint a majority of directors, control the management and the policy decisions taken.
The move is expected to increase India’s insurance penetration or premiums as a percentage of GDP, which is currently only 3.76 per cent, as against a global average of more than 7 per cent.
Also read: Why Modi govt is expected to struggle to sell stakes in 2 listed insurance companies
What this means for Indian insurance 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 insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), mandates that insurers should maintain a solvency ratio of at least 150 per cent. 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 per cent could see more interest from foreign insurance companies who specialise in this business and who bring the so-called ‘patient’ capital.
How this impacts Indian promoters of insurance companies
Most of the Indian promoters of insurance companies are either Indian business houses or financial institutions like banks. Many entered into the insurance space when they were financially strong but are now struggling to cater to the constant need to infuse capital into their insurance joint ventures. Over the years, the sector has seen large scale consolidation and exits of many promoters.
A higher FDI cap will mean that more promoters could now completely exit or bring down their stakes in their insurance joint ventures. It will also provide a reprieve to many state-owned banks who are dependent on the government to meet their own regulatory capital requirement and are being discouraged from putting more money into what is considered as a ‘non-core’ business.
What 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 experience.
Safeguards in place to protect policyholders
The government has announced several safeguards to protect policyholders’ money.
The majority of the directors in the board and key management persons will need to be resident Indians so that they are accountable to Indian laws and courts.
In addition, the government will prescribe a specific percentage of the profits that will have to be treated as general reserve. This will ensure that reserves will be available to meet the claims of policy holders regardless of a foreign investors’ own financial condition, Finance Minister Nirmala Sitharaman said Thursday in her reply to the debate on the bill in Rajya Sabha. It will also mean that the government will ensure that only a part of the profit can be repatriated to the foreign promoter and there is sufficient money available with the insurance company to pay every claim.
This clause has been put in place keeping in mind the 2008 global financial crisis where many global insurance giants faced severe stress due to their investments and were forced to withdraw from many of the Asian and European markets due to shortage of capital.
The government has also reiterated that the provision of Section 27E of the insurance act will continue to be applicable. This means that no insurance company, irrespective of its foreign shareholding, can directly or indirectly invest the money of the policy holders outside India.
The insurance companies will also have to ensure that 50 per cent of the directors are independent directors so that insurance companies follow all Indian laws.
(Edited by Manasa Mohan)
Also read: Health insurance coverage grew 69.8% in April-Sept, firms say pandemic increased awareness
It seems the author is innocent of basic economic ideas, or he trusts that we are. I suggest that one or two people associated with The Print acquaint themselves with the ideas of Michael Hudson, a main advisor to China. Paul Craig Roberts, President Ronald Reagan’s economic advisor calls Hudson the world’s leading economist. Hudson does a lot of writing for an intelligent general audience. See Michael-Hudson.org.
Modern Monetary Theory (MMT), of which Hudson is the chief exponent, emphasises the freedom of sovereign states in issuing debt-free money to support capital projects. That does not lead to trouble. But borrowing foreign funds in foreign currency is risky and not at all called for. What does an Indian insurance company need dollars for? Foreign rentiers have run out of schemes at home for a free lunch. Developing countries are their best bet. And nothing like insurance for controlling a country’s finances. And the Modi government is entirely at the service of this globalist class. The policy behind the article is less than worthy in intent.