How Higher Insurance FDI Limit Could Benefit You

NDTV Profit Desk

24 Jul 2014, 12:46 PM IST

The insurance business requires huge capital and higher FDI cap will benefit the sector. "The insurance sector is investment starved. Several segments of the insurance sector need an expansion," Finance Minister Arun Jaitley said while proposing higher FDI limit in the Budget.
If the higher foreign direct investment limit is raised in insurance sector, it could result in inflows of Rs 40,000 crore to Rs 60,000 crore over time, says Ajay Bagga, chairman of OPC Asset Solutions. Amitabh Chaudhry, MD & CEO of HDFC Standard Life Insurance Company, says that in the immediate turn the inflows could be around Rs 20,000 crore.
The Insurance Bill says that management control of insurance companies will be with the Indian companies only. For up to 26 per cent FDI in insurance, the Foreign Investment Promotion Board (FIPB) nod would not be needed but for the 49 per cent limit, the board's approval would be needed.
Life insurance penetration in India is about 3.2 per cent of gross domestic product in terms of total premiums underwritten in a year, much lower than more than 10 per cent in Japan and nearly 6 per cent in Australia. Higher FDI limit could help in deepening the insurance penetration in India.
At the end of Sept 2013, India had 24 life insurers but only 17 of them reported profits in the fiscal year ended March 2013, according to latest data available with the regulator. State-owned Life Insurance Corporation of India controls about 70 per cent of the life insurance business.
Besides entry of more players in the insurance sector, higher FDI could boost job creation in the sector. Higher capital will help insurance companies to tap under-insured markets through better infrastructure and more manpower. Hailing the Budget announcement to raise the FDI cap in insurance, Insurance Regulatory and Development Authority member had earlier said that more players will come and existing players will be strengthened, besides creating more jobs.
The higher FDI limit in insurance would also be beneficial for the pension sector. The Pension Fund Regulatory Development Authority (PFRDA) Bill ties the FDI limit in pension sector to that of the insurance sector. If the pension bill is also passed, then the FDI limit could be at 49 per cent. This means 49 per cent ownership by foreign companies in domestic businesses selling pension plans.
Typically investors invest in insurance and pension products on a long-term basis and this money could help fund infrastructure projects, which requires long-term funding. The Reserve Bank of India had recently allowed banks to raise 7-year bonds to fund infrastructure projects.
The proposal to raise FDI cap in insurance has been pending since 2008 when the previous Congress-led UPA (United Progressive Alliance) government came up with Insurance Laws (Amendment) Bill to hike foreign holding in insurance joint ventures to 49 per cent. The BJP had earlier opposed raising the FDI cap in the insurance sector from 26 per cent to 49 per cent.
The insurance sector was opened up to the private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority (IRDA) Act, 1999. (With Agency Inputs)