Insurance Regulatory and Development Authority of India recommendation to increase the share of foreign investment in the insurance business to 74 percent is likely to potential relief to a sector that has long craved capital and been hobbled by tight regulations.
Insurance Regulatory and Development Authority of India (IRDAI) has recommended increasing the share of foreign investment allowed in the Rs 5.5 trillion insurance business to 74 percent, providing potential relief to a sector that has long craved capital and been hobbled by tight regulations.
Currently, foreign direct investment (FDI) in insurance is capped at 49 percent under the automatic route. IRDAI has recommended the increased FDI through the automatic route as well, said people familiar with the matter.
Insurance in India is a tough business, long gnawed by rampant losses, frequent changes in rules, and a sharp slowdown in growth. Opening up the business could potentially attract investors, providing funds to a capital-intensive market and deepen it with more reach through more intermediaries and new products.
Insurance in India — life and general combined — is only 3.69 percent of the gross domestic product (as on 2017) in terms of the premiums underwritten in a year.
IRDAI, the sector’s watchdog, has stopped short of presenting its views on whether the management control would stay with the Indian or foreign partner in a situation where the foreign partner increases its stake in an insurance company to 74 percent. It has left that decision to the government, said the persons quoted above, requesting anonymity.
The rationale behind raising the FDI limit in insurance could be to attract long-term fresh capital to the sector, according to some industry insiders CNBC-TV18 spoke to. This became pertinent after Indian promoters have been reluctant to bring in fresh capital, they said.
The government will have to amend the Insurance Act, alter provisions pertaining to Indian ownership and monitor the solvency of foreign firms to facilitate the 74 percent investment limit. Finance minister Nirmala Sitharaman, in the Union Budget for fiscal 2020, had said the government will examine suggestions of opening up FDI further in insurance in consultation with all stakeholders.
IRDAI officials told CNBC-TV18 that the decision to increase the FDI limit in insurance to 74 percent could come before the 2021 Union Budget.
Foreign investment in insurance intermediaries was increased to help foreign brokerages buy into Indian companies and deepen the market with new products and technology. The idea was to bring in global products, practices, and sales strategies to India’s insurance market.
In 2015, the government increased FDI in insurance sector to 49 percent from 26 percent through the automatic route. The change in FDI limit would cover insurance broking, insurance companies, third party administrators, surveyors, and loss assessors. The increase in FDI limit attracted many overseas investors who increased their stakes in Indian insurance joint ventures.
The government had sought the opinion of IRDAI on the proposal to increase FDI limit. IRDAI launched an industry-wide consultation to gather the views of all stakeholders.