Insuring Adequately
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The Indian insurance industry is the most restricted globally (139% more restrictions than the global average). Thus, opening up of FDI in the insurance sector may bring India at par with global standards


Prasoon Sharma

As per International comparison of insurance penetration, 66% of Indians are still not adequately insured (Figure1). Foreign Insurance providers are keen to invest in the Indian insurance market. But, foreign investment happens when both investor and beneficiary thinks that this investment will be beneficial and better than other offers (Hindley & Smith, 1984). Another argument submitted in favour of removing FDI cap is to relieve the financial burden on domestic operators by sharing the load with foreign insurers especially in the pension and saving sector. In the current scenario, opening up the insurance sector may contribute to make India a $5 trillion economy.

Indian Insurance Market Snapshot

The Indian insurance sector is booming with massive growth potential and has become considerably important with its significant contribution of 3.69 % in nations GDP (IBEF, 2019). The Indian insurance industry is likely to touch US$ 280 billion by 2020.(IBEF, 2019) It is predicted that in the next 3 to 5 years, life insurance would grow by 12-15 % annually (IBEF, 2019). The rapidly growing segments observed US$ 94.48 billion of gross premiums in FY18(IBEF, 2019). The contribution from life insurance and non-life was US$ 71.1 billion and US$ 23.38 billion respectively (IBEF, 2019). The industry is progressing with the growing participation of private companies. Till FY19, the market share of private players has reached to 54.68 % in life and 33.74 % in the non-life segment(IBEF, 2019). But the industry is not limited to life and non-life segments. The crop insurance is showing a progressive growth of 7.63 % every year (IBEF, 2019). With Pradhan Manti Suraksha Bima Yojna (PMSBY) the health sector has reached 130.41 million in 2017-18. And as the automotive industry is growing sharply, the motor insurance is sure to progress.
Apart from the prior stated reasons, there is something more that’s adding advantage to this industry. The insurance industry of India was running as nationalised business till the late ’90s. The Life Insurance Corporation of India had a monopoly over the market. The outcomes of the monopolistic market were visible as limited market penetration and poor service standards. So to safeguard the consumer’s interest, it was ideal for transforming the market from monopolistic to competitive. The waves of reforms were introduced, and an insurance regulatory and development authority of India was constituted in 1999. It was only under the regulations of IRDAI; the insurance industry was opened for foreign players from the year 2000 onwards for company ownership up to 26%. Till recent past, the insurance company could have a stake till 26% through automatic route But to attract FDI’s in December 2014 the government has raised the equity cap to 49%. But despite the government's initiatives of liberalising the insurance sector, a considerable gap between the demand and supply exist. The country is still considered as under-insured in the world, thus leaving a vast scope for industry players to penetrate the untapped market.
The digitisation and growing interest of people towards new products have pushed the demand. The new business premium from FY12-18 has increased by 14.44 % for life and 16.65 % for non-life. The market reach is still low providing an extraordinary opportunity for players. The industry players have vast scope to offer products to low-income groups both in urban and rural India. The Government of India is willing to support existing as well as new entrant by continual reforms in policies. The tax benefits are provided on insurance products. The Insurance Bill has given full control to IRDAI to make a guideline for the sector. With IRDAI sincere attempts of providing clarity, the industry was able to raise US$ 6.7 billion through public issues in 2017.
Under the governance of IRDAI, the insurance industry is divided into life insurance, general insurance, specialised insurers, Standalone Health insurance, Re-insurance and Foreign reinsurers.
The above chart states how the share of private players has notably increased over the years. The reach of the insurance sector has widened by the appearance of a new distribution channel. The tie-up with banks, online distribution, e-commerce majors partnering with companies to offer mobile insurance (Flipkart partnering with Bajaj Allianz) is some of the trends which would help in deeper market penetration.
The private insurance sectors are leaving no stone unturned to make the best use of available opportunities in the Indian Insurance Industry. In January 2019, Turtlemint raised funding of US$ 25 million (IBEF, 2019). HDFD Ergo is in progressive talks to acquire Apollo Munich Health insurance at a valuation of US$ 370.05 million (IBEF, 2019). WestBridge Capital had announced earlier in 2018, its plans of acquiring Star Health and Allied Insurance at an estimated value of US$ 1 billion (IBEF, 2019). Warburg Pincus in June 2018, had invested a growth capital of US$ 104 million in IndiaFirst Life Insurance(IBEF, 2019). In 2017, the industry had witnessed 10 mergers and acquisitions worth US$ 903 million(IBEF, 2019). Also, IRDAI permitted private equity investors to be promoters in unlisted insurance companies.

Indian Regulatory Framework

The Insurance Regulatory and Development Authority of India (IRDAI) regulates the insurance sector in India. To safeguard the interest of the domestic insurance companies and citizens, IRDAI has set specific guidelines for Foreign Direct Investment (FDI). The foreign investor could not hold the equity of more than 49 % in any Indian insurance company(DIPP, 2017). The investment of up to 49 % of the total paid-up equity is permitted on the ordered route subject to verification by IRDAI. All foreign investments in this industry shall comply with the provisions of the Insurance Act, 1938. All the companies that receive FDI shall have the necessary approval from IRDAI for commissioning insurance and related activities. As per the regulations, the ownership and control of the insurance company shall remain in the hands of the Indian residents(DIPP, 2017). The foreign portfolio investments shall be administered by the Regulations of Foreign Exchange Management Act (FEMA), 2000 and Securities and Exchange Board of India (SEBI) ’s (Foreign Investors) Regulations, 2014.(DIPP, 2017)
Any increase in the foreign investment shall be in unity with the pricing guidelines of Reserve Bank of India (RBI) under the FEMA regulations. The equity investment cap of 49 % applies to insurance intermediaries.(DIPP, 2017)
As per OECD, the Indian insurance industry is the most restricted globally (139% more restrictions than the global average).(Nordås et al., 2017). Thus, opening up of FDI in the insurance sector may bring India at par with global standards.
The writer is the Pentland-Churchill fellow for Global Public Policy leadership at New York University (NYU) and University College London (UCL). This is a snippet of his research work at NYU and UCL.The writer is also mentoring a President Awardee startup (Nanotechnology-based) and AI-Blockchain based startup (cross border investment platform)