- Government approved promulgation of an Ordinance to hike Foreign Direct Investment (FDI) cap in the insurance sector to 49 per cent from 26 per cent, as the legislation could not be passed in the Parliament session.
- The 49 per cent cap would include both FDI and foreign portfolio investments.
- The proposed hike in foreign investment limit to 49 per cent in the insurance sector has potential to attract up to USD 7-8 billion (about Rs 50,000 crore) from overseas investors, giving a major boost to the segment.
- The total capital deployed in the private life insurance sector is close to Rs 35,000 crore. At FDI at 26 per cent, foreign equity is close to Rs 8,700 crore.
Let us Analyse the Pro and Cons of FDI in insurance
- It will provide additional source of finance for insurance companies.
- The foreign currency infusion will help India better it's Current Account Deficit and Balance of Payments.
- It will promote development of insurance sector by bringing in more products & features in this sector, by way of sharing knowledge with foreign investors.
- Insurance companies funded by FDI may have lower cost of capital and better operating efficiency thus resulting in cheaper and better cover to end consumers.
- FDI in Insurance will introduce more competition in this market which will improve the services of the existing players also.
- We have seen in the past as well, competition teaches new strategies, better management and more focus on customer satisfaction. So, this would ultimately benefit the customers.
- Higher stake holding by foreigners would mean higher foreign control on the insurance company, thus runs a risk of having some decisions which are not in the best interest of domestic consumers.
- Foreign Direct Investment is money put in to our country by financial institutions or individuals of another country, and thus some or most of the profit made would at some point move outside our country and invested or spent in another country or home country.
- Different countries have different regulations in insurance sector, Government may need to relax some regulations in order to encourage FDI which may not always be in best interest of the country.
- Non FDI funded domestic insurance companies may have higher cost of capital and they would need to find ways of competing with lower premium offered by FDI funded insurance companies.
- There are already a lot of players in the insurance field which means that the competition already exists and services are quite good. LIC is one of the best companies in insurance sector offering one of the best and quickest settlements to the customers. Not much of competition is desied in this field.
- If the government is worried about the customers, it should make the laws stronger to ensure that the customers do get their deserved and promised benefits.
Does India need FDI in Insurance?
FM Arun Jaitley came up with the new proposal of increasing the FDI limit to 49% from 26% in the insurance sector. It is an encouraging move as the finance minister has presented the proposal with an additional rider where the management and controlling power will stay with the Indian partner company. So, it eliminates the risk of foreign companies getting the control over the sector.
In the competitive industry, it has become really tough for the Indian promoters to invest the additional capital in the sector. And investment is must for higher growth.
- The increase in FDI limit will solve the problem. It will allow the industry to have additional investment capital of Rs 7,800 crores.
- Another significant factor is the investment will come through the Foreign Investment Promotion Board (PFIPB) route.
- The increase in FDI cap will attract the investment capital from foreign promoters.
- The increase in FDI limit in retail posed the threat to the existing small and mid-sized companies. But it is an entirely different story in insurance sector.
- The step will help the small and middle-level companies. It will pave way for new products, better structure, effective customer service mechanism and a deeper insurance penetration in India especially in the rural markets.
- The hike can be said the start of better days for the insurance industry.
- There are always pros and cons of each decision, FDI will increase competition and basis economics would suggest that when the supply increases as compared to demand the prices will come down, thus benefiting the end customers.
- The insurance sector in India is still under developed as compared to developed countries, and despite private players now allowed to enter this sector, we only have a small number of providers.
- FDI would increase the number of insurance companies and may also make possible better plans at lower prices. But careful consideration is required to ensure that the investment stays for long term and does not get withdrawn, leaving the companies and their domestic customers in a miserable position, and not all profits are moved outside the country but some reinvested or spent in our country.
- Regulations need to be revisited to ensure that Insurance Companies are subject to relevant and strict governance.