Irdai may go for 100% FDI in 'new' insurance biz to expand scope of sector

The insurance regulator may allow 100 per cent foreign direct investment (FDI) in new lines of insurance business to expand the scope of the sector. At present, the upper limit for FDI is 74 per cent into companies that write insurance cover.

For insurance intermediaries, like brokerages and others, who bring together customers and insurance firms, 100 per cent foreign investment is allowed.

Speaking at an event of the insurance industry in Mumbai last week, Debasish Panda, the new chairman of the Insurance Regulatory and Development Authority of India (Irdai) said he plans to work on the “creation of a framework to enable new entities enter the insurance market in India with special outreach to global investors for enhancing FDI into the country.”

While Panda did not elaborate, a source interpreted the statement as an option to further expand the presence of foreign capital in the sector, without disturbing existing joint ventures.

Investors from abroad have often complained that they are not able to expand their insurance business in India in their joint ventures. This is because of the limited capital put up by the Indian partners.

Changing the upper cap to 100 per cent for existing players from the current 74 per cent will be difficult, according to industry insiders. But the regulator can identify new types of insurance companies where it can ask the finance ministry to allow free inflow of foreign capital, provided the scope of business is interpreted liberally.

In his address, Panda has given some indication of what these new types of insurance could be. He said the regulator will “facilitate the entry of captive insurers, standalone microinsurers, niche players and regional entities into the insurance space.”

In Budget FY21, Finance Minister Nirmala Sitharaman had announced raising the cap of FDI to 74 per cent for insurance companies with effect from August 2021.

To keep the interests of domestic companies secure, the cap has been raised only gradually over the years, from 26 per cent, to 49 per cent and now 74 per cent. The move was particularly welcomed by the business chambers of the US, where insurance companies have a strong presence.

Praveen Gupta, former managing director & chief executive officer of Raheja QBE, a general insurance company, said, “There is a need to bring in a breath of fresh air to the very rationale of JV so as to expand the scope of insurance penetration in the country.”

The central government hopes that the rise would encourage expansion of the insurance business in the country, especially in semi-rural areas, where the demand is high but the coverage low.

Despite the presence of 24 life insurance companies and 34 non-life companies in India, insurance penetration in the country has risen by only one percentage point in 16 years. It was 2.7 per cent in 2001 and 3.7 per cent in 2017. The global average is 7.33 per cent.

In the current foreign investment rules for the life insurance sector, most of the headroom is not used. Up to March 2019, against the 49 per cent allowed, the aggregate foreign investment was only 35.49 per cent. The utilisation rate of FDI is worse for non-life business, reinsurance, and standalone health insurance companies.  The aggregate space for foreign investment has rather gone down from the level of March 2018, when it was 25.42 per cent, to 23.66 per cent in March 2019.