Foreign direct investment is an investment made by a company or entity based in one country, into a company or entity based in another country. The investing company may make its overseas investment in a number of ways – either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture.
There are various sectors in India where FDI is capped and insurance is one of them. The insurance sector in India can be divided into 2 phases. The first phase was pre 1999 when there were only two public sector companies namely LIC and GIC operating in India. The following year FDI in insurance was introduced at 26 % which led to inception of various insurance companies and after the recent approvals, the number today stands at a healthy forty nine. The insurance sector has now gone through two clear cycles – the first of very high growth (CAGR of over 12 per cent in number of new policies between 2000-10) and then one of substantive moderation (CAGR of over 9 per cent between 2010-12). Despite this, long-term growth prospects for the industry remain intact.
There are several factors which highlight that India insurance sector has a lot of potential. They are-
- Low penetration levels – only two million people (0.2% of the total population of 1 billion) are covered under Mediclaim, whereas in developed nations like USA about 75% of the total population are covered under some insurance scheme.
- Untapped potential- the potential that the Indian market possesses has not been fully tapped which provides lot of room for growth.
- Recent regulatory developments that govern the current market state:The development of the insurance industry in India is likely to be critically dependent on the nature and quality of regulation. The recent increase in the FDI limit to 49% will give impetus to the industry. The new Bancassurance regulations have also ensured that banks can tie up with insurance companies to provide services.
- Rise in young people population – the number of working Indian middle class is on the rise and therefore the prospects of insurance are bright because the awareness levels of this category of consumers is very high.
However to tap the potential that in Indian insurance sector has the following points need to kept in mind –
- Channelizing industry focus– In meeting the significant potential, the industry has an increased role and responsibility. Three areas of focus could be — a) product innovation matching the risk profile of the policy holders b) reengineering the distribution and more significantly c) making sales and marketing more responsible and answerable
- Distribution– Distribution channels evolved in response to market dynamics and changing consumer preferences. The alignment of economic incentives with distribution dynamics should be driven by market forces rather than regulatory intervention.
- Regulation– The industry should be given time to adjust to regulatory changes in a phased manner aligned with a regulatory impact assessment. Regulations need to drive transparency and simplification of products and services.
- Transparency – one problem that the Indian insurance industry is facing is the lack of transparency. The customers in many case feel cheated and that is proven by the number of complains in the consumer courts pertaining to insurance.
- E insurance – IRDA launched ‘Insurance Repository’ services in India. It is a unique concept and first to be introduced in India. This system enables policy holders to buy and keep insurance policies in dematerialized or electronic form. This initiative needs to be strengthened more.
The increase in FDI cap will lead to a cash inflow in the range of $8-$10 billion in the next five years. It will provide the much needed capital that this sector has been craving for which has led to the stagnation. An increase in foreign investment limits for insurance companies would translate into higher limits for pension as well as other insurance intermediaries as well. India’s insurable population is projected to touch 75 crore in 2020, with life expectancy reaching 74 years hence increase in cap of FDI is a move in the right direction which will enable the sector to provide services to such a large population.
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