Govt proposes raising FDI limit in insurance from 74% to 100%

• The Union Finance Ministry on Friday released a consultation paper proposing to raise the Foreign Direct Investment (FDI) limit in the insurance sector from 74 per cent to 100 per cent.

Highlights:

• The Union Finance Ministry has proposed raising the Foreign Direct Investment (FDI) limit in the insurance sector from the current 74% to 100%. This is part of a broader initiative to reform the insurance industry and enhance accessibility, affordability, and efficiency in the sector.

Key Aspects of the Proposal

Increase in FDI Limit:

• The proposed amendment will allow 100% foreign ownership of Indian insurance companies, a significant shift from the 74% limit established in February 2021. This move aims to attract substantial foreign capital and foster the sector’s growth.

Net Owned Funds Requirement:

• The proposal suggests reducing the Net Owned Funds requirement for foreign reinsurers from ₹5,000 crore to ₹1,000 crore, making it easier for global players to enter the Indian market.

Capital Requirements for Special Cases:

• IRDAI will be empowered to specify lower entry capital requirements (not less than ₹50 crore) for insurers targeting underserved or unserved market segments.

Broadening Business Scope:

• Insurers may be allowed to engage in multiple insurance-related activities under a single license, simplifying regulatory processes and promoting diversification.

Rationale Behind the Proposal

• The move aligns with the “Insurance for All by 2047” vision, which seeks to expand insurance coverage across India. According to IRDAI Chairman Debasish Panda, the insurance sector needs approximately ₹50,000 crore annually to double insurance penetration. This significant capital infusion is expected to come from increased foreign investment.

Current Insurance Penetration

• India’s insurance penetration remains low compared to global standards:
  • Overall penetration stood at 4% of GDP in FY23, down from 4.2% in FY22.
  • Life insurance penetration declined from 3.2% to 3% during the same period.
  • Non-life insurance penetration remained flat at 1%.
• These figures underscore the need for higher investment and innovation in the sector to improve accessibility and reach.

Industry Composition

• The Indian insurance sector currently includes:
  • 25 life insurers, including the state-run Life Insurance Corporation of India (LIC).
  • 34 general insurers, catering to non-life insurance needs.

Potential Implications

• Increased Foreign Capital:
  • Full foreign ownership could attract global insurers, bringing in much-needed funds and expertise to modernize the sector.
• Greater Competition:
  • Enhanced competition may lead to better insurance products and services, benefiting consumers.
• Enhanced Infrastructure:
  • A reduced Net Owned Funds requirement for reinsurers and lower capital requirements for underserved markets could improve insurance penetration, particularly in rural areas.

Concerns and Challenges:

• Over-reliance on foreign capital may raise regulatory and national interest concerns.
• The competitive landscape might challenge domestic players to keep pace with global firms.

Prelims Takeaways

• Foreign Direct Investment (FDI)
• Insurance Regulatory and Development Authority (IRDAI)