A long overdue but welcome reform

The insurance sector was opened up for private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999. This Act permitted foreign shareholding in insurance companies to the extent of 26% with an aim to provide better insurance coverage and to augment the flow of long-term resources for financing infrastructure.

However, as the companies expanded, their capital requirement also increased. Lack of funds has seriously limited their ability to increase the insurance penetration in the country. India still remained grossly underpenetrated as far as the insurance coverage is concerned with 3.1 per cent compared to 10 per cent in Japan and 7 per cent in Australia.

Insurance premium currently is a measly 3 per cent of the GDP as against the global average of about eight.

In this backdrop, the Centre has approved enhancement of the FDI limit in Insurance sector to 49 from the existing 26 per cent, which was a reform that was long overdue.

Understandably, the decision has evoked mixed reactions from various sections, with the employees of public sector insurance companies being more vocal.

According to IRDA, insurance sector requires big investments for growth and may attract Rs 30,000 crore that the industry requires over the next five years. Unless FDI cap was raised, the industry would not have required capital to underpin the growth of the insurance industry.

Moreover, when 74 per cent FDI is allowed in the banking sector, one hundred per cent in AMCs, a mere 26 per cent in the crucial and critical insurance sector is rather illogical and unjustified.

Currently, there are 24 players in the life insurance industry, including 22 joint ventures with foreign participation to the extent of 26 per cent. Of them, only 17 have reported profit for the year ended 31st March, 2013, as per the data available with the regulator. Life Insurance Corporation of India (LIC) continues to be the major player in the country with about 70 per cent market share in life insurance business.

The benefits of raising FDI

Increased Insurance Penetration– With the population of more than 120 crores, India requires insurance sector growth more than any other nation. However, the insurance penetration in the country is rather miniscule in proportionate to the gross domestic product. Increased FDI limit will strengthen the existing companies and open the floodgates for new players to come and increase a healthy competitive spirit and give adequate level playing field.

Increased Capital Inflow – Most of the private sector insurance companies have been making considerable losses. The increased FDI limit would surely bring some much needed relief to these firms as the inflow of more than Rs 10,000 crore is expected in the near term and Rs 30,000-40,000 crores in the medium to long term, depending on how things pan out.

Job Creation –This is where the country can hit the jackpot and come as boon to the youth. The quantum of job openings will be vibrantly encouraging.

Mobilisation of Long term Financial Resources - Typically investors invest in insurance and pension products on a long-term basis and this money could help fund infrastructure projects, which requires long-term funding. Arrival of more foreign players will induce more products and channel innovation with the increased competition. The growth and development of insurance sector will further give a huge boost to the tertiary sector in India.

Conclusion: The Reserve Bank of India (RBI) report on FDI stated that the demands for raising the limit in the insurance sector may be favourably considered taking into account the changing demographic patterns as well as the role of insurance companies in supplying the required long term finance in the economy. And since insurance is a high gestation, capital intensive business and the sector needs fresh capital to fund its existing businesses and expansion. Growth of insurance sector will spur other sectors and providing capital to the government for long-term infrastructure projects.

A strong domestic consumption, rural health, education, connectivity, high savings, low dependency on exports, burgeoning middle class, positive demographics, talent pool and intellectual capital are some of the key strengths of our economy.

However, somewhere down the line, some bottlenecks started emerging as we did not pay enough attention to re-engineering and making our institutions contemporary with the growing needs and changing environment.

One of the underlying needs is the building of an institutional and financial infrastructure and the latest move is a right step in the right direction.

(The author is former Chairman, Association of National Exchanges Members of India, AP Chapter)