Topic of the week for discussion : 8th to 14th October 2012

Topic: FDI in Insurance A Welcome Step

In order to curb the trend of falling Foreign Direct Investment (FDI) in the country, government recently increased the FDI limit in various sectors, latest being the insurance sector. The need for larger FDI exists because India is at a stage where it needs not just investments, but also technology, and management policies to sustain and enhance its economic growth. The latest decision to increase the FDI cap to 49 percent in insurance sector received mixed reactions from various sectors, for obvious reasons, was opposed by the employees of public sector insurance companies. Insurance industry, suffering from muted growth and undergoing consolidation, needs a major breather in the form higher investments. According to Insurance Regulatory and Development Authority (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 is raised from 26 percent to 49 percent, the industry will not have the required capital to underpin the growth of the insurance industry. Moreover, when 74 percent FDI is allowed in the banking sector, 100 percent in Asset Management Companies, just 26 percent FDI is 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. ICICI Lombard has Fairfax Financial a Canadian company as 26 percent partner, HDFC Standard Life has Standard Life Plc a UK based company, MaxBupa Health Insurance Company is a joint venture between Max India Limited and Bupa Finance plc UK, India First Life Insurance is a joint venture between two of India's public sector banks: Bank of Baroda (44 percent) and Andhra Bank (30 percent) and UKs financial and investment company Legal & General. The benefit of this step will go to the private sector insurance companies which require huge amount of capital. At the operational level, foreign joint-venture partners are already very involved in the industry and they bring the product and risk-related expertise. Generally, such arrangements have worked well. Along with bringing capital for future growth, FDI will bring a degree of comfort to the foreign partner. Another advantage of increasing FDI limit will be to grow the industry by increasing customer penetration with a range of products that are focused on todays uninsured population. The life insurance industry is long term in nature and requires years of capital infusion before it can sustain itself. Arrival of more foreign players will induce more product and channel innovation with the increase in competition. The growth and development of life insurance sector will further give a huge boost to the tertiary sector in India.

Topic Introduction

However, many analysts believe that sector will not get immense benefits from the move. There are the industry leaders that are established and doing very well. They reached the breakeven point and dont need further capital. They will not be impacted by the FDI change. However, there are companies that do have an issue with capital and have not been doing too well. They are the ones who are excited about the FDI reforms. Moreover, there are the newcomers who have been there for the past four-to-five years but most of them are in the process of building up their portfolios and are, in fact, struggling. They also need more capital. But these opportunities dont really excite the foreign players, not because India is no longer attractive, but because they are facing a lot of pressure in their own markets. Other opponents argue that the hike would have an adverse impact on the economy and decision will enable the foreign companies to gain control over the domestic savings. Consequently, the upheavals in foreign finance market will have much larger impact in the country. However, the arguments of proponents of the move are more acceptable than that of opponents. Is a prelude to the move, RBI considered that as the economy integrates further with the global economy and domestic economic and political conditions permit, there may be a need to relook at the sectoral caps (especially in insurance) and restrictions on FDI flows (especially in multi-brand retail). RBI report on FDI stated that the demands for raising the present FDI limits of 26 per cent in the insurance sector may be reviewed 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 also help in developing other sectors and providing capital to the government for long-term infrastructure projects. Cross-country analysis also supports the increase in FDI limit as sectoral cap was higher than India even in China for insurance and a few other sectors, while countries like Brazil and Russia have higher sectoral caps than India across most of the sectors. 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.

http://www.mbarendezvous.com/topimage.php?id=568 http://www.thehindubusinessline.com/industry-andeconomy/banking/article3978529.ece?ref=wl_industry-and-economy http://www.hindustantimes.com/News-Feed/BusinessBankingInsurance/Insurance-sector-needs-5-6bn-in-capital-FM/Article1-941671.aspx http://www.thehindubusinessline.com/industry-and-economy/banking/article3799865.ece