Raising FDI Limit to 49% in Insurance Sector

By Sandeep Sapre
It was in 1999 the then Finance Minister Mr.Yashwant Sinha proposed Insurance Laws
(Amendment) Bill giving scope to foreign investment in insurance sector which was opposed
by Congress. In the next Parliamentary elections Congress came to power and initiated steps
to open insurance sector to foreign investors as a part of their efforts of economic reforms.
However this time BJP opposed it and the issue remained to be resolved for 8 years. In
2012, the then Finance Minister P. Chidambaram initiated steps to open the sector to FIIs
again and this time it was Mr. Yashwant Sinha who did his job of opposing it vehemently. He
maintained that FIIs have the sole interest of reaping profits and that they would not be
interested in longer waiting period for return on their investments. The Government
accepted this and made changes in the bill. Initially there was a provision of allowing FDI to
the extent of 49% , but BJP did not accept this extent. It was then decided to lower the limit
to 26% and the bill was then passed accordingly. Now the roles have changed again and
Modi government has proposed an amendment bill making way to raise the limit of FDI to
49% and Congress is opposing it. Thus the perspective of political parties towards the
development of insurance sector changes according to the benches their members occupy
in the house.
Why need of FDI and why only 49%
Of the 1.25 billion population of India only 6% are insured. This
is despite having 23 private companies and LIC. There is very large scope for tapping the
untouched market. However for expansion and spreading the activities in insurance sector,
huge capital investment is required. The structure of insurance sector is very complex and
requires huge investment and longer waiting period for returns. Since there is little capacity
to make this much investment without immediate returns from the domestic market, there
is need to invite foreign investment. Despite the fact that the new companies brought in
investment of about Rs.40,000 crores ( to bring in new annual premium income of
Rs.80,000 cores during last 12 years) there is a need of many more thousand crores to
expand the sector. The position of some Asian countries as far as FDI in insurance sector is
concerned is as follows:

Country FDI Limit in % Country FDI Limit in %
China 74 Indonesia 80
Malaysia 80 Japan 100
Taiwan 100 South Korea 100
The only reason to restrict FDI level to 49% is to restrict the decision making authority in
Indian hands. There are certain restrictions imposed by IRDA for operations in insurance
sector that compels more investment in this sector.
Solvency Margin Pressure
The companies have to keep certain level of real value assets over and above their insurance
liabilities and other liabilities of policy holders fund and share holders fund. Here the new
companies find it difficult to maintain the margins because certain assets like furniture and
fixtures, dead stock, stationary and preliminary expenses in the formation of the company
which constitute a large amount but are required to be placed with value zero.
Expenses Overrun
Although some companies show surplus of income over expenses, this surplus must not be
less than the increase in liabilities during the year. If the expenses are less than the increase
in liabilities during the year, then they are said to be overrunning. This is bound to happen in
the first years of operation for companies when they have to incur heavy operational
expenses and agency commissions. This situation is improved only after the renewal
premium amount is increased. This also means that the lapsation percentage should be kept
to the minimum possible level. Considering the data available from IRDA an average
individual agent of private insurance company sells only 3 policies in a year (as against 29 by
an agent of LIC). This suggests that the percentage of agents discontinuing agency is high
leaving the customer orphan and hence the lapsation increases. There is need to invest
more money in training the agents to retain them with the company.
Effects on LIC
With a token capital of meager amount of Rs.100 crore LICs solvency margin position is
worst and cant be improved until it is raised to its required level. However LIC has excellent
surplus position and there is no question of expenses overrun. By infusion of more capital by
FDI in private sector the companies can acquire latest technology to penetrate the market
and recruit and train more agents. The number of agents has been decreasing since last 2
years in almost all companies including LIC. Although considering the size of LIC, there will
not be much effect of this , but LIC needs to leave the sense of complacency or it will face
the growth in speed in losing the market share and will also see threat to its top position in
some parameters.

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