Introduction

It was in the year 2000 that the Government decided to liberalize the Indian insurance
sector, and allow private players to participate in the workings of the sector and to
provide competition to the Public Sector Units (PSUs) in the market at the time. A
bold reform at the time, it was put in place to make sure that the customers can gain
from the increased competition, the increase in jobs and the growth of the economy
that would be brought about from the move. The reforms allowed the sector to grow
at an exponential rate. The penetration of the sector has grown from 2.71% in 2001-
02, to 3.9% in 2013-14 and the density has grown from $11.5 in 2001-02 to $52 in
2013-14. This level of growth has only been possible because of the bold decision that
was made more than a decade ago, to liberalize a promising sector, as the insurance
sector.

Quite recently, the Government was faced with a similar decision regarding the
insurance sector. On seeing the growth of the sector dwindle the first-ever fall in life
insurance density to $49 in 2011, from $55.7 in 2010, and a major fall in the
penetration levels from 4.4%in 2010 to 3.4% in 2011, the need for major reforms was
felt across the industry. To bring about those reforms, the Government finally
delivered on a change the entire sector (barring the PSUs) has been asking for. The
FDI Cap on equity in the insurance sector was raised from 26% to 49% on 12th March
2015, by way of the Insurance Laws (Amendment) Bill, 2015 being passed by the
Parliament.
The Insurance Laws (Amendment) Bill 2015

In addition to the change in the FDI cap, the bill also showed the Governments
commitment to make IRDA more of a regulator than a developer of the industry, to
stop practices like mis-selling and fraudulent selling of Insurance, create more
distribution points for insurance policies, promoting simpler products and more
transparency on features and less dependence on insurance agents. The Bill sought to
bring about a new environment for the sector to thrive in, and wanted to transform the
sector to take it to newer heights.

Some salient features of the Bill are as follows:

1. FDI Cap: The biggest change was the enhancement of the foreign investment
cap in an Indian Insurance Company from 26% to an explicitly composite
limit of 49%, with the safeguard of Indian ownership and control.

2. Capital Availability: It will enable the raising of capital through new and
innovative instruments under the regulatory supervision of IRDAI. The four
public sector general insurance companies, presently required as per the
General Insurance Business (Nationalisation) Act, 1972 (GIBNA, 1972) to be
100% government owned, are now allowed to raise capital, keeping in view
the need for expansion of the business in the rural and social sectors, meeting
the solvency margin for this purpose and achieving enhanced competitiveness
subject to the Government equity not being less than 51% at any point of time.

3. Consumer Welfare: It will enable the interests of consumers to be better

served through provisions such as:
Enabling high penalties on intermediaries/insurance companies for
misconduct, mis-selling and misrepresentation by agents/insurance
companies
Disallowing multilevel marketing of insurance products in order to
curtail the practice of mis-selling.
This could act as a deterrent against the rampant mis-selling menace,
which has resulted in many policyholders being duped into buying
 unsuitable products.

4. Empowerment of IRDAI: IRDAI is empowered to regulate key aspects of

Insurance Company operations in areas like solvency, investments, expenses
and commissions and to formulate regulations for payment of commission and
control of management expenses. It empowers the Authority to regulate the
functions, code of conduct, etc., of surveyors and loss assessors. It also
expands the scope of insurance intermediaries to include insurance brokers, re-
insurance brokers, insurance consultants, corporate agents, third party
administrators, surveyors and loss assessors and such other entities.

5. Promoting Reinsurance Business in India: The amended law enables

foreign re-insurers to set up branches in India and defines re-insurance to
mean the insurance of part of one insurers risk by another insurer who
accepts the risk for a mutually acceptable premium. It excludes the
possibility of 100% ceding of risk to a re-insurer, which could lead to
companies acting as front companies for other insurers.

6. Grievance redressal: To strengthen redressal of policyholders' complaints,

the Bill proposes an independent grievance redressal authority, with powers
similar to a civil court. The authority should be composed of judicial and
technical members. The current ombudsman scheme is held to be insufficient
to tackle the large number of complaints against companies.
A Timeline of the FDI Cap on Equity in the Insurance Sector

Although the Bill saw unison from both sides of the house in its passage, this isnt
the first time the idea of increasing the FDI cap has been proposed. In fact, the
current Government was opposed to the Bill in their last term, when they served
as the Opposition Party.

The FDI cap of 26% has had a very tumultuous past, which began all the way
back in 2008, when the Insurance Laws (Amendment) Bill, 2008 was presented in
the Rajya Sabha, and referred to the Parliamentary Standing Committee on
Finance. The committee considered the idea of this bill until December 2011 but it
finally decided to let the FDI cap remain at 26%.

Private Insurance Companies continued to push for the bill, as they still believed
that foreign investment was the only effective way of raising any more capital,
which was greatly required by these companies to be able to capitalize of the
consumer market and increase insurance penetration in the market.

The Insurance Bill saw resurgence in 2014, when the Union Finance Minister of
the time Arun Jaitley, proposed to hike the FDI cap in the sector from 26% to
49%. This of course, came as a huge relief to a capital hungry private insurance
sector, but it wasnt such a welcome change for all. The agents of LIC would go
on to stage an agitation to protest the Bill. The FDI cap was not the bone of
contention for them; rather it was the provision that allowed the insurance
companies to set the percentage of commission that agents would receive (a job
entrusted to the IRDA initially). The LIC Agents believed that this provision
would create a situation where the targets to be reached by the agents would be
unattainable.

The resolve and determination on the part of the government however, was
undeterred, and the Fiannce Minister, Arun Jaitley, presented the Bill in the Rajya
Sabha on December 17, 2014 and by December 26, 2014 the Ordinance was
approved for the Insurance Amendment Bill. An Ordinance implies an interim
measure, and a statement of intent by the Government.
Despite the protests from the Life Insurance Agents Federation of India (LIAFI),
the Bill was passed in the Lok Sabha on March 4, 2015, and finally in the Rajya
Sabha on March 12, 2015, and the Insurance Laws (Amendment) Bill finally
came into power, bringing along with it a flurry of hope for the private sector
insurance companies. The passage of the Bill thus paved the way for major reform
related amendments in the Insurance Act, 1938, the General Insurance Business
(Nationalization) Act, 1972 and the Insurance Regulatory and Development
Authority (IRDA) Act, 1999.
Possible Shortcomings of the Insurance Bill

1. The Indian Ownership and Management Clause: A clause that has created
widespread confusion due to its ambiguity is the ownership clause in the
Insurance Bill 2015.

Rule 3 of Rules, 2015 states that:

No Indian insurance company shall allow the aggregate holdings by way of
Total Foreign Investment in equity shares held by Foreign Investors,
including portfolio investors, to exceed forty-nine percent, of the paid up
equity capital of such Indian insurance company.

Rule 4 of Rules, 2015 states that:

An Indian Insurance Company shall ensure that its ownership and control
shall remain at all times in the hands of the resident Indian entities referred to
in clauses (k) and (l) of rule 2.

Although Rule 3 asks, that foreign stake held in an insurance company be

capped at 49%, implying that the remaining share being owned by Indians,
Rule 4 creates another layer on Indian Insurance Companies, instructing that
not only should they be owned by Resident India, but also be controlled by
them. On one hand foreign investment is not allowed beyond 49%, and on the
other hand only such companies that are owned by Indians are allowed
ownership and control. This rules out the possibility of Indian insurance
companies being owned and controlled by such companies that may have been
incorporated in India but are ultimately foreign controlled.

The confusion that has been created by this clause slowed down the
momentum that the passage of the Insurance Bill had created for the insurance
industry, and may have been a deterrent for a few players to increase their
stake in Indian companies.

2. Calculation of Foreign Share Holding: Another regulation that created

cataclysmic levels of confusion within the industry, was one initially issued by
 the IRDAI, which stipulated that all insurance companies seeking higher
foreign ownership should comply with norms that restrict such increase to
only companies owned and controlled by Indians at the parent level.

However, this issue was later clarified by the finance ministry which said that
foreign shareholding in parent companies of insurance ventures would not be
counted as overseas ownership for computation of foreign direct investment in
the insurance ventures.

Earlier, foreign ownership in a firm was calculated by also taking into account
the proportion of overseas holdings in the parent firm. If foreigners owned half
of the parent company and 50 per cent in the subsidiary, then foreign holdings
in the subsidiary would be computed as 75 per cent. But not so anymore, at
least when it comes to insurance firms founded by banks.

This was also the cause of the ordeal that Kotak Mahindra Bank had to go
through, in which it status as in Indian or Foreign owned company was in flux
because any Indian company with 51% or more foreign investment would be
considered a foreign owned (and hence controlled) company. And all
downstream investments by a foreign owned company would be foreign
investments. So if foreign investment in Kotak Mahindra Bank were to cross
51%, the Banks 74% stake in the insurance joint venture would count as
foreign. Add that to Old Mutuals 26% and all 100% of Kotaks insurance
business would be foreign owned.

Although, some clarity on the issue has been shed now, the chaos served to
take away a lot of steam away from the Insurance Bills engine.

3. Foreign Institutional Investors and Hot Money: The Insurance Bill has also
allowed for portfolio investment, which is essentially an investment of hot
money. Hot money' is the flow of funds (or capital) from one country to
another in order to earn a short-term profit on interest rate differences and/or
anticipated exchange rate shifts. These speculative capital flows are called 'hot
money' because they can move very quickly in and out of markets, potentially
 leading to market instability.

The property of hot money to shift from one place to another in a short amount
of time, gives no company which has a capital base formed with hot money a
chance to adapt to the sudden change. If an insurance company (a highly
capital intensive company) were to be affected by a hot money shift, all of a
sudden, they would require to be bailed out by the Government for an
extremely steep cost (AIG is an example of a bank that went through the
same), and not only that, but the policyholders will end out losing the most,
with their policies falling in their values, and claims not getting settled on the
required timelines.

4. Life Insurance Corporation Employees Protest: The employees of the

PSU firm LIC hosted multiple protests against the increase in the FDI cap,
stating several times, that the Bill would weaken the position of the public
sector. It was claimed by some of the protestors that the Government was
going to privatize the public sector insurance companies in the country. Some
financial experts had suggested that the government sell 10 per cent properties
of the LIC of India and use it for government expenses. This suggestion was a
precursor for future privatisation. They also said that allowing hike in FDI in
Insurance sector would help the International finance capital to gain greater
control and access over the domestic savings of the Indian public; and such
money of Indian people will not be safe in the hands of the foreign companies.

A few statistical indicators that support the importance of LIC are as follows.
The average annual premium for the private insurers is a figure of Rs 60,000,
and the average annual premium of LIC Rs 9000. This shows that LIC is
trying to do the job of spreading insurance to the lower levels of the income
bracket, whereas the private firms are more focused on the higher level of
clientele. Also, as per claims and settlement performance LICs figure is at
99.86% settlement and the private sector is at 79%, whereas the lapse rate of
LIC is 5% as compared to a lapse rate of 47% in the private sector.
The Advantages of FDI Investment in India

1. Increased Capital Means Increased Penetration: The Insurance sector at the

moment is struggling when it comes to penetration. The penetration levels
according to the Swiss Re Report of 2014 shows the penetration of the Indian
Insurance sector is only 3.3%. With a greater amount of capital flowing into
the country, the insurance ventures will be able to deploy a larger amount of
resource to focus on increasing the awareness of the people (a major
impediment towards penetration), bring about innovation in their products and
focus on research and development of new methods of distribution of policies.
2. A New Base of Knowledge: Monetary resources are not the only things on the
table for India with the increase in the FDI cap. With a greater stake in a Joint
Venture, the foreign partner will be keener to bring along with them, the
technology and the methods of their home company. This infusion of
knowledge-based and/ or technological resources is something that the entire
country can benefit from, and it only takes the cause of innovation in products
and distribution methods forward. All of this helps to bring down the cost of
the companies down as well
3. The Groundwork for Social Security: The population of India is not covered
by any major Social Security Scheme which transcends across all differences
to cover all segments of society. The new schemes introduced by the PM
focus of covering the rural sector, but no scheme has been put in place so far,
that covers everyone. However, advanced social security measures are quite
common for some of the foreign partners involved in the insurance sector.
Their increased involvement in the sector could also help to establish the
groundwork for creating a comprehensive social security program for the
country.
4. Foreign Funds Utilized by the Economy as a Whole: FDI is needed not only in
insurance, but also, in the general as it brings in the requisite growth capital
from the foreign promoters, which can be utilized for the improvement of the
infrastructure of the country, especially a developing country like India which
is heavily dependent a the moment on improvement and innovation in
infrastructure. The foreign capital can be used to fill the gaps that exist in the
Indian Budget for infrastructure financing.
5. Increased Competition in the Industry: The Indian PSUs in the insurance
sector were established long before the private sector came into existence.
This allowed them to accumulate quite a lot of the market share, and the newly
established companies needed more capital as well as experience to pose as a
viable replacement to the top position held by the PSUs. With the increase in
capital with each private company now, and the increased involvement of the
insurance giants of other countries, who have perhaps as many years of
experience as the PSUs if not more, for the first time, the PSUs are faced with
the possibility of losing their top spots in the insurance industry.
The Disadvantages of FDI Investment in India

1. Correlation Between Penetration and Capital: Proponents to the move of

increasing FDI in Insurance have said that it will help in increasing the
penetration levels. This would be correct, if there were a direct positive
correlation between the capital invested and penetration. However, for a lot of
people (especially the rural sector), a lack of adequate resources is what
prevents them from availing insurance policies, because they cannot afford a
periodic premium payment. This problem is compounded for the people who
have variable incomes throughout the year (farmers are an example of this,
and they also span the largest segment of the rural population). If the opposing
side is true, and a lack of resources in the hand of the people is a limiting
factor, then the increase in FDI is going to make a small impact at the most.
2. A Shift in the Balance of Power: Although the Government has assured the
public that this Bill benefits our population more than the foreign investors, a
large section of the population still feels insecure about letting their savings
for the long-term go into the hands of the foreign companies. Allowing a
greater participation of the foreign sector also increases our dependency on
their resources, technology and knowledge, which shows a shift in the balance
of power between 2 countries. Dependency on foreign funds can be dangerous
also because of the hot money that will be invested by the FIIs.
3. Private Sector and the Lapse Ratio: On calculations based on the IRDA
Handbook on Indian Insurance Statistics 2013-2014, the lapse ratio of the
public sector is only 5.69% and the average lapse ratio for the Private sector is
22.59%. This shows a difference in the efficiency of the two sectors. If the
share if the Private sector were to increase and they were to gain more control
over the market, and the savings of the people, it would not necessarily
translate to the people being insured, as their policies could lapse (with a
higher probability than before), and the companies get to keep the premium
paid up till that date, which helps them profit from lapses. Hence, the ultimate
benefit expected from increased FDI, would not come to fruition.
4. A Matter of Trust: For many people, an insurance policy is a means to provide
protection against an unforeseeable event. For this, people prefer to choose a
company that is trustworthy and has a good track record for settling claims
 quickly without any hassles. Also, the urgency of funds characterized by an
unforeseeable circumstance makes these requirements non-negotiable and
primary for people. LIC has the best claim settlement (97.73% claim
settlement) in the country and it far better than any private insurance company.
The lapse ratio in private companies is also higher because of mis-selling of
policies, which further depreciates the trust people have in the private sector.
5. Alternative Sources of Capital: According to the opposing forces to the FDI
cap, the private sector can raise capital from domestic sources as well, and
does not necessarily need to resort to FDI infused capital as they keep on
insisting. People feel that FDI is a source of capital that should be used only
under extreme circumstances, as it increases dependency on foreign capital,
hurts the smaller players in the market and creates room for economic
instability (through hot money).
The Impact of the Increase in FDI

After the passage of the Bill, the developments that took place in respect to FDI are as
follows:

1. Bharti AXA
a. The government approved the proposal of French insurance firm AXA,
to raise its stake in its life insurance joint venture with Bharti Group to
49 per cent for Rs 858.6 crore.
b. The proposal by the firm to raise its stake in the general insurance joint
venture with Bharti has also been approved. This will entail capital
flow of Rs 431.40 crore.
c. Together, AXAs FDI in Bharti group will be worth Rs 1,290 crore.
2. Edelweiss Life Insurance
a. Edelweiss Tokio Life Insurance has filed an application with the
Foreign Investment Promotion Board for hiking stake of the foreign
partner from 26 per cent to 49 per cent
3. Max Bupa
a. Bupa, Maxs foreign partner in the Joint Venture was the first
company to announce in January, its intention to raise the stake from
26% to 49% after the passage of the Insurance Bill, 2015.
4. Aegon Religare Life Insurance Company
a. Financial services group Religare announced its exit from life
insurance business, while the foreign partner Netherlands-based Aegon
decided to hike its stake to 49 percent in their joint venture.
b. Religare decided to sell all of its stake to BCCL however, the
transaction is subject to necessary and appropriate regulatory approvals
of CCI, FIPB and IRDA
5. State Bank of India
a. BNP Paribas Cardif is keen to increase its stake in SBI Life Insurance
from 26 per cent to 36 per cent.
b. Once the foreign joint venture partner increases its stake to 36 per cent,
SBIs stake in SBI Life will get diluted to 64 per cent.
 c. SBIs general insurance partner, Insurance Australia Group (IAG), will
be raising its stake to 49 per cent. In the SBI General Insurance Joint
Venture, currently, SBI owns 74 per cent and IAG the remaining 26
per cent.
6. ICICI Bank
a. There has been speculation that ICICI Bank Ltd., is in talks to sell part
of its stake in its insurance unit (ICICI Prudential Life) to Temasek
Holdings Pte and Carmignac Gestion for about $300 million.
b. There have been no official comments from both parties confirming
the new however.
7. IDBI Federal Life Insurance
a. The domestic partners, IDBI Bank and Federal Bank are exploring the
option of diluting their stake in the life insurance venture.
b. They say Europe's Ageas may hike stake in the insurance company to
49 per cent.
c. The deal is in a very preliminary stage at the moment and many
aspects are to be looked at right now according to the comments given
by Federal Bank.
8. Birla Sun Life Insurance
a. Sun Life is considering an option to hike its stake in its life insurance
joint venture Birla Sun Life to 49% from current 26%.
9. Star Union- Dai Chi Life
a. The Bank Of India declared that it will sell 18% of its stakes in life
insurance JV to Dai-Ichi (Japanese Insurer) for bringing down its
stakes to 30%.
10. Lloyds
a. The UK based re-insurer has initiated talks with the IRDA to set up
shop in India, and is looking to open many branches in India for its re-
insurance business.
Conclusions

1. The reforms that have been taken up by the Government have shown positive
signs of increasing the penetration of insurance in the rural sector of India. The 2
new PM schemes have performed significantly well. In a statement reported by
the press on June 12, 2015, the Finance Minister, Arun Jaitley informed the
people, that the 2 insurance schemes, Suraksha and Jeevan Jyoti have now
touched a figure of 10.17 crore. This is the performance of the 2 schemes in 1
month which is absolutely path breaking.
2. The new Insurance Bill has helped to infuse much needed capital into the
Insurance Sector, and also the Indian economy (USD 184.97 million in the period
of March to May 2015). However, there is still a need for more capital if the
projections for the sector are to be met.
3. As of July 24th, 9 companies in the Insurance Sector have opted for an increase in
stake of the foreign partner and 1 foreign company has approached India
(Lloyds) for setting up a re-insurance business.

Hence, it can be seen that the Insurance Bill has started to move in the right direction
and will hopefully achieve the goal it was installed into place for.

The effectiveness of the Insurance Bill can be seen from the companies that
have opted to increase their stake in the Joint Ventures they have with Indian
companies. India received USD 184.97 million (about Rs 1,186 crore) foreign direct
investment (FDI) in the insurance sector during March to May this year which shows
just how successful the Bill has been. All indicators of the future of the industry
indicate that we are moving in the right direction. Life insurance premiums are
projected to nearly triple, to 9 lakh crore by 2020 from 3.14 lakh crore in 2014 and
India's life insurance industry is likely to grow by 12 to 15 per cent in the current
financial year due to improved market scenario, According to the latest report by
Financial Intermediaries Association of India and CRISIL, assets of the financial
distribution industry are seen rising three-fold by 2020. Although this is a broad
indicator of the financial services industry as a whole, according to the report, life
insurance premiums are projected to nearly triple, to 9 lakh crore by 2020 from 3.14
lakh crore in 2014. Premiums of non-life insurance are expected to grow two-and-a-
half times from Rs. 70610 crore in 2014 to nearly R1.8 lakh crore by 2020.