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FDI IN INSURANCE ISSUES AND RECENT DEVELOPMENTS

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transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without prior permission of Vision IAS
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FDI in Insurance Issues and recent developments

Contents
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Introduction
Need of FDI in Insurance
Criticism of FDI/private companies in Insurance
Challenges
Way Forward

Introduction

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India is one of the least insured countries where only 6% of population has any kind of insurance cover.
Only 4.4% have life insurance cover and 5% have any kind of health insurance cover. Access to insurance
is one of the aspects of financial inclusion.
The enormous scope of growth for insurance has meant that India is one of the top ten insurance
markets in the world.
India opened the insurance sector to private companies in 2000, which was billed as a major financial
reform. It infused much needed competition in the insurance sector.
Government of India in budget 2014 has raised the FDI limit in insurance from 26% to 49%. The 49% is a
composite cap, which will include FDI, FII, QFI and other foreign investments. The government is going to
amend the Insurance laws (Amendment) Bill, 2008 to raise the limit from 26% to 49%.

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To bounce back to 8% growth rate, the country needs investment. FDI will bring much needed
investment in insurance, which will in turn finance various infrastructure projects.
FDI will insurance has led to increased competition, which has resulted in innovative products and better
deal for the consumer. This trend needs to be continued by allowing foreign capital and expertise to
enter the Indian insurance sector.
The Indian public sector companies have failed to provide insurance coverage to even 7% of its
population. Thus private companies and foreign investment is needed to provide insurance cover to the
rest of the population.
In the last 30 yrs, around Rs. 30,000 crore of capital has been infused by life insurance companies but
still they are struggling to break-even. According to estimates, the sector needs Rs. 50,000 crore over the
next 5 years to break-even. The recent FDI limit hike will bring in the required capital

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Need of FDI in Insurance

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Criticism of FDI/private companies in Insurance

The claims settlement record of private companies has been dubious. In numerous cases, genuine claims
have been rejected on flimsy grounds. A famous example is that of Hemant Karkare, the former chief of
the Mumbai Anti-Terrorist Squad, who was killed in Mumbais 26/11. His life insurance claim was
rejected by a private insurance company on the ground that the deceased had willfully risked his life,
even after knowing that his life was in danger. Thus, FDI in insurance must not only be viewed from an
economic angle but also from the point of view of Trust that an insurance company must inculcate in its
customers
The settlement record of public sector insurance companies has been, on the other hand, impeccable.
LIC settles 98.6% of its claims, the only insurance company in the world to do so.
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FDI hike will allow foreign companies with small investments to gain greater access and control over
large domestic savings. The 2008 global crisis showed how private companies misused common mans
savings for their personal gains. In the end, it was the general public who suffered the most as they lost
all their insurance money.
The annual report (2011-2012) of the Insurance Regulatory and Development Authority (IRDA) points
out that FDI brought in by private life insurance companies up to March 31, 2012, was a meagre
Rs.6,324.27 crore, which was to meet share capital requirements prescribed by the regulator. Not a
single pie was invested in the infrastructure sector
The World Economic Forum Financial Development Report 2012 tells that USA, even with 30 times the
per capita income of India, has a life insurance penetration of 3.56% as against 3.66% of India. Thus,
even with low level of income and low disposable income of most Indians, insurance penetration in India
is much greater than developed countries. This shows the success story that public sector insurance
companies like LIC have been.

Challenges

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The recent hike in FDI from 26% to 49% will not give ownership right to foreign players. Financial experts
feel that the hike is not adequate incentive for foreign players to invest in insurance sector and without
any increase in voting rights, the current move will not make any difference to the existing scenario.
IRDA Chairman opines that marketing of products and skilled professionals who could drive the industry
to higher growth are more important than increasing the FDI limit in insurance. Initiatives like sale of
insurance products on Common Service Centre (CSC) platform need to be emulated.
Also, there is lack of innovative and customized products for different income-level groups.

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Though India has one of the lowest FDI limit at 49% - China has 50%, Indonesia 80%, Malaysia has 51%,
but any increase beyond 50% has to be studied carefully
The current limit hike is a step in the right direction. Indian insurance market has enormous potential,
which needs to be tapped. Insurance needs more competition and innovative products so that every
household and individual is insured against bad times.

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Way Forward

Copyright by Vision IAS

All rights are reserved. No part of this document may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without prior permission of Vision IAS
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