TERM PAPER

On
ANALYSIS ON FOREIGN DIRECT INVESTMENT
IN INSURANCE SECTOR IN INDIA

Submitted to
Amity School of Insurance Banking and
Actuarial Science

AMITY UNIVERSITY UTTAR PRADESH

Guided By:
Submitted By:
Ms.Preeti Sahay Mr.
ShubhamChoudhary
 DECLARATION

I, Shubham Choudhary student of B.sc.-Actuarial Sciences hereby

declare that the project titled ANALYSIS ONFOREIGN
DIRECTINVESTMENT IN INSURANCE SECTOR IN INDIA which is
submitted by me to Amity School of Insurance Banking and
Actuarial Science, Amity University, Uttar Pradesh, Noida, in
partial fulfilment of requirement for the award of the degree of
Bachelor of science in actuarial science has not been previously
formed the basis for the award of any degree, diploma or other
similar title or recognition. The Author attests that permission has
been obtained for the use of any copy righted material appearing
in the Dissertation / Project report other than brief excerpts
requiring only proper acknowledgement in scholarly writing and
all such use is acknowledged.

Signature

Noida

Date SHUBHAM CHOUDHARY

 CERTIFICATE

This is to certify that Mr. ShubhamChoudhary, student of

Bsc..-Actuarial Science has carried out the work presented in
the project of the Term paper entitle " ANALYSIS ON FOREIGN
DIRECT INVESTMENT IN INSURANCE SECTOR IN INDIA" as a part of
second year programme of Bachelor of Science in Actuarial
Science from Amity School of Insurance, Banking and Actuarial
Science, Amity University, Noida, Uttar Pradesh under my
supervision.

Ms. Preeti Sahay

Amity School of Insurance, Banking and Actuarial
Science
AUUP
 Analysis on Foreign direct
investment in insurance sector in
India
-By
ShubhamChoudhary

Introduction
One of the most striking developments during the last two decades is
the spectacular growth of FDI in the global economy landscape. This
decent growth of FDI in 1990 around the world make FDI an important
and vital component of development strategy in both developed and
developing nations and policies are design in order to stimulate
inward flows. FDI provides a win-win situation to the host and the
home countries. Both countries are directly interested in inviting FDI,
because they benefit a lot from such type of investment. Generally
speaking FDI refers to capital inflows from abroad that invest in the
production capacity of the economy and are usually preferred over
other form of external finance because they are non-debt creating
non-volatile and their returns depend on the performance of the
projects financed by the investors. FDI inflow helps the developing
countries to developed transparent, broad and effective policy
environment for investment issues as well as, builds human and
institutional capacities to execute the same. The insurance sector is
of considerable importance to every developing economy it includes
the saving habit, which in turn generates long-term investible funds
for infrastructure building. This Papers objectives are to investigate
the Indian Insurance sector, to know benefits of increased foreign
direct investment limit in insurance sector, to know the Government
policy regarding insurance sector in India, to know Issues in FDI in
Insurance Sector.
 Objectives
1. To find out benefits of increased foreign direct investment limit
in insurance sector.
2. To study the Government policy regarding insurance sector in
India.
3. To know Issues in FDI in Insurance Sector .

History of Insurance
A contract of insurance may be defined as a contract whereby,
one person, called the insurer, undertakes, in return for the
agreed consideration, called the premium to pay to another
person, called assured, a sum of money or its equivalent on the
happening of a specified event. The aim of all insurance is to
make provisions against dangers which beset human life and
dealings. Those who seek it endeavor to avert disasters from
themselves by shifting possible losses on the shoulders of others
who are willing for pecuniary consideration, to take risk thereof,
and in the case of life assurance, they endeavor to assure to
those dependent on them a certain provision in case of their
death, or to provide a fund out of which their creditors can be
satisfied.
The Nationalized Period

The protection alteration demonstration of 1950 nullified

key organizations. In any case, there were an extensive
number of insurance agencies and the level of rivalry was
high. There were additionally charges of out of line
exchange rehearses. The legislature of India,
subsequently, chose to nationalize protection business. In
nationalized time a statute went on nineteenth January,
1956 nationalizing the disaster protection division and Life
Insurance Corporation appeared around the same time.
LIC assimilated 154 Indian, 16 non-Indian guarantors as
additionally 75 provident social orders 245 Indian and
outside back up plans on the whole. The LIC had imposing
business model till the late 90s when the protection
division was revived to the private segment. Because of
new advancement, privatization and globalization, the
protection part was revived to private division.

The Liberalized Period

The protection administrative and Development Authority

was constituted as a self-sufficient body to control and
build up the protection business. The IRDA opened up the
business sector in august 2000 with the welcome for
application for enrollments. The bill permits remote value
stake in household private insurance agencies to most
extreme of 26% of the aggregate paid-up capital and tries
to give statutory status to the protection controller.
Outside organizations were permitted responsibility for to
26%. In December, 2000, the auxiliaries of the general
protection organization of India were rebuilt as
autonomous organizations and in the meantime GIC was
changed over into a national reinsurer. Parliament passed
a bill de-connecting the four backups from GIC in July,
2002.
Today there are various private segment insurance
agencies. The table beneath demonstrates the separation
of insurance agencies:- Number of insurance agencies in
India

.
Type of No. of Public No. of Private Total
Business sector companies sector companies companies
Life Insurance 01 23 24
General 06 22 28
Insurance
Re Insurance 01 0 01
Total 08 45 53

Government Policy with respect to Insurance Sector in India

Protection being essential part of the monetary segment assumes

a huge part in India's economy. ''Aside from securing against
mortality, property and loss hazards and giving a wellbeing net to
people and endeavors in urban and rustic territories, the
protection part supports sparing and gives long haul assets to
framework advancement and other long development
undertakings of the country. The improvement of the protection
part in India is important to bolster its proceeded with monetary
change.''

This thousand years has seen protection come a full hover in an

excursion reaching out to about 200 years. The procedure or re-
opening of the segment had started in the early1990s and the
most recent decade and more has seen it been opened up
significantly. In 1993, the administration set up a board of
trustees under the chairmanship of R.N.Malhotra, previous
legislative head of RBI, to propose proposals for changes in the
protection segment. The destinations were to supplement the
changes started in the monetary division. The panel presented its
report in 1994wherein, in addition to other things, it prescribed
that the private segment be allowed to enter the protection
business. They expressed that remote organizations are permitted
to enter by gliding Indian organizations, ideally a joint endeavor
with Indian accomplices.

The IRDA opened up the business sector in August 2000 with the
welcome for application for enrollments. Remote organizations
were permitted responsibility for to 26%. The Authority has the
ability to edge control under segment 114-An of the Insurance
Act, 1938 and has from 2000 onwards confined different
directions security of policyholders interests. Today there are 28
general insurance agencies (Non-life) including the Export
.

Credit Guarantee Corporation (ECGC) and Agriculture Insurance

Corporation of India, 24 life insurance companies that have set up
operations in the life segment post opening up of the sector 20
are in joint venture with foreign partners. Of the twenty two
private insurers who have commenced operations in the non-life
segments, 18 are in collaboration with foreign partners.

Benefits of Increases in Foreign Direct

Investment Limit in Insurance Sector
The cabinet committee on economic affairs headed by Prime
Minister Narendra Modi has approved the limit of foreign direct
investment in insurance sector to 49 percent from the existing 26
percent. The cabinet has cleared the FDI limit in insurance
companies through FIPB route which necessitates the
management control with the Indian promoters. This was a long
due reform which the Modi government has undertaken and is
surely bond to benefit the insurance sector.

Lets look at the six key benefits of increased

foreign direct investment limit in insurance
sector:-

Increased insurance penetration

With the population of more than 100 cores, India requires
insurance more than any other nation. However, the insurance
penetration in the country is only around 3 percent of our gross
domestic product with respect to over-all premiums underwritten
annually. This is far less as compared to Japan which has an
insurance penetration of more than 10 percent. Increased FDI
limit will strengthen the existing companies and will also allow the
new players to come in, thereby enabling more people to buy life
cover.

Level playing field

With the expansion in outside direct speculation to 49 percent,
the insurance agencies will get the level playing field. So far the
state possessed Life Corporation of India controls around 70
percent of the protection market.

Expanded capital inflow

A large portion of the private division insurance agencies have

been making significant misfortunes. The expanded FDI limit has
conveyed some genuinely necessary alleviation to these as the
inflow of more than 10,000 crore is normal in the close term. This
could go up to 40,000 crore in the medium to long haul,
contingent upon how things work out.

Work creation

With more cash coming in, the insurance agencies will have the
capacity to make more occupations to meet their objectives of
wandering into under guaranteed markets through enhanced
foundation, better operation and more labor.

Good to the benefits division

On the off chance that the benefits bill is passed in the parliament
then the outside direct interest in the annuity assets will likewise
be raised to 49 percent. This is on account of the benefits reserve
administrative improvement Bill connects as far as possible in the
annuity area to the protection segment.
Customer inviting

The end recipient of this alteration will be regular men. With more
players in this division, there will undoubtedly be stringent rivalry
prompting focused quotes, enhanced administrations and better
claim settlement proportion.

Issues in FDI in Insurance Sector

"1) Efficiency of the organizations with FDI

The opening up of this area for private cooperation in 1999,

permitted the privately owned businesses to have outside value
up to 26 for each penny. Tailing this up 12 private division
organizations have entered the life coverage business.

.Aside from the HDFC, which has remote value of 18.6%, the
various privately owned businesses have outside value of 26 for
every penny. All in all protection 8 privately owned businesses
have entered, 6 of which have outside value of 26 for every
penny. Among the private players when all is said in done
protection, Reliance and Cholamandalam does not have any
outside value. The total loss of the private life back up plans
added up to Rs. 38633 lakhs rather than the Rs. 9620 crores
overflow (after duty) earned by the LIC. By and large protection, 4
out of the 8 private safeguards endured misfortunes in 2002-03,
with the Reliance, an organization with no remote value, rising as
the most gainful player. Truth be told the 6 private players with
remote value made a total loss of Rs. 294 lakhs. Then again
people in general part back up plans by and large protection
made total after assessment benefits of Rs. 62570 lakhs.''

2) Credibility of outside organizations

''The contention that outside organizations might acquire more

ability and polished skill into the current framework is
questionable after the late occurrences of the worldwide
monetary emergency where firms like AIG, Lehman Brothers and
Goldman Sachs broken down. Prior as well, the Prudential
Financial Services (ICICI's accomplice in India) confronted an
enquiry by the securities and protection controllers in the U.S
heaps of having distorted reports and produced marks and
requesting that their customers sign clear structures. This was
after it made an installment of $2.6 billion to settle a legal claim
assaulting incorrectly protection deals rehearses in 1997 and a $
65 million dollar fine from state protection controllers in 1996.
Regal Sun Alliance likewise close down their productive
organizations in 2002. Henceforth FDI in protection in India would
uncover our budgetary markets to the questionable and
theoretical exercises of the remote insurance agencies when the
ideals of directing such exercises are being examined.''

3)Greater channelization of saving to insurance

''One of the most important duties played by the insurance sector
is to mobilize national saving and channelize them into
investments in different sectors of the economy. However, no
significant change seems to have occurred as far as mobilizing
savings by the insurance sector is concerned even after the
liberalization of the insurance sector in 1999. Therefore the
private or foreign participation has not been able to achieve the
goal.

4)Flow of funds to infrastructure

The primary aim of life insurance is about mobilizing the savings
for the development of the economy in long term investment in
social and infrastructure sectors. The same vision was argued for
the opening up of insurance market would enable huge flow of
funds into infrastructure. But more than fifty percent of the
policies they sell are ULIPS where the investments go into the
equity markets. As per a report, 95% of policies sold by Birla Sun
Life and over 80 percent of policies sold by ICICI Prudential were
unit-linked policies during 2003-04. Under these schemes, nearly
50 percent of the funds are invested in equities thus limiting the
fund availability for infrastructural investments. On the other
hand, the LIC has invested Rs. 40,000 crore as at 31.3.2003 in
power generation, road transport, water supply, housing and
other social sector activities. IRDA figures further imply that the
share of the public sector life and non-life insurance companies in
investment in infrastructure is greater than their market share.''

Advantages of FDI in Insurance Sector

1)Capital for Expansion
FDI has the potential to meet Indias long term capital
requirements to fund the building of infrastructures which is
critical for the development of the country. Infrastructure has
been the major factor which has restricted the progress of the
Indian economy. Insurance sector has the capability of raising
long term capital from the masses as it is the only avenue where
people put in money for as long as 30 years even more. An
increase in FDI in insurance would indirectly be a boon for the
Indian economy, the investment not withstanding but by making
more people invest in long term funds to fuel the growth of the
Indian economy.

2)Wider Scope for Growth

FDI in insurance would increase the penetration of insurance in
India, where the penetration of insurance is abysmally low with
insurance premium at about 3% of GDP against about 8% global
average. This would be better through marketing effort by MNCs,
better product innovation, consumer education etc.

3)Moving Towards Global Practice

Indias insurance market lags behind other economies in the
baseline measure of insurance penetration. At only 3.1%, India is
well behind the 12.5% for the UK, 10.5% for japan, 10.3% for
Korea and 9.2% for the US. Currently, FDI represents only Rs. 827
crore of the Rs.3179 crores capitalizations of private life insurance
companies.
4)Provide Customers with Competitive Products, More
Options and Better Service Levels
Opening the FDI in the insurance sector would be good for the
consumers, in a lot of ways. Increasing FDI will impact on a lot of
industries in a positive.

Conclusion
Many international studies have estimated that the insurance
sector in India can grow by over 125 per cent in the next ten
years. In fact, India has been identified as one of the fastest
growing insurance markets. The current policy is trying to
encourage joint ventures insurance sector so as to boost the
domestic insurers growth in this area. However; there is also the
risk that some foreign insurers will not be interested in investing
unless they have 100% ownership and that the current policy will
prevent them from choosing India as an Insurance destination.

With this, a plethora of business opportunities in India has been

thrown open to the foreign investors. In life insurance business,
India is ranked 10th among the 88 countries for which data are
published by Swiss Re. India has seen an increase in its FDI in
2012, at a time when the aforesaid limit were not even approved-
a sign that suggests India is set to be one of the favored
destinations for foreign investors in the insurance sector.
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