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Submitted in Partial fulfilment for the award of the degree of Master of Business Administration



The foregoing thesis entitled Foreign Direct Investment and International Marketing Vol-I (Insurance Sector) is hereby approved as a credible study of research topic and has been presented in a satisfactory manner to warrant to its acceptance as prerequisite to the degree for which it was submitted. It is understood that by this approval, the undersigned do not necessarily endorse any conclusion drawn or opinion expressed therein, but approve the thesis for the purpose for which it is submitted.

(Internal Examiner)

(External Examiner)


This is to certify that the Project Report entitled Foreign Direct Investment and International Marketing Vol-I (Insurance Sector) has been submitted in Partial fulfilment of the requirement for the award of the degree of Master of Business Administration. It is a bonafide project work carried out by Ujjwal Kumar Singh(Roll- MBA/1038/2010).




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Introduction Objectives .

1 2

FDI in India ... 3-4 Growth of FDI inflow in pre-liberalization period . 4-6

Routes of approval .. 7-8 Share of investing country . 8-9 Foreign market entry strategy . 10-12 Industry profile .. 13-15 List of insurance companies in India 16-17 Current scenario 18-21 Growth drivers .. 22-23

Emerging trends 24-27 Need of FDI in sector . 28-30 Barriers to FDI in sector .. 31-33

FDI regulations in insurance sector . 34-35 Strategy adopted by foreign investors .. 36-43 Suggestion . 44 Conclusion . 45 References . 46

Foreign Direct Investment plays a major role in the economy of a country. It is not only a vital source of earning foreign currency but also plays a major role in the development of a country, specially for developing country like India. India has a great potential for attracting a large amount of FDI because of its natural and finest human resources. There are certain roadblocks also which may make the ride little bumpy. There are a number of factors which play an important role in attracting foreign investment like politics, rules and regulation of a certain country, market competition. So, investors as well as host country must have a close watch on these. In this project, I will try to find out foreign investment scenario of insurance sector of India. As insurance sector of India is full of potential and India can be considered as untapped market in this field. So, there is great opportunity for foreign investors to enter in the market. There are different features of insurance sector of India which will help us to attract more investment. There are limitations to certain in our control which we can overcome. When a company enters in the foreign market they have to adopt some strategy. Some of the strategy depends upon the rules set by country, for instance in insurance sector all the company have to form joint venture with an Indian company, because they are only allowed to invest 26% in the market. So, analysis of marketing strategy will be done to find out its advantage and disadvantage to investors.

1. To study the FDI scenario of Indian insurance sector 2. To analyse the risks faced by investors in Indian insurance sector 3. To suggest ways and means to reduce those risks 4. To find out the market strategy of foreign investor

FDI IN INDIA What is FDI? Foreign direct investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country ( the host country) with the intent to manage the asset. Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are usually preferred over other forms 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 also facilitates international trade and transfer of knowledge, skills and technology. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporation (MNC). Difference Between FDI & FII FDI - is Foreign Direct Investments i.e. a foreign company having a stake in a public sector undertaking in a country for a long period and that company is called Multinational Enterprise. FII - is Foreign Institutional Investors, i.e., foreign Investment Bankers like Goldman sachs, Merrill lynch, Lehman bros etc. investing in Indian markets, in other words buying Indian stocks. FII's generally buy in large volumes which has an impact on the stock markets.

Foreign Direct Investment (FDI) is permitted as under the following forms of investments Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments. ADVANTAGES OF FDI Increase in Domestic Employment/Drop in unemployment Investment in Needed Infrastructure. Positive Influence on the Balance of Payments. New Technology and Know How Transfer. Increased Capital Investment. Targeted Regional and Sectoral Development DISADVANTAGES OF FDI Industrial Sector Dominance in the Domestic Market. Technological Dependence on Foreign Technology Sources. Disturbance of Domestic Economic Plans in Favor of FDI-Directed Activities. Cultural Change Created by Ethnocentric Staffing The Infusion of Foreign Culture , and Foreign Business Practices

Growth of FDI inflows in India in Pre-Liberalization Period In the pre liberalization period the government's attitude to FDI inflows was open but halfhearted. The investment coming to the country had to seek prior approval. The data of FDI available for this period is of the amount approved rather than actually received. However, the amount approved increased manifold during this period. Growth of FDI inflows (approved) in India in Pre-Liberalization Period

Growth of FDI inflows (Actual) in Post -Liberalization Period

Liberalization in India: 24-07-1991 The assassination of Prime Minister Indira Gandhi in 1984, and later Rajiv Gandhi in 1991 crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s. India started having balance of payments problems since 1985, and by the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks worth of imports. Our foreign exchange reserve was only 1 billion dollar of Import ,GDP growth was standstill ,economy was in shambles Our Gold was put to security to foreign countries for money to save India. Dr. Manmohan Singh with great support of late PM P.V.Narsimha Rao presented a great budget of economic liberalization. This liberalization was duly supported by the then opposition leader Atal Bihari Vajpayee of BJP. Within 4 years of liberalization Indian foreign exchange reserve rose to 140 billion dollar INDIA AN IDEAL INVESTMENT DESTINATION Worlds largest democracy Second largest emerging market (US$ 2.4 trillion) Liberal Foreign Investment Regime Skilled, economic and competitive labor force Amongst the highest rates of return on investment

Large domestic market Stable democratic environment over 60 years of independence Abundance of natural resources World class scientific, technical and managerial manpower Well-established legal system with independent judiciary. Developed banking system and vibrant capital market India among the top three investment hot spots and one of the fastest growing economies in the world. Large English speaking population

FDI in India are approved through three routes: AUTOMATIC ROUTE: No need of Prior Approval From FIPB,RBI,GOI but the investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors. THE FIPB ROUTE: FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration are granted on the recommendations of FIPB. Application for all FDI cases, except NRI investments and 100% EOUs, should be submitted to the FIPB Unit, DEA, and Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion (DIPP). Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

CCFI ROUTE: Investment proposals falling outside the automatic route. Having a project cost of Rs. 6,000 million or more would require prior approval of Cabinet Committee of Foreign Investment (CCFI). Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI. SHARE OF TOP INVESTING COUNTRIES (Fiscal years)



Percentage to total Inflows


EXPORTING A company without any marketing or production organization overseas, export a product from its home base . It is ease in implementation. Minimum risk involved. Function poorly when home country currency is strong

LICENCING It is an agreement that permits a foreign company to use industrial property, technical know-how and skills, architectural and engineering designs, or any combination of these in a foreign market. It is not only restricted to tangible products. Substantial risks and other difficulties can avoided.

JOINT VENTURE It is simply a partnership at corporate level. It is an enterprise formed for a specific business purpose by two or more investors sharing ownership and control. There is possibility of a parent firms change in mission or power. Reduce amount of resource.

MANUFACTURING Manufacturing process can be employed as a strategy involving all or some manufacturing in foreign country. Manufacturing operations in host country , not so much to sell there but for the purpose of exporting from that country to companys home country or other country is known as sourcing.

ASSEMBLY OPERATIONS Assembly operation is variation on a manufacturing strategy. Assembly means the fitting or joining together of fabricated components. To gain each countrys comparative advantage. It also allow a companys product to entry many markets without being subject to tariffs and quotas.

MANAGEMENT CONTRACT Management contract is agreement with new owner in order to manage the business. New owner may lack technical and managerial expertise and need former owner to manage the investment until local employees are trained. It is used as a sound strategy for entering a market with minimum investment and minimum political risk.

TURNKEY OPERATIONS It is an agreement by seller to supply a buyer with facility fully equipped and ready to operate by the buyers personnel. It is usually associated with giant projects. Term is also used in fast food franchising when a franchisor agree to select a store site , build the store, equip it ,train manpower etc.

SECTORS WHICH WILL BE ANALYSED Insurance Banking Retail Real Estate Automobile

The insurance industry in India has come a long way since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favour of market-driven competition. This shift has brought about major changes to the industry. The beginning of a new era of insurance development has seen the entry of international insurers, the proliferation of innovative products and distribution channels, as well as the raising of supervisory standards.

Evolution of the industry

The growing demand for insurance around the world continues to have a positive effect on the insurance industry across all economies. India, being one of the fastest-growing economies (even in the current global economic slowdown), has exhibited a significant increase in its GDP, and an even larger increase in its GDP per capita and disposable income. Increasing disposable income, coupled with the high potential demand for insurance offerings, has opened many doors for both domestic and foreign insurers. The following table briefly depicts the evolution of the insurance sector in India. 1818 1870 Oriental Life Insurance Co. was established in Calcutta. The first insurance company, Bombay Mutual Life Insurance Society, was formed. 1907 1912 The Indian Mercantile Insurance Limited was formed. Life Insurance Companies Act and the Pension Fund Act of 1912 Beginning of formal insurance regulations

1928 1938 -

Indian Insurance Companies Act was passed to collect statistical data on both life and non-life. The Insurance Act of 1938 was passed; there was strict state supervision to control frauds.

1956 -

The Central Government took over 245 Indian and foreign life insurers as well as provident societies and nationalized these entities The LIC Act of 1956 was passed.

1957 -

The code of conduct by the General Insurance Council to ensure fair conduct and ethical business practices was framed.

19721991 1993 -

The General Insurance Business (Nationalization) Act was passed. Beginning of economic liberalization The Malhotra Committee was set up to complement the reforms initiated in the financial sector.

1994 -

Detariffication of aviation, liability, personal accidents and health and marine cargo products

1999 -

The Insurance Regulatory and Development Authority (IRDA) Bill was passed in the Parliament

2000 -

IRDA was incorporated as the statutory body to regulate and register private sector insurance companies. General Insurance Corporation (GIC), along with its four subsidiaries, i.e., National Insurance Company Ltd., Oriental Insurance Company Ltd., New India Assurance Company Ltd. and

United India Assurance Company Ltd., was made Indias national reinsurer. 2005 2006 Detariffication of marine hull Relaxation of foreign equity norms, thus facilitating the of new players 2007Detariffication of all non-life insurance products except the auto third-party liability segment In India, the Ministry of Finance is responsible for enacting and implementing legislations for the insurance sector with the Insurance Regulatory and Development Authority (IRDA) entitled with the regulatory and developmental role. The government also owns the majority share in some major companies in both life and non-life insurance segments. Figure below depicts the structure of the insurance industry in India. entry



Fig : Indian insurance industry structure

Both the life and non-life insurance sectors in India, which were nationalized in the 1950s and 1960s, respectively, were liberalized in the 1990s. Since the formation of IRDA and the opening up of the insurance sector to private players in 2000, the Indian insurance sector has witnessed rapid growth. List of Insurance companies in India LIFE INSURERS Public Sector Life Insurance Corporation of India Private Sector Allianz Bajaj Life Insurance Company Limited Birla Sun-Life Insurance Company Limited HDFC Standard Life Insurance Co. Limited ICICI Prudential Life Insurance Co. Limited ING Vysya Life Insurance Company Limited Max New York Life Insurance Co. Limited MetLife Insurance Company Limited Kotak Mahindra Life Insurance Co. Ltd. SBI Life Insurance Company Limited TATA AIG Life Insurance Company Limited AMP Sanmar Assurance Company Limited Dabur CGU Life Insurance Co. Pvt. Limited

GENERAL INSURERS Public Sector National Insurance Company Limited New India Assurance Company Limited Oriental Insurance Company Limited United India Insurance Company Limited Private Sector Bajaj Allianz General Insurance Co. Limited ICICI Lombard General Insurance Co. Ltd. IFFCO-Tokio General Insurance Co. Ltd. Reliance General Insurance Co. Limited Royal Sundaram Alliance Insurance Co. Ltd. TATA AIG General Insurance Co. Limited Cholamandalam General Insurance Co. Ltd. Export Credit Guarantee Corporation

REINSURER General Insurance Corporation of India

Current scenario
A growing middle-class segment, rising income, increasing insurance awareness, rising investments and infrastructure spending, have laid a strong foundation to extend insurance services in India. The total premium of the insurance industry has increased at a CAGR of 24.6% between FY03 and FY10 to reach INR2,523.9 billion in FY10. The opening up of the insurance sector for private participation/global players during the 1990s has resulted in stiff competition among the players, with each offering better quality products. This has certainly offered consumers the choice to buy a product that best fits his or her requirements. The number of players during the decade has increased from four and eight in life and non-life insurance, respectively, in 2000 to 23 in life and 24 in nonlife insurance (including 1 in reinsurance) industry as in August 2010. Most of the private players in the Indian insurance industry are a joint venture between a dominant Indian company and a foreign insurer.
Fy00 Fy01 Fy02









Life insurers

Public Private
Non-life insurers

1 3

1 10

1 12

1 12

1 13

1 13

1 15

1 15

1 21

1 21

1 22

Public Private Reinsurer s

4 3

4 6

5 8

6 8

6 8

6 8

6 9

6 10

6 15

6 15

6 17

Table: Insurance companies in India from 2000-2010

Life insurance industry overview

market share
4.0 2.8 3.4 3.5 4.8 8.5 7.7 10.2 11.6 16.5 8.6 18.3

Fig : Market share of private companies (fy 11)

The life insurance sector grew at an impressive CAGR of 25.8% between FY03 and FY10, and the number of policies issued increased at a CAGR of 12.3% during the same period. As of August 2011, there were 23 players in the sector (1 public and 22 private). The Life Insurance Corporation of India (LIC) is the only public sector player, and held almost 65% of the market share in FY10 (based on first-year premiums). To address the need for highly customized products and ensure prompt service, a large number of private sector players have entered the market. Innovative products, aggressive marketing and effective distribution have enabled fledgling private insurance companies to sign up Indian customers more rapidly than expected. Private sector players are expected to play an increasingly important role in the growth of the insurance sector in the near future.

In a fragmented industry, new players are gnawing away the market share of larger players. The existing smaller players have aggressive plans for network expansion as their foreign partners are keen to capitalize on the enormous potential that is latent in the Indian life insurance market. ICICI Prudential, Bajaj Allianz and SBI Life collectively account for approximately 50% of the market share in the private life insurance segment. To tap this opportunity, banks have also started entering alliances with insurance companies to develop/underwrite insurance products rather than merely distribute them. Non-life insurance industry overview

Market share

FIG : Market share among players in FY11 (in %)

Between FY03 and FY11, the non-life insurance sector grew at a CAGR of 17.05%. Intense competition that followed the de-tariffcation and pricing deregulation (which was started during FY07) decelerated the growth momentum.

As of August 2011, the sector had a total of 24 players (6 public insurers, 17 private insurers and 1 re-insurer). The non-life insurance sector offers products such as auto insurance, health insurance, free insurance and marine insurance Private sector players have now pivoted their focus on auto and health insurance. Out of the total non-life insurance premiums during FY10, auto insurance accounted for 43.5% of the market share. The health insurance segment has posted the highest growth, with its share in the total non-life insurance portfolio increasing from 12.8% in FY07 to 20.8% in FY11. These two sectors are highly promising, and are expected to increase their share manifold in the coming years. With the sector poised for immense growth, more players, including monoline players, are expected to emerge in the near future. The last two years has seen the emergence of companies specializing in health insurance such as Star Health & Allied Insurance and Apollo DKV. In the last decade, it was observed that most players have experienced growth by formulating aggressive growth strategies and capitalizing on their distribution network to target the retail segment. Although the players in the private and public sector largely offer similar products in the non-life insurance segment, private sector players outscore their public sector counterparts in their quality of service.

Growth drivers
Indias favourable demographics help strengthen market penetration The life insurance coverage in India is very low, and many of those insured are underinsured. There is immense potential as the working population (25 60 years) is expected to increase from 675.8 million to 795.5 million in the next 20 years (20062026). The projected per capita GDP is expected to increase from INR18,280 in FY01 to INR100,680 in FY26, which is indicative of rising disposable incomes. The demand for insurance products is expected to increase in light of the increase in purchasing power. Health insurance attracts insurance companies The Indian health insurance industry was valued at INR51.2 billion as of FY10. During the period FY03-10, the growth of the industry was recorded at a CAGR of 32.59%. The share of health insurance was 20.8% of the total nonlife insurance premiums in FY10. Health insurance premiums are expected to increase to INR300 billion by 2015 Private sector insurers are more aggressive in this segment. Favorable demographics, fast progression of medical technology as well as the increasing demand for better healthcare has facilitated growth in the health insurance sector. Life insurance companies are expected to target primarily the young population so that they can amortize the risk over the policy term.

Rising focus on the rural market Since more than two-thirds of Indias population lives in rural areas, micro insurance is seen as the most suitable aid to reach the poor and socially disadvantaged sections of society.

Poor insurance literacy and awareness, high transaction costs and inadequate understanding of client needs and expectations has restricted the demand for micro-insurance products. However, the market remains significantly underserved, creating a vast opportunity to reach a large number of customers with good value insurance, whether from the base of existing insurers or through retail distribution networks.

In FY09, individuals generated new business premium worth INR365.7 million under 2.15 million policies, and the group insurance business amounted to INR2, 059.5 million under 126 million lives. LIC contributed most of the business procured in this portfolio by garnering INR311.9 million of individual premium from 1.54 million lives and INR1,726.9 million of group premium under 11.1 million lives. LIC was the first player to offer specialized products with lower premium costs for the rural population. Other private players have also started focusing on the rural market to strengthen their reach. Government tax incentives Currently, insurance products enjoy EEE benefits, giving insurance products an advantage over mutual funds. Investors are motivated to purchase insurance products to avail the nearly 30% effective tax benefit on select investments (including life insurance premiums) made every financial year. Life insurance is already the most popular financial product among Indians because of the tax benefits and income protection it offers in a country where there is very little social security. This drives more and more people to come within the insurance ambit.

Emerging trends
Exploring multiple distribution channels for insurance products To increase market penetration, insurance companies need to expand their distribution network. In the recent past, the industry has witnessed the emergence of alternate distribution channels, which include bancassurance, direct selling agents, brokers, online distribution, corporate agents such as non-banking financial companies (NBFCs) and tie-ups of Para-banking companies with local corporate agencies (e.g. NGOs) in remote areas. Agencies have been the most important and effective channel of distribution hitherto. The industry is viewing the movement of intermediaries from mere agents to advisors. Product innovation With customers asking for higher levels of customization, product innovation is one of the best strategies for companies to increase their market share. This also creates greater efficiency as companies can maintain lower unit costs, offer improved services and distributors can increase flexibility to pay higher commissions and generate higher sales. The pension sector, due to its inadequate penetration (only 10% of the working population is covered) offers tremendous potential for insurance companies to be more innovative. Consolidation in future The past few years have witnessed the entry of many companies in the domestic insurance industry, attracted by the significant potential of insurance sector. However, increasing competition in easily accessible urban areas, the FDI limit of 26% and the recent downturn in equity

markets have impacted the growth prospects of some small private insurance companies. Such players may have to rethink about their future growth plans. Hence, consolidation with large and established players may prove to be a better solution for such small insurers. Larger companies would also prefer to take over or merge with other companies with established networks and avoid spending money in marketing and promotion. Therefore, consolidation will result in fewer but stronger players in the country as well as generate healthy competition. Mounting focus on EV over profitability Many companies are achieving profitability by controlling expenses; releasing funds for future appropriations as well as through a strong renewal premium build up. As a few larger insurers continue to expand, most are focused on cost rationalization and the alignment of business models to ground level realities. This will better equip insurers to realize reported embedded value (EV) and generate value from future new business. In the short term, companies are likely to face challenges to achieve the desired levels of profitability. As companies are also planning to get listed and raise funds, the higher profitability will help companies to get a better valuation of shares. However, in the long term, companies would need to focus on increasing EV, as almost 70% of a companys EV is influenced by renewal business and profitability is not as much of an indicator for valuation. Hence, players are now focusing on increasing their EV than profitability figures. Rising capital requirements Since insurance is a capital-intensive industry, capital requirements are likely to increase in the coming period. The capital requirement in the life insurance business is a function of the three factors: (1) sum at risk; (2)

policyholders assets; (3) new business strain and expense overruns. With new guidelines in place, capital requirements across the sector are likely to go up due to: Higher sum assured driving higher sum at risk Greater allocation to policyholders assets due to lower charges Back loading of charges is resulting in high new business strain, and expense overruns due to low productivity of the newly set distribution network (and inability to recover corresponding costs upfront) For non-life insurance companies, the growing demand for health insurance products as well as motor insurance products is likely to boost the capital requirement. With the capital market picking up and valuations on the rise, insurance companies are exploring various ways of increasing their capital base to invest in product innovation, introducing new distribution channels, educating customers, developing the brand, etc. This is due to the following reasons: A major portion of the costs in insurance companies is fixed (though it should be variable or semi-variable in nature). Hence, the reduction in sales will not result in the lowering of operational expenses, thus adversely impacting margins. As such, reduced margins would impact profitability, and insurers would need to invest additional funds. The sustained bearishness in capital markets could further pressurize the investment margins and Increase the capital strain, especially in the case of capital/return guarantee product. Besides, companies are likely to witness a slowdown in new business growth. Companies may also opt for product restructuring to lower their costs and optimally utilize capital.

According to IRDA Regulations 2000, all insurance companies are required to maintain a solvency ratio of 1.5 at all times. But this solvency margin is not sustainable. With the growing market risks, the level of required capital will be linked to the risks inherent in the underlying business. India is likely to start implementing Solvency II norms in the next three to four years. The transition from Solvency I norms to Solvency II norms by 2012 is expected to increase the demand for actuaries and risk management professionals. The regulator has also asked insurance companies to get their risk management systems and processes audited every three years by an external auditor. Many insurance companies have started aligning themselves with the new norms and hiring professionals to meet the deadline.

Contribution of insurance to FDI

The importance of FDI in the development of a capital-deficient country such as India cannot be undermined. This is where the high-growth sectors of an economy play an important role by attracting substantial foreign investments. Currently, the total FDI in the insurance sector, which was INR50.3 billion at the end of FY09, is estimated to increase to approximately INR51 billion in FY10. It is difficult to estimate, but an equal amount of additional foreign investment, can roughly flow into the sector if the government increases the FDI limit from 26% to 49%. The insurance sector, by virtue of attracting long-term funds, is best placed to channelize long-term funds toward the productive sectors of the economy. Therefore, the growth in their premium collections is expected to translate into higher investments in other key sectors of the economy. Therefore, the liberalization of FDI norms for insurance would not only benefit the sector, but several other critical sectors of the economy.

Need of FDI in Insurance sector

The insurance sector in India is highly under-penetrated and capitalintensive. High investment, poor underwriting and lack of technical expertise are the major problems Indian insurance firms are currently struggling with. Insurers focus on top line growth at any cost resulted in poor operating and inefficiency in the system. The industry has inferior operating expense ratio (cost of operation to generate operating income or operating expense divided by gross operating income) compared to global standards both in life and nonlife segments. Due to these challenges we still have many people across the country that are either under-insured or uninsured and it will take huge capital and expertise to reach and educate them and design new insurance products that meet their requirements. This amount of money is difficult to get from the domestic market, especially when the sector has made losses in near past. With a limited ability to access long term capital, private insurance companies are not able to grow fast and expand in new verticals. As per the Insurance Regulatory and Development Authority, only eight out of 22 private life insurance companies and seven out of 13 private non-life insurance companies were profitable last year. Due to this lacklustre performance by private companies, it is difficult for them to raise capital through initial public offering (IPO) route and even if they are able to get successful IPOs, the fund will be diverted from other sectors that also require capital market financing. The other way to get funds is FII which by its very nature provide funding for short term only and not for long term as required by insurance firms to build and expand their business. We have already witnessed outflow of FII funds during last recession which lead to 50 per cent drop in Bombay Stock Exchange. In contrast to these sources foreign direct investment (FDI) is more sustainable and offer long term investment. The industry is expected to grow at a much faster pace due to huge capital inflow, expertise and transfer of technical

know-how. Various sources within the industry suggest that the industry will grow to $60-$70 billion in size from its current size of $45 billion and the life insurance sector will get more than a billion dollar of FDI given the increase in its limit to 49 per cent. Rural India may also benefit from this move as with current resources Indian firms are not able to serve this market. The opportunity is evident from the fact that around 50 insurers are serving Indias 1.2 billion population compared to 400 insures serving 60 million Britons. These Indian insurers are currently focusing on the urban market leaving the rural market uninsured. To tap this market, insurance companies require more expertise and innovative products, designed specifically for rural India. This can be done by raising the FDI limit and by ensuring that it is directed towards inclusive insurance of our country by focusing on the rural and social sectors. To make sure rural India benefit from such a move the IRDA should come up with new norms and guidelines for insurers where a particular portion of the FDI inflow in the sector is used in rural and social sectors. Regulations also need to change in the direction which facilitates movement towards an era of electronic policy issuance and de-materialisation. This will help insurers to reach and operate in regions where they dont have presence due to logistical difficulties. Insurance sector is an important driver of job creation and as the number of insurance firms increase and enter into new markets, it will provide jobs to millions of people. Statistics reveals that private insurers have created more than three million jobs (direct and indirect) 2003 onwards. The joint ventures with foreign players will provide enough capital and expertise to develop new products and hire more agents, analyst and supporting staff to enter into new urban and rural markets. Raising the FDI cap will also help developing infrastructure in the country. It is a well known fact that the sustainable and inclusive growth of India is primarily dependent on the ability of government to provide adequate

infrastructure to all sectors. But figures suggest that we spend only 6 per cent of our GDP on infrastructure development as compared to 20 per cent of GDP by China. Lack of funds is a primary concern to build up and support huge infrastructure projects. As per the Eleventh Plan, government spending can support only 43 per cent of infrastructure development projects and around 70-80 per cent of rest of funding has to be raised through debt market where insurance companies with long-term investment horizon can play a vital role. As of now insurance firms are not major contributors in infrastructure funding but with a higher FDI cap and improved regulations and guidelines there is a possibility to attract more firms to invest their insurance premiums in infrastructure projects. A section of supporters suggest that instead of raising the limit to 49 per cent, it should be raised to 51 per cent. It will have a bigger impact in attracting more investment in the sector. However, the sector is still in a developing state and Indian players are not capable and experienced to compete with their foreign peers (above 50 per cent FDI will give management control to foreign players). So it is advisable to wait until the market is mature and Indian players get sufficient expertise and technical know-how to compete with their foreign peers. We will see major change in the way the Indian insurance sector is functioning at the moment. The business model will change from agentcentric to customer-centric, which offers more value to its end customers. There will be more products in the market catering the needs of all sections of society; the role of insurance agents will transform from mere intermediaries to financial advisers; people will be more aware of insurance products and customers will get better products and services at competitive prices. The shortage of technical know-how and expertise in the Indian industry (like claims management, actuarial, underwriting etc) will be overcome by technology and know-how transfer, generally not available under the current system.

Barriers to FDI in the insurance sector

Despite its recent growth, the Indian insurance market lags behind other economies in the baseline measure of insurance penetration. At only 2.8%, India is well behind the 13% for the UK, 11% for Japan, 10% for Korea, 9.6% for the US, and even 3.4% for China. Given the dramatic demographic shifts now taking place in India, it is clear that the insurance industry will need to play an increasingly important role in the future. For this to be achieved, further modernisation is required of the regulatory environment for insurance in India. The following barriers to insurance in India are considered as most important: - 26% cap on foreign direct investment in insurance companies - Set tariffs and conditions which still dominate non-life insurance in India - Reinsurance monopoly

Barriers with regards to the national treatment in insurers in India Certain government banks are unwilling to accept insurance covers written by private insurance companies (i.e. Marine) Removing this barrier would increase revenues available to private insurers and widen the choice of available cover Foreign reinsurers are not granted right of first refusal privileges while domestic reinsurers have this right. The national reinsurer, General Insurance Corporation, has the right but not obligation to accept any business that requires reinsurance over and above 20% mandatory cessions. This unfair advantage has created an unlevel playing field, and National Re remains effectively a monopoly in the market.

Effective prohibition on cessions abroad. Insurance law makes it mandatory to place the business within India (exhaust local capacity) before reinsurance can be taken out with foreign reinsurers. Greater reinsurance competition would increase pressure on price.

Barriers with regard to market access of foreign insurers in India Restrictions on foreign equity ownership of insurance and insurance brokerage companies. Foreign insurers cannot establish unless via a joint venture with an approved partner with a minimum 74% local shareholding. This restriction will hamper the growth prospects of private companies, as growth requires more capital allocation, which the local partners may be unable to match. While the intent of the current government to raise the foreign equity ownership cap to 49% has been made clear, it has yet to result in action. Set tariffs dominate the market resulting in poor development of underwriting skills and leading to cross-subsidisation. 74% of the market GWP is regulated by tariff; the Tariff Advisory Committee decides on price, terms and conditions. This prevents insurance companies from offering product or price differentiation. Capitalisation requirements in India are at USD 25 million for initial establishment. This may restrict market entry by mono-line insurers. Their entry would create greater awareness and demand. Limitations with respect to payment of claims in foreign currency-exceptions require approvals from RBI

A lengthy permission process is required from the central bank. Removal of this barrier would reduce administrative costs and reduce currency risk. Imposition of 20% mandatory cessions across the board for non-life classes to state reinsurer. The National Reinsurer, General Insurance Corporation, benefits from a share of 20% of every business written by Insurance companies. This prevents insurance companies from retaining profitable classes of business on their own books and restricts them from seeking better terms from foreign reinsurers. Insurance companies investments are strictly limited. Most funds in insurance companies are only allowed to be invested in low-return state and central government bonds. This is an impediment for foreign insurers as their profits and the returns available to policyholders - may suffer from their inability to invest in a wider range of investment products.

FDI Regulations in Insurance Sector

A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the Foreign Direct Investment (FDI) policy. A citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI policy, only under the Government route. NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels. As per the policy, Foreign Direct Investment (FDI) by non-resident in resident entities through transfer or issue of security to a person resident outside India in insurance sector is as follows: 1. FDI upto 26% is allowed under the automatic route. 2. This will be subject to the condition that Companies bringing in FDI shall obtain necessary license from the Insurance regulatory Development Authority (IRDA) for undertaking insurance activities. A person desiring to obtain a licence (hereinafter referred to as the applicant) from Insurance Regulatory Development Authority to act as a corporate agent or a composite corporate agent shall proceed as follows: 1. The applicant shall make an application to a designated person in Form IRDA-Corporate Agents-A-1. (Provided that the applicant, who desires to be a composite corporate agent, shall make two such separate applications)

2. The fees payable by the applicant to the Authority shall be Rupees Two Hundred and Fifty only. 3. The designated person may, on receipt of the application along with the evidence of payment of fees to the Authority, and on being satisfied that the corporate insurance executive of the applicant:i. possesses the prescribed qualifications; ii. possesses the prescribed practical training; iii. has passed the prescribed examination; iv. has furnished an application complete in all respects; v. has the requisite knowledge to solicit and procure insurance business; and vi. is capable of providing the necessary service to the policyholders; Grant or renew, as the case may be, a licence in Form IRDA-Corporate AgentsL-1 4. Every licence granted by the Authority to a corporate agent or any renewal thereof, in terms of these regulations, shall remain in force for three years. A licence granted to a corporate agent may be renewed for a further period of three years on submission of the application form along-with a renewal fee of rupees two hundred and fifty, at least thirty days prior to the date of expiry of the licence.

Strategy adopted by foreign investors

In India only 26% fdi is allowed through automatic route. Generally foreign insurance company make alliance with reputed Indian company or bank and operates their business in Joint Venture with their Indian counterpart. It is necessary that Indian company should have at least 74% share in the venture. What is joint venture? There are many good business and accounting reasons to participate in a Joint Venture (often shortened JV). Partnering with a business that has complementary abilities and resources, such as finance, distribution channels, or technology, makes good sense. These are just some of the reasons partnerships formed by joint venture are becoming increasingly popular. A joint venture is a strategic alliance between two or more individuals or entities to engage in a specific project or undertaking. Partnerships and joint ventures can be similar but in fact can have significantly different implications for those involved. A partnership usually involves a continuing, long-term business relationship, whereas a joint venture is based on a single business project. Parties enter Joint Ventures to gain individual benefits, usually a share of the project objective. This may be to develop a product or intellectual property rather than joint or collective profits, as is the case with a general or limited partnership. A joint venture, like a general partnership is not a separate legal entity. Revenues, expenses and asset ownership usually flow through the joint venture to the participants, since the joint venture itself has no legal status. Once the Joint venture has met its goals the entity ceases to exist.

What are the Advantages of forming a Joint Venture?

Provide companies with the opportunity to gain new capacity and expertise Allow companies to enter related businesses or new geographic markets or gain new technological knowledge access to greater resources, including specialised staff and technology sharing of risks with a venture partner Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure.

In the era of divestiture and consolidation, JVs offer a creative way for companies to exit from non-core businesses. Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

The Disadvantages of Joint Ventures

It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if: The objectives of the venture are not 100 per cent clear and communicated to everyone involved. There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners. Different cultures and management styles result in poor integration and co-operation. The partners don't provide enough leadership and support in the early stages. Success in a joint venture depends on thorough research and analysis of the objectives.

Embarking on a Joint Venture can represent a significant reconstruction to your business. However favourable it may be to your potential for growth, it needs to fit with your overall business strategy.

It's important to review your business strategy before committing to a joint venture. This should help you define what you can sensibly expect. In fact, you might decide there are better ways to achieve your business aims. You may also want to study what similar businesses are doing, particular those that operate in similar markets to yours. Seeing how they use joint ventures could help you decide on the best approach for your business. At the same time, you could try to identify the skills they use to partner successfully. You can benefit from studying your own enterprise. Be realistic about your strengths and weaknesses - consider performing strengths, weaknesses, opportunities and threats analysis (swot) to identify whether the two businesses are compatible. You will almost certainly want to identify a joint venture partner that complements your own skills and failings. Remember to consider the employees' perspective and bear in mind that people can feel threatened by a joint venture. It may be difficult to foster effective working relationships if your partner has a different way of doing business. When embarking on a joint venture its imperative to have your understanding in writing. You should set out the terms and conditions agreed upon in a written contract, this will help prevent misunderstandings and provide both parties with strong legal recourse in the event the other party fails to fulfil its obligations while under contract. A written Joint Venture Agreement should cover:

The parties involved The objectives of the joint venture

Financial contributions you will each make whether you will transfer any assets or employees to the joint venture Intellectual property developed by the participants in the joint venture Day to day management of finances, responsibilities and processes to be followed. Dispute resolution, how any disagreements between the parties will be resolved How if necessary the joint venture can be terminated. The use of confidentiality or non-disclosure agreements is also recommended to protect the parties when disclosing sensitive commercial secrets or confidential information.

JOINT VENTURE STRATEGIES Businesses should not engage in joint ventures without adequate planning and strategy. They cannot afford to, since the ultimate goal of joint ventures is the same as it is for any type of business operation: to make a profit for the owners and shareholders. A successful company in any type of business is often recruited heavily for participation in joint ventures. Thus, they can pick and choose in which partnerships they would like to engage, if any. They follow certain ground rules, which have been developed over the years as joint ventures have grown in popularity. For example, experience dictates that both parties in a joint venture should know exactly what they wish to derive from their partnership. There must be an agreement before the partnership becomes a reality. There must also be a firm commitment on the part of each member. One of the leading causes for the failure of joint ventures is that some participants do not reveal their true intentions in the partnerships. For example, some private companies in advanced countries have formed partnerships with militant governments to supply technological expertise and develop products such as chemicals or

nuclear reactors to be used for allegedly peaceful purposes. They learned later that the products were used for military purposes. Such results can be detrimental to the companies involved and adversely affect their bottom lines and reputations, to speak nothing of the direct victims of the military development. Businesses should form joint ventures with experienced partners. If the partners do not have approximately equal experience, one can take advantage of the other, which can lead to failure. Joint ventures generally do not survive under this imbalanced dynamic. Nor do they survive if companies jump into them without testing the partnership first. Partners in joint ventures would often be better off participating in small projects as a way to test one another instead of launching into one large enterprise without an adequate feeling-out process. This is especially true when companies with different structures, corporate cultures, and strategic plans work together. Such differences are difficult to overcome and frequently lead to failure. That is why a "courtship" is beneficial to joint venture participants.

Some examples of joint venture in insurance sector

Tata AIG Insurance Solutions Tata AIG Insurance Solutions, one of the leading insurance providers in India, started its operation on April 1, 2001. A joint venture between Tata Group (74% stake) and American International Group, Inc. (AIG) (26% stake), Tata AIG Insurance Solutions has two different units for life insurance and general insurance. The life insurance unit is known as Tata AIG Life Insurance Company Limited, whereas the general insurance unit is known as Tata AIG General Insurance Company Limited. AVIVA Life Insurance AVIVA Life Insurance, one of the popular insurance companies in India, is a joint venture between the renowned business group, Dabur and the largest insurance group in the UK, Aviva plc. AVIVA Life Insurance has an extensive network of 208 branches and about 40 Bancassurance partnerships, spread across 3,000 cities and towns across the country. There are more than 30,000 Financial Planning Advisers (FPAs) working for AVIAV Life Insurance. It offers various plans like Child, Retirement, Health, Savings, Protection and Rural.

MetLife Insurance MetLife India Insurance Company Limited is another popular player in Indian insurance sector. A joint venture between the Jammu and Kashmir Bank, M. Pallonji and Co. Private Limited and other private investors and MetLife International Holdings, Inc., MetLife Insurance offers a wide range of financial solutions to its customers including Met Suraksha, Met Suraksha TROP, Met Mortgage Protector and Met Suraksha Plus etc. It has its branches situated over 600 locations across the country. More than 50,000 Financial Advisors work for MetLife.

ING Vysya Life Insurance ING Vysya Life Insurance entered into the Indian insurance industry in September 2001. A joint venture between ING Group, Ambuja Cements, Exide Industries and Enam Group, ING Vysya Life Insurance uses its two channels, viz. the Alternate Channel and the Tied Agency Force to distribute its products. The first channel has branches in 234 cities across the country and has got 366 sales teams. On the other hand, the later one has more than 60,000 advisors. Currently, ING Vysya Life Insurance has tie ups with more than 200 cooperative banks.

Birla Sun Life Financial Services Birla Sun Life Financial Services is a joint venture between Aditya Birla Group and Sun Life Financial Inc, Canada. It has got an extensive network of more than 600 branches. More than 1,75,000 empanelled advisors work for Birla Sun Life, which currently covers over 2 million lives.

MAX New York Life Max New York Life Insurance Company Ltd. is one of the top insurance companies in India. A joint venture between Max India Limited and New York Life International (a part of the Fortune 100 company - New York Life), Max New York Life Insurance Company Ltd. started its operation in April 2001. It currently has around 715 offices located in 389 cities across the country. It also has around 75,832 agent advisors. Max New York Life offers 39 products, which cover both, life and health insurance.

Bajaj Allianz Bajaj Allianz is a joint venture between Bajaj Finserv Limited and Allianz SE, where Bajaj Finserv Limited holds 74% of the stake, whereas Allianz SE holds the rest 26% stake. Bajaj Allianz has been rated iAAA by ICRA for its ability to pay claims. The company also achieved a growth of 11% with a premium income of ` 2866 crore as on March 31, 2009.

Bharti AXA Life Insurance Bharti AXA Life Insurance, one of the top insurance companies in India, is a joint venture between Bharti group and world leader AXA. Bharti holds 74% stakes, whereas AXA holds the rest of 26%. Bharti AXA has its branches located in 12 states across the country. It offers a range of individual, group and health plans for its customers. Currently more than 8000 employees work for Bharti AXA Life Insurance.

On the basis of my study I figured out some of the important factors which can help India in not only attracting more FDI in insurance sector but can also help to increase Indias reputation as a premium investment destinations. Some of the suggestions are as follows: It was demanded since long time that FDI cap for insurance sector should raise upto at least 49% from its current 26%. This will attract further more investors in India. As competition will increase and this will result into enhanced product quality A lengthy permission process is required from the central bank. Removal of this barrier would reduce administrative costs and reduce currency risk for foreign company. The state-owned General Insurance Corporation (GIC), with its traditionally close ties to the primary insurers of the public sector, holds a monopoly, being the only domestic reinsurer in India. Mandatory cessions to GIC and its right of first refusal privilege prevent Indian primary insurers from diversifying their risks freely and flexibly. Opening up Reinsurance sector will definitely help India to attract more FDI.

There is no doubt that the potential market for the buyers of insurance is significant in India and offers a great scope of growth. While estimating the potential of the Indian insurance market we often tempt to look at it from the perspective of macro-economic variables such as the ratio of premium to GDP, which is indeed comparatively low in India. For example, India's life insurance premium as a percentage of GDP is 1.3% against 5.2% in the US, 6.5% in the UK or 8% in South Korea. But the fact is that the large part of the India's (the number of potential buyers of insurance) is certainly attractive. However, this ignores the difficulties of approaching this population. Much of the demand may not be accessible because of poor distribution, large distances or high costs relative to returns. Despite innumerable delays the sector has finally opened up for private competition. The threat of private players shaking and giving the run for incremental market share for the Public Sector mammoths has been overplayed. The number of potential buyers of insurance is certainly attractive but much of this population might not be accessible for the new insurers. Since distribution will be a key determinant of success for all insurance companies regardless of age or ownership, Indian Insurance companies should broaden the distribution network. As the product move towards the mature stages of commodization (increased awareness and popularity) they could then a host of new channels like grocery stores, direct mails. Regulators must formulate strong and fair guidelines and ensure that old and new players are subject to the same rules and at the same time the government should ensure that the IRDA does not become yet another toothless tiger like CEA or TRAI. In a reopened Indian insurance market, regulators must formulate strong fair and transparent guidelines and make sure that old and new players are subject to the same rules. Companies meanwhile must be prepared to set and meet high standards for themselves. The big challenge for both companies and regulators is to ensure that they replicate the benefits of the past while eliminating its ills.

References Banking and Insurance - Law and Practice by The Institute of Company Secretaries of India (ICSI) International Marketing by Michael R. Czinkota, Illka A. Ronkainen Global Marketing (3rd Edition) by Warren J. Keegan, Mark Green International marketing by R. Srinivasan Ministry of commerce websites Business Today Business & Economy