Impact of Foreign Direct Investment in Insurance Sector in India

Mr. Suranjan Sharma

Student, Department of Management Studies, Christ University
Mob: 7018494926 Email: [email protected]

Dr. Sunita Panicker

Associate Professor, Department of Management Studies, Christ University
Mob: 9449641233 Email: [email protected]
Abstract:

Foreign Direct Investment(FDI) refers to capital inflows from abroad that are invested 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. Foreign direct investment is gaining importance in the global economic growth. However,
this growth is highly seen in the Insurance Sector. The insurance sector in India has a great potential
even during the downtrend and FDI flow is expected to rise in the near future. The objective of this paper
is to analyze the problems that are present in the insurance industry with reference to the impact of
foreign direct investment on private insurance sector in India. For this, the researchers collected data
from government magazines, journal, paper, websites, company’s financial report, IRDA official website
etc. The data was analyzed using ratio analysis, comparative study, and descriptive statistics. Based on
the analysis it was found that an in the increasing foreign direct investment (F.D.I.) is an optimistic
move for the future of Indian Life Insurance Sector. The reason being that this sector needs the huge
amount of capital investment which can be done effectively only through an increase in FDI and it
enhances the overall performance of insurance sector.

Keywords: FDI, Investment boundaries, Cash Inflow, Cash Outflow, Life Insurance, General
Insurance, Public Sector, Private Sector.
I. INTRODUCTION
The insurance industry of India consists of 52 insurance companies of which 24 are in life insurance business and 28
are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.
Apart from that, among the non-life insurers, there are six public sector insurers. In addition to these, there is sole
national re-insurer, namely, General Insurance Corporation of India. Other stakeholders in Indian Insurance market
include agents (individual and corporate), brokers, surveyors and third-party administrators servicing health insurance
claims.

Out of 28 non-life insurance companies, five private sector insurers are registered to underwrite policies exclusively
in health, personal accident, and travel insurance segments. They are Star Health and Allied Insurance Company Ltd,
Apollo Munich Health Insurance Company Ltd, Max Bupa Health Insurance Company Ltd, Religare Health Insurance
Company Ltd and Cigna TTK Health Insurance Company Ltd. There are two more specialized insurers belonging to
the public sector, namely, Export Credit Guarantee Corporation of India for Credit Insurance and Agriculture
Insurance Company Ltd for crop insurance.

Insurance in India is a flourishing industry in India with both national and international players competing and growing
at rapid rate. Together with banking and real estate, it constitutes 12.9% of GDP in India. However, the penetration of
insurance coverage for both life and non-life insurance is still very less and was 3.9% in 2013.

Indian insurance sector was liberalized in 2001. Liberalization has led to the entry of the largest insurance companies
in the world, who have taken a strategic view on India being one of the top priority emerging markets. The Insurance
industry in India has undergone transformational changes over the last 14 years. With raising the cap on FDI into
Indian insurance companies to 49% from the 26% would allow global reinsurance companies to set up branches in
India.

According to the insurance amendment bill (2015), the section 24 of the Pension Fund Regulatory and Development
Authority (PFRDA) Act provides that the foreign investment limit in the pension sector will be linked with the ceiling
in the insurance sector, which has gone up to 49% from 26%. Under the legislation, while up to 26 percent foreign
capital will be under the automatic route, the balance 23 percent has to secure approval from the Foreign Investment
Promotion Board (FIPB). According to the General Insurance Business (Nationalization) Act, 1972 (GIBNA, 1972)
the four general insurance companies (GICs) had to be 100% government owned, however, The Insurance Laws
(Amendment) Bill, 2015 — passed by the Rajya Sabha on March 12 and by the Lok Sabha on March 4 — will change
that.

The GICs “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. The amendment also clearly defines health insurance
business to include travel and personal accident cover. It is also expected that the proposed increase in the FDI limit
will have a follow-on impact on other sectors, including the pension industry creating further momentum.

INDIAN INSURANCE SECTOR

Insurance in India is listed in the Constitution of India in the Seventh Schedule as a Union List subject, meaning it can
only be legislated by the Central government. The history of insurance date backs to 1818 when Oriental Life
Insurance Company was started. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer. In
the year 1912, the Life Insurance Companies Act and the Provident Fund Act was passed to regulate the insurance
business. This was the first statutory measure to regulate life insurance business. In 1928, the Indian Insurance
Companies Act was enacted to enable the Government to collect statistical information about both life and non-life
business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a
view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the
Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The
Government of India issued an Ordinance on 19 January 1956 nationalizing the Life Insurance sector and Life
Insurance Corporation came into existence in the same year. The Life Insurance Corporation (LIC) absorbed 154
Indian, 16 non-Indian insurers as also 75 provident societies-245 Indian and foreign insurers in all. In 1972 the
parliament passed General Insurance Business (Nationalization) Act, and consequently, General Insurance business
was nationalized with effect from 1 January 1973. 107 insurers were amalgamated and grouped into four companies,
namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company
Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a
company in 1971 and it commences business on 1 January 1973.

In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to
propose recommendations for reforms in the insurance sector. Following the recommendations of the Malhotra
Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an
autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in
April 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction
through increased consumer choice and lower premiums while ensuring the financial security of the insurance market.

The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign
companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section
114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of
companies for carrying on insurance business to the protection of policyholders' interests.

The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the
industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General
Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary companies. With effect from
December 2000, these subsidiaries have been de-linked from the parent company and were set up as independent
insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National
Insurance Company Limited and United India Insurance Company Limited.

II. LITERATURE REVIEW

Kumar (2003) examines the various issues relating to insurance business in India like liberalization, privatization,
regulatory issues and future possibilities. He points out the importance of insurance in promoting saving habits and
providing safety to rural and urban enterprises and generation of funds for infrastructure building. Foreign companies
are required in this vital sector. Even after liberalization, nationalized players will continue to hold strong market share
positions but there will be enough business for new entrants to be profitable. P.S Palande, R.S. Shah, and M.L.

Sen (2006) analyzed the Indian life insurance industry after the privatization of the insurance market. The entry of
private firms will raise both price competition and service competition. The study concludes that there is a hint of
movement towards a more competitive regime but 20 there is a good level of competition among the private companies
to capture market share.

S. Krishnamurthy (2005) points out that the life insurance industry has shown extremely satisfactory results in terms
of premium income and new policies sold but a huge potential still remains unexploited. Experience suggests that
consumers still favor insurance as a saving tool. There is a need to change the perception of Indian consumers towards
insurance and it is the responsibility of the distribution channel to advise and educate consumers.

Geetanjali Mehlwal (2006) in her article describes the insurance market as it exists today, its growth potential and
the incentive to private insurers from the world over. The study suggests that after liberalization of the insurance
industry in March 2000, there has been consistent growth and the current potential premium income of the country is
estimated at $80 billion. India is seen as the sixth largest market in the world. In India, 80 percent of the population
remains without life insurance and only 2.5 percent of the country's insurable population is currently insured. Though
LIC has been in the country for a long time, it did not tap much of the rural market. It mainly concentrated on
endowment and money back policies. The private insurance has made good progress despite the existence of public
sector players. As a result, there is a decline in the new premium business of LIC.
Between April 2004 and February 2005, LIC's first-year premium dropped by 9.3 percent i.e. 77.87 percent from a
market share of 87.22 percent in the preceding year. The study points out that the insurance business is growing at the
rate of 15-20 percent annually. Insurance penetration has increased from 2.32 percent in 2000 to 2.88 percent in 2003.
Likewise, insurance density has increased from Rs 435.897 in 2000 to Rs.722.092 in 2003. There has been an increase
of 83 percent in the premium collection during the three years following the enactment of the IRDA Act. The premium
collected by insurers, both life and non-life are estimated to be about Rs 25,343 billion in the year 2004-2005. The
average size of life insurance cover before privatization which was around Rs 50,000/- has now risen to Rs 80,000/-.
Geetanjali Mehlwal also mentions about insurance distribution and intermediaries. Insurance companies are making
new investments in information technology. Today there are alternate channels like bancassurance, brokers, corporate
agents and direct marketing through internet.

Narayana (2012) explained that one of the major concerns of planners and policymakers in India is attracting more
and more Foreign Direct Investment. He analyzed the Foreign Direct Investment and its flows into India. He
highlighted the basic constraints to investment in general and Foreign Direct Investment in particular.

Jampala, Lakshmi, and Srinivasa (2013) discussed Foreign Direct Investment Inflows into India in the Post-reforms
period. They concluded that "as far as the economic interpretation of the model is concerned; the size of the domestic
market is positively related to Foreign Direct Investment. The greater the market, the more customers and more
opportunities to invest."

Pradeep (2013) made an attempt to study of foreign direct investment in India. He emphasized that Investment, or
creation of capital, is an important determinant of economic growth. In general, the investment may lead to the creation
of physical capital, financial capital and human capital. In case of foreign direct investment (FDI), the private foreign
investor either sets up a branch or a subsidiary in the recipient country. In the liberalized environment as economies
become increasingly open, and trade between countries expand, financial transactions become global through
financing trade of goods and services. Capital is the engine of economic development and this statement is gaining
importance in the recent times.

III. METHODOLOGY OF THE STUDY

Data collection methods

The study is entirely depending upon the utilization of the secondary data as it is related to the proven result, which
has been published in the government magazines, journal, paper, websites, company’s financial report, IRDA official
website etc.

Research Questions

 What is the impact of FDI on Insurance Sector?

 What are the current policy and regulations of Indian Insurance Industry and they impact the same?

Research Objectives

• To measure the factors that impact the FDI on insurance sector

• To study the effect of FDI on Indian Insurance Sector

• To Study the pattern of FDI in Insurance Sector and the Government regulation involved in them.

• To analyze the significance of Foreign Direct Investment for Indian Insurance Industry.

Data Analysis Tools

• Descriptive statistics analysis

• Indicators - Insurance penetration ratio, Insurance density ratio

IV. DATA ANALYSIS AND INTERPRETATION

INSURANCE PREMIUM

Premium Sale

8.06 LIC
1.12
1.6
2.08 SBI
2.08
4.08 ICICI

4.88 HDFC

Bajaj Allianz
5.1
Max Life

Birla Sun Life

70.4
Reliance Life

Others
 70

60

50

45
40
42
39
Public
38 39
37 34
30 Private

20 28
21
21 13
10 17 19
17 18
14 13 14 14 13
10 11
6 6 6.3
2 3
0
FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16

Figure 1 Premium Growth In Insurance Sector

NON LIFE INSURANCE

RATIOS

Penetration is measured as the percentage of the measure of insurance penetration and insurance premium to GDP,
insurance density is density reflects the level of development of calculated as the ratio of premium to population
insurance sector in a country. While insurance (per capita premium).

INSURANCE PENETERATION AND DENSIY

64.4
59 60 61.2
54.3 53.2 55 53
52
46.6 47.4
38.4

22.7

3.17 3.4 4.8 4.7 4.6 5.2 5.1 4.1 3.96 3.9 3.3 3.4 3.5
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% INSURANE PENETERATION %INSURANCE DENSITY

YEAR % INSURANCE YEAR % INSURANCE
PENETRATION DENSITY
2005 2005
3.17 22.7
2006 2006
38.4
3.4 2007
2007 4.8 46.6
2008
2008 4.7 47.4
2009
2009 4.6 54.3
2010
2010 5.2 64.4
2011
2011 5.1 59
2012
2012 4.1 53.2
2013 3.96 2013
52
2014 3.9 2014
55
2015 3.3 2015
53
2016 3.4 2016
60
2017 3.5 2017
61.2

MARKET SHARE
HOUSEHOLD SAVINGS
GOVERNMENT INITIATIVES

INTERPRETATION

 As shown in the data given above post liberalization the growth in the insurance industry is immense the insurance
density has increased from 20 percent to 60 percent which means 60 percent of the population has paid premium
in total in both general and life insurance
 The GDP of the country has grown since 2001 also the penetration ratio has kept up consistently to 3.5
 The non-life insurance market grew from US$ 2.6 billion in FY02 to US$ 19.8 billion in FY17.
 Over FY08-17, non-life insurance premiums increased at a CAGR of 17.7 per cent.
 The number of policies issued increased from 65.55 million in FY08 to 161.17 million in FY17, at a CAGR of
10.5 per cent.
 The first two factors are resultant from the various initiatives taken by the government.
 The total insurance market expanded from US$ 23 billion in FY05 to US$ 84.74 billion in FY17.
 The market share was 2 percent for the private sector in FY 03 as the FDI was introduced in 2001 and the bar was
raised to 26% in the insurance industry. The private sector share has increased to 29% in the FY 17 as the FDI
bar was raised to 49% in 2014.
 As of 2016, life insurance sector has 29 private players in comparison to only four in FY02 with 70.4 percent
market share in FY16,
 LIC continues to be the market leader, followed by SBI (5.1 percent), ICICI (4.9 percent) and HDFC (4.1 percent)
 India’s robust economy is expected to sustain the growth in insurance
 premiums written.
 Higher personal disposable incomes would result in higher household savings that will be channeled into different
financial savings instruments like insurance and pension policies.
 Household savings reached US$ 388.20 billion in 2016 from US$ 89 billion in 2000
 Per capita income and rural income are increasing
 The number of middle class households (earning between US$ 2,300 and US$ 30,800 per annum) is estimated to
increase more fourfold to 234 million by 2025 from 113 million in 2005
 Rising per capita income leads to increased spending on medical and healthcare services leading to increase in
the premium of the health insurance.

CONCLUSION

The FDI increase limit helps the industry to match with the competitiveness of the world. The government of India
has taken various initiatives to boost the market in a positive manner. The first one is Tax implication, which offers
Tax deduction under the health scheme and it has been increased to USD 409.43 from USD 245.66. Furthermore,
increase in FDI limit and revival packages will empower the flow of FDI and helps the company to raise capital and
funds for their future expansion plan. In addition to that, Union Budget brings Insurance (Amendment) Bill 2015,
expected to strengthen the IRDA with the injection of regulations for gaining sustainable growth. For instance, to
provide the boost to the liberalization policy, the government allowed the company to go public, in support of this
IRDA allowed those company which has completed 10 years of operation in the Indian Life insurance market to come
out with the IPO. With almost 70% of the total market share, LIC continues to be the market leader, followed by the
ICICI Prudential with 6.9% of market share. In FY‟16, the gross premium earned by the General Insurance Company
stood at USD 10.2 billion. The contribution of private players in the non-life insurance product is 45.4% in the total
revenue generation activities while the public sector has 54.6%. The final expectation of the Insurance market to
generate USD 280 billion of revenue. Currently, only 26% of FDI is permitted in the insurance sector. The total
insurance business would touch US$ 60 billion sizes. If insurance sector is opened up to an extent of 49% for FDIs, it
is expected that FDI‟s contribution to insurance business would touch nearly US$ 2 billion.

FUTURE PREDICTION

India's insurable population is anticipated to touch 750 million in 2020, with life expectancy reaching 74 years.
Furthermore, life insurance is projected to comprise 35 percent of total savings by the end of this decade, as against
26 percent in 2009-10. The future looks promising for the life insurance industry with several changes in the regulatory
framework which will lead to further change in the way the industry conducts its business and engages with its
customers. Demographic factors such as growing middle class, young insurable population and growing awareness of
the need for protection and retirement planning will support the growth of Indian life insurance.

V. REFERENCES

[1] Shikhare, Y. (2015). Foreign direct investment in the insurance sector in India. The Business & Management
Review, 5(4), 31.

[2] Blomstrom, M., Konan, D., & Lipsey, R. E. (2000). FDI in the Restructuring of the Japanese Economy (No.
w7693). National Bureau of economic research.

[3] IMF, Business of Payments Manual, Fifth Edition

[4] UNCTAD, World Investment Report 2013.

[5] IRDA, Annual Report 2012-13, available at Development (UNCTAD), World Investment

www.policyholder.gov.in/uploads/CEDocuments \

[6] Khan, A., “FDI Hike in Insurance Harmful”, http://unctad.org/en/PublicationsLibrary/wir201

People’s Democracy, (1993).

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