Major Impact of FDI in India on Insurance Sector

Economic liberalization in 1991 was a game-changing decision for the growth of Indian economy. It proved a major breakthrough for the Indian economy, which metamorphosed the country forever. This prodigious decision was like breathing a new life in the Indian economy, in which a new script has been written for the development of the nation. This economic reform not only worked as a catalyst for the growth of the Indian economy rather also fuels Foreign Direct Investment (FDI). In the matter of Foreign Direct Investment, India adopted a meticulous, concrete, and steady approach. The Government opened the economy for foreign investors gradually. It was the period 1999–2004 when India received first US$ 19.52 billion of foreign investment. Later foreign investment in the country touched US$ 114.55 billion (2004–09) and US$ 172.82 billion (2009-13).

From, April 2000 - September 2020, the total FDI inflows in the country was $729.8 bn. The impacts of FDI in the growth of the Indian Economy are phenomenal. In the last few years, the Government has made many changes in FDI policies and allowed FDI in the banking sector (public and private) and the insurance sector (49% through automatic route).

FDI plays a significant role in the GDP growth of the country as well as it gives unprecedented contribution in generating a new source of capital, technological up-gradation, skill enhancement, and in creating new employment opportunities. With a 3.71% of GDP rate, Insurance is a flourishing sector in India, where national and international players are competing and growing at a rapid rate. Although, the penetration of insurance coverage for both life and non-life insurance is very less (about 3.7%) in fiscal year 2018. After the liberalization of the insurance sector in 2001, the industry has gone through transformational changes.

In 2015, the government raised FDI in India in insurance sector under the automatic route to 49% from 26%, which allowed global reinsurance companies to set up branches in India. After this decision, veteran organizations like Reliance, Birla, ICICI, Tata, HDFC, Aviva, ING Vysya, etc. have tied up with foreign insurance partners. Before this, there was a monopoly of LIC in the life insurance sector.

1. Oriental Life insurance was the first insurance company in India, which was started in 1818 in Calcutta (presently Kolkata). This insurance company was started by Mr. Bipin Behari Dasgupta and Europeans living in India were their primary customers.
2. Bombay Mutual Life Assurance was the first native insurance provider in India, which was formed in 1870.
3. To regulate the insurance business in India, the Life Insurance Companies Act and the Provident Fund Act was passed in 1912.
4. The insurance act was passed in 1938, and the department of insurance under the authority of Superintendent of Insurance was established for the administration of the Insurance Act.
5. On 19 January 1956, the Government of India issued an ordinance to nationalize the life insurance sector and Life Insurance Corporation came into existence in the same year.
6. According to the Indian Insurance Industry Report in November 2020, there are 57 insurance companies operating in India, out of which 24 are in the life insurance business, while 33 are in the non-life insurance business.

Following points explain the major impact of foreign direct investment on insurance sector of India:

With more than one billion population, India’s insurance penetration rate is just about 3.7% according to fiscal year 2018, which is quite low compared to Japan which has an insurance penetration of more than 10%. The permission of increment in FDI limit in insurance sector from 26% to 49%, will strengthen the basic insurance infrastructure of the country that will allow new players to come in that will empower more individuals to purchase life cover.

Increased Foreign Direct Investment will strengthen the private sector companies and they will get equal opportunities to compete with state claimed Life Insurance Corporation of India which controls around 71.49 percent of the life insurance market according to fiscal year 2020.

This increased FDI will breathe new life in private sector insurance companies, who were facing considerable losses. Due to the increased FDI limit, there will be the inflow of more capital 20,000-25,000 crore is expected in the near term. This could go up to 40,000-60,000 crore. Investment of such voluminous amount can rejuvenate the insurance sector of the country.

The more inflow of capital in the insurance sector will enable insurance companies to create more employment through improved infrastructure, better operations, and more manpower.

The massive investment in the insurance sector by foreign players will also enable insurance sector to provide excellent services through cutting-edge technology. Thereby customer can claim their insurance in minutes that will ensure the credibility of insurance companies and customer satisfaction.

To ensure the stability and overall better performance of the insurance sector in India, Foreign Direct Investment (FDI) is the most effective step. The huge amount of capital, which comes through FDI not only enables insurance companies to improve their basic insurance infrastructure (manpower and business operation) but also allows them to develop innovative insurance products and services. Therefore, it will not exaggeration that FDI is a bonanza for the Indian insurance sector.

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