The Indian government has proposed raising the cap on foreign direct investment (FDI) in the insurance sector to 100%, a significant move aimed at driving economic growth and fostering competition in the industry. This initiative is expected to attract substantial global investment, enabling insurers to innovate, expand, and enhance financial resilience.
A notable change includes reducing the net owned funds (NOF) requirement for foreign reinsurers from $50bn (Rs4.24bn) to $10bn, aimed at making the sector more reachable to foreign investors.
If approved, this reform will mark a milestone in India’s economic liberalization journey. Currently capped at 74%, the increase to 100% FDI would allow foreign entities full ownership of their operations in the country.
India’s insurance market, the tenth largest in the world, has long been a focus for foreign investors due to its rapid growth and untapped potential. Analysts suggest that a higher FDI limit could result in an influx of global capital, leading to product diversification, better customer services, and advanced technologies.
The Indian insurance industry has seen remarkable growth in recent years, with penetration increasing to 4.2% in 2023 from 3.7% a decade ago. However, challenges like underinsurance and lack of access in rural areas persist.
Full FDI is expected to bridge this gap by introducing innovative solutions and reaching underserved populations. Moreover, foreign insurers will gain greater confidence to deploy resources and establish long-term operations, providing much-needed stability to the sector.
While the reform is seen as a positive step for the economy, it has also sparked debates over national interest and market control. Critics argue that granting complete ownership to foreign entities could marginalize domestic players and increase external dependency.
To address these concerns, the government has invited the public to provide feedback on these proposed amendments to legislations, such as the Insurance Act, 1938, the Life Insurance Corporation Act, 1956, and the Insurance Regulatory and Development Authority (IRDA) Act, 1999.
Alongside the Foreign Direct Investment FDI increase, the government has suggested allowing insurers to offer multiple classes of insurance business and activities. The government also intends to authorise the IRDAI to set lower minimum capital requirements of no less than $500m for insurers targeting under-served or un-served market segments.
The insurance industry in India has witnessed an impressive growth rate over the last two decades driven by the greater private sector participation and an improvement in distribution capabilities, along with substantial improvements in operational efficiencies
In terms of total premium volumes, India is 10th largest market globally and the 2nd largest of all emerging markets, with an estimated market share of 1.9%. It is expected that premiums will grow by an average of 9% p.a. (in real terms) over the next decade. India is poised to emerge as one of the fastest-growing insurance markets in the coming decade.
India has 73 insurers of which 26 are Life Insurers, 27 are general insurers, 7 are stand-alone health insurers, and 13 are re-insurers.
The FDI limit in the insurance sector was last raised, from 49% to 74%, in 2021.
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