The government’s latest proposal to raise the FDI cap in insurance to 74% is likely to accelerate growth and spur competition in the sector, raising hopes of a flux of foreign capital into private Indian insurers
Parliament on Monday passed the Insurance Amendment Bill 2021 to increase the foreign direct investment (FDI) limit in the insurance sector to 74% from 49%. This measure was first announced by finance minister Nirmala Sitharaman in the Union budget last month.
“The insurance companies today are facing severe liquidity pressures and capital constraints. Hence, they are facing solvency related issues as well. So, if growth capital is very hard to come by there will be a stress situation and in order to ensure that the situation is not left unattended, we need to increase the FDI cap. This has been recommended by the regulator. Also, the pandemic has caused liquidity issues for them," Sitharaman said in a speech in the Lok Sabha earlier in the day.
She said also that the 2015 amendment which raised the FDI cap to 49% from 26% led to foreign capital inflows of more than ₹26,000 crore into the sector. About 28 insurance firms were able to tap the increased FDI limit and assets under management of the sector have jumped 76% in the last five years.
“In 2015, when there were 53 companies as insurers, three more have joined in. Where there was one re-insurer, now there are 13, and where there were no listed companies in insurance, now there are six. So the change in 2015, raising the FDI to 26% to 49% itself, has brought in such a drastic change," Sitharaman said.
The government’s latest proposal to raise the FDI cap in insurance to 74% is likely to accelerate growth and spur competition in the sector, raising hopes of a flux of foreign capital into private Indian insurers.
The proposal is likely to help local private insurers grow fast and grow their presence across India, which has one of the lowest insurance penetration levels globally.
Insurance penetration in India is currently at 3.7% of the gross domestic product (GDP) compared to the world average of 6.31%. Growth in the life insurance sector has slowed to 11-12% currently from 15-20% until fiscal 2020 as the pandemic pushed customers to save cash instead of spending on stocks or life insurance policies.
The general insurance sector is, however, growing at a robust annual pace of 18%, faster than in the previous years. Growth in this sector has picked up as covid-19 led more people to buy health insurance policies. The average growth in standalone health insurance is currently at 35-40%.