Move on FDI good for insurance sector

The Union cabinet’s decision to approve legislation to raise the foreign direct investment (FDI) cap in the insurance sector will help increase the depth and spread of insurance in the country. It will take the financial and economic reform agenda forward and boost the investment sentiment. The legislation is expected to be introduced in the ongoing winter session of parliament. The government thinks the measure will ‘’deepen penetration, accelerate growth and promote ease of doing business in the insurance sector.’’ Insurance was a state monopoly but the UPA government opened it up for private and foreign investment. The NDA government gradually increased the investment cap, and though the BJP as an Opposition party had once opposed it, it has now taken it to 100%. 

Finance Minister Nirmala Sitharaman had announced the decision to raise the FDI from 74% to 100% in the sector during the presentation of the budget for the current year. She had said that the enhanced limit would be enforced with conditionalities to protect the country’s interests. Insurance is a capital-intensive sector and needs investment for a long time before it starts yielding returns. It calls for deployment of funds, technology and expertise to improve the penetration of the sector. India is among the most underinsured countries in the world, with a penetration of just about 3.7% against the global average of 7%. Though the penetration has seen improvement in the last two decades, the growth has been much lower than what was expected when the liberalisation of the sector was initiated. The coverage and penetration increased during the Covid period but saw a decline after that.  

Awareness in the country about insurance is limited, and various constraints limit the sector’s reach. With the FDI decision, the government expects the industry to grow at an annual rate of over 7% over the next five years. New technologies and global practices in distribution and management are expected to energise the sector. Indian companies will also have to change to cope with the new situation, and competition is expected to help them and the sector. The government plans to put in place safeguards and guard rails to protect the country’s interests. Many countries, including China and Brazil, have allowed 100% FDI in the insurance sector. The Insurance Regulatory and Development Authority of India (IRDAI) should exercise regulatory oversight to ensure that the interests of the policy-holders are fully protected.